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Renting out a new build property can be exactly what it says on the tin. Brand new, clean and no previous tenants to account for. But does it make a good investment? And what’s the best way to manage it?
First things first, the basics of good investment still apply. So you’ll need to carefully consider yield and the rental market in general, along with property management expenses.
Beyond that, an understanding of ‘off-plan’ property (buying a property on spec from a plan, before it’s fully built), is important – as is an analysis of the maintenance and running costs for a new build property, along with new build mortgages and new build buy-to-let (BTL) insurance.
You’ll also want to create a mental map of the best places in the UK for a new build investment - hotspots - how to choose a new build property and, just as important, how to solve any problems before you commit.
Depending on your corner of the UK, you’ll have noticed a ballooning increase in new build property over the last decade. The government has committed to building one million new homes by 2020. Property investment experts RW Invest report a 10-year high in construction levels in 2018.
According to Savills, new applicants for new builds grew by 31 per cent in Q1 2019, compared with the same period in 2018. London, the London commuter belt, Glasgow and Edinburgh have seen a particular surge.
Affordable, reasonable pricing, along with Brexit fatigue, have been key factors in the renewed interest (an improvement has also been seen in the second-hand market, but is more pronounced for new build).
So, are new build houses worth it?
In any property investment, rental yields and your running costs will always be key. Will your new build property make enough money to cover your running costs, and keep you driving a profit?
If you’re going for off-plan (see our defintion below), nothing is set in stone. The property might look great on paper but what happens if the spec changes before you get the keys? Or if the build schedule slips? Allowing for this in your sums is essential, as you may need to rethink your target tenants, move-in dates and overall strategy, often at the last minute.
More positively, new builds often come with great selling points. They suit a certain type of prospective tenant, from families to commuting professionals. Often in sought-after locations, close to areas benefitting from regeneration, they make an attractive listing.
You may also benefit from lower prices when buying earlier in the build process, with some developers offering discounts of up to five per cent. But this brings its own risks and you’ll need to go back to that initial question: is a new build property going to have a good enough rental yield to cover my risks and costs?
So what does ‘off-plan’ mean? Simply put, it’s a property that hasn’t been fully completed yet, and isn’t ready for tenants to move in. You’re often looking around a partially completed building site and discussing a property on paper, or from a model.
One crucial positive here is that, depending on your agreement, the developer and other factors, you do have an opportunity to shape the property. There often isn’t much (if any) flexibility, but it’s worth getting in touch with the developer, and having a say on any areas you can.
There are also some interesting opportunities for potential capital growth when going for off-plan and most investors will get a 10-year warranty.
New builds are just that – brand, spanking new. They don’t usually come with aging fixtures, or the need for refurbishment. This is good news for your tenants, too, and many may be specifically looking for a new build, for this reason. They also tend to be more energy efficient.
From electricity to plumbing, you’ll be one of the very first to test drive it, and see the paperwork. You’ll also probably have a direct contact for any questions or problems within the development company (if not, get organised and find the right person).
New builds do come with their fair share of problems, though, from built-in flaws to teething problems that refuse to go away. Make sure you’ve run a thorough check on the planning, and the property itself, as it builds or until you get the keys. A ‘snagging company’ can help you with this, or you can put together your own snagging survey.
Yes, buy-to-let mortgages on new builds are certainly out there. But new builds are seen as ‘higher risk’, which means your choice of lender will be more limited.
The eligibility criteria for a new build buy-to-let mortgage can be more stringent. On average, you’ll need a 35 per cent deposit and, for some lenders, a track record as a successful landlord.
Like any buy-to-let property, a normal home insurance policy won’t cut it. Your mortgage provider will usually insist on you having a specific landlord insurance policy, featuring key protection like buildings and contents insurance, as well as liability cover.
You’ll need to state the age of your property when applying for your landlord insurance. At Simply Business we just ask you to tick the ‘After 2000’ box, when telling us its build date.
We’ve mentioned the sector’s fast-growth areas above, with London and Scotland coming out on top. But where do tenants want to live, and where are the hotspots in 2019?
RW Invest highlight Liverpool and Manchester for some of the UK’s best opportunities. Investment in building, plans to develop 10,000 new homes in the city centre and a surge of young professionals give Manchester its national advantage. Liverpool is a famous student city, benefitting from graduating students going into work and looking to rent a well-placed, modern property. It also has the fastest-growing city centre population.
No surprises here, London comes out on top for lots of buy-to-let investors. The Royal Docks are creating significant buzz, with great riverside locations and transport links. Woolwich is also attractive, again with great transport links and lots of local investment.
With household brand names shifting their operations to the Midlands, a huge ‘staying put’ graduate community and overall population growth, Birmingham is another new build hotspot. From Kent Street in the city centre to commuter belt developments, put it on your must-see list.
Have you got experience with renting out a new build? Did it work for you? Let us know in the comments.
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