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Why Off-Plan Property is a Smart Choice for Investors
- Saulius Bertauskas
- Sep 8, 2017
- 5 min read
Off-plan investments work very well as investments You can buy them at a discount and often the capital growth can be excellent. But, a word of caution, speculative investing carries a lot of risks and capital growth can’t be guaranteed. My advice is to have a plan B and be ready to rent the property out if it becomes necessary.
House Price Fluctuations
When I first started investing in property, I focussed exclusively on investment in existing housing stock rather than new build developments or off plan property.
This was because I understood older houses. Being from an estate agency background this is what I had experience in and therefore found it easier to make decisions when it came to these kinds of houses.
I started investing in property in 2005. I, therefore, saw the boom of 2006 and the dips that came in 2007 and 2008. During these years I learned a valuable lesson about how the house prices can fluctuate.
Why Trying To Predict The Future Is A Bad Idea
The market can always drift or change, quickly. This is especially important to understand when it comes to off-plan investments as you are investing in a property that is not yet ready. The temptation is, therefore, to gamble and invest your money, based on what you ‘guess’ the future worth of that property might be.
I suggest you don’t try to do this. The housing market can be volatile and guesswork shouldn’t be a factor when it comes to investing in property.
Our approach is to leave future projections to one side and instead, we approach off plan investments in the same way that we would any other investment. In short, the questions we ask ourselves are not concerned with anticipated capital growth but with whether or not the property works as an investment right now.
New Build and Off Plan Investments In 2017
Currently, new build and off plan investments are great things to consider and could make very valuable additions to your portfolio.
The reason for this is not necessarily because there is anything unique about this kind of property but more fundamentally because there is a lot of demand, generally, for rental property, both from tenants and buyers (in the right locations, of course).
Personally, I don’t see this changing a great deal, anytime soon. Despite there being a lot of talk in the industry about the death of buy to let, I see a market that very healthy.
Property prices will still fluctuate, of course. But this is something that will affect the whole industry and not just existing housing stock or new builds on their own.
Treating Off Plan Investments The Same As You Would Any Other Property
When you are looking at investing in a property there are some fundamental factors that you should always take into account. These are rental yield, location, tenant profile and your exit strategy. You should also consider the purchase discount and capital growth, as long as you bear in mind that if your yields don’t cover your costs a discount is not going to help you keep your head above water.
Whether it comes to investing in old houses, in new builds or in off-plan property, it shouldn’t matter. You should try and remain unbiased and do the same calculations for every investment you look at.
The Problem With Speculative Investing
The truth is, there are a lot of investors who do invest in property in a speculative manner, particularly in off plan and new build property. Big money can be made by doing this and big money can be lost, as well.
The process is simple. Say there is an off plan property with a value of £100,000 that can be bought with a £10,000 discount (discounts are more common with properties that have not yet been completed than they are with existing stock). House prices in the area are going up by 10% per year so it can be estimated that when the property is ready, in a year’s time, its value will be £110,000.
So, on paper, that’s a £20,000 profit, which is great.
The problem is, if that is your only strategy, what do you do if things don’t go as you planned? What if house prices don’t rise by 10%? What if they actually go down? What happens if you can’t sell it while you are still making large monthly payments on a mortgage? What if something happens in the local area, say a large employer goes bust?
The point is if you are forced into a buy to let situation to cover your monthly costs, can you still make that property work? Or, were you so fixated on capital growth that you don’t have a well-planned strategy in place to achieve that balance between rental yield and monthly expenditure should you have to.
So, even if your plan is to buy low and sell high you always need a plan B which is to approach your investment as a buy and hold. If you take the fundamental principles of yield, demand, and location into consideration for every investment you will be much better placed to weather any storm that occurs.
Putting It All Together
New builds and off plan investments can be fantastic (not least of all because of the discounts you can achieve with these kinds of property). Furthermore, demand for rental housing has never been higher.
Buy at a discount means that in principle you will have value locked into the investment from day one and being a new build, the property will be in a good condition and your running and maintenance costs will be low.
What I suggest, though, is that you plan for the long-term. Even if your intention is to flip at a profit you will still need that plan B and will want to make sure that you are looking at something that will still work as a buy and hold or buy to let.
FREE Property Training
Thank you for watching this video. If you like this content and would like to join our free online property training course we’ve got a link for it on this page. In there we cover a range of different property strategies to help you get started on building a long-term property portfolio or creating a cash flowing property business. We also look at ways to increase your return on investment with any of the properties you may be considering and we also have a couple of cheat sheets and downloadable documents.
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