Property Investing: Why REAL Investors Don’t Buy New Builds
You might think buying a new build property is a smart investment, it’s not. Real property investors don’t buy new builds. Find out why, now.
Lots of first-time investors are sucked into believing that new build properties will make great investments for their small, growing portfolio.
After months or even years of saving to get their first investment property the easy option seems to be buying a property that is already tenant ready, renovated, new and fresh.
But these properties really don’t make good investments for the savvy investor, read on to find out why.
The “discount” isn’t real
Many developers will frame selling a new build unit at a discount to the benefit of the new buyer. For example the value of this newly created unit will be £230K when it's completed but the developer will sell it at a £3K discount for just £200K.
Now this is generally akin to the DFS discount (I’m sure many other retailers do this too) which is simply a made up or overinflated RRP to convince you that you’re getting a bargain. The item gets marked up before being sold for a price which the retailer is happy to sell it at and is still making a comfortable profit. This is what happens when you buy a new build property!
It takes 7-10 years of trading for new properties to get a true market value so that number that the developer has told you is the market value has simply been plucked from the air.
Also, the developer is probably saying the same thing to all the other new buyers who will all pay the same price as you so a surveyor would come in and deem market value to be an absolute maximum of what you’ve just paid, probably less as it's no longer brand new anymore.
What you think is a discounted price ends up being a premium…not good!!
If you have gone ahead and bought this new build property and are now planning on renting it out, over time what you will find is that the standard of work is not the highest, the finish will be on the cheap side and further investment will be needed to keep the property in good condition.
Contractors typically do a large number of jobs on a new build site so speed is the priority for them, getting the job looking good is more important than a good spec, meaning there are numerous faults.
Your property will be covered by a 10 year warranty, something like the NHBC, however getting tradies to come back and repair work can be a slow process and many landlords/homeowners that have bought new builds end up paying out of their own pocket to get the job done faster.
Length of tenant stay
Unfortunately, your problems may continue!
Once your tenant begins to notice the poor finish and it starts bothering them they may be inclined to move on giving you just 2 months’ notice before vacating.
If it’s not the shoddy workmanship that gets them moving it may well be the lack of storage or small living areas that drive them away, new builds are notorious for both of these problems as well.
Tenants that don’t stay long can end up costing as you may encounter voids and will have to pay further tenant find fees and referencing costs. If you do manage to find new tenants before you have to start paying the mortgage, utilities and council tax out of your own pocket you may also find that the rent achievable has reduced.
A combination of the property no longer being brand new, there being some wear and tear and other landlords in the block having the same issues and putting their own properties up for rent again means you could run into an oversupply problem where the new tenants can drive the rents down as it becomes a race to the bottom to get someone in the property.
This combined with a hefty service charge that might be eating into your cashflow means that monthly profit you were forecasting has evaporated extremely quickly and because you effectively overpaid for the property in the first place you’ve got limited second exit strategies other than selling at a loss.
If you do decide to hold then you’ll find appreciation will take longer as I mentioned earlier that it typically takes 7-10 years for true market values to emerge from these new build sites
We’ve established that buying new build properties isn’t a property strategy you want to get involved in, BUT, if you are interested in getting into property you need to join us for our next kickstart webclass.
We will be telling you everything you need to know to start or scale your portfolio and which strategies best suit your personal circumstances.
Don’t miss out. Reserve your place for our next available date below.