Off-Plan Vs 2nd-Hand Property Investments

If you are seriously considering investing your money into property then chances are you have been offered or at least seen off-plan opportunities as well as researching second hand property. Neither is necessarily better than the other, and is largely dependant on your own scenario. Read through the pros and cons of each below to better understand what is involved in both kind of investments.  

Off plan Property

 

 Pros

• Energy efficient – New homes are now built to a much higher standard when it comes to energy efficiency, with no gas boilers, minimum EPC ratings, triple glazing and all-round better materials and technology. This can make utility bills cheaper.

 

• 10-year warranty – New residential buildings now come with a 10-year build warranty. These can come from a range of suppliers but the most common is from NHBC. This will cover any defects on the building for the first 10-years, effectively meaning your maintenance costs of anything architectural related is free.

 

• Early entry deals – one of the very first concepts of buying and investing in an off-plan property is you pay a much lower rate than market value, and so the earlier you invest the better deal you can get. BY the time completion comes round you may have already made a significant profit on the property value.

 

• You can invest by only putting down 20%-30% of the property value – As you only need to invest the deposit, stamp duty and legal costs off-plan can be offered at a lower entry point, unlike 2^nd hand property which may involve some level of refurbishment on top of these initial costs. In addition, recommended solicitors of the development are likely to have already carried out searches on the building so unforeseen costs are far less likely.

 

• Passive Income – These investments are mostly hands off and fully turnkey, meaning all you must do is invest and everything is managed for you. This makes it ideal for anyone who does not have the time to actively work on their investments. Usually, a working professional from an unrelated industry or someone overseas who will rarely get to even visit the property (if at all).

 

• Possible Rent Assurance or Guarantee – A lot of new apartments will be offered to investors with a rent assurance or guarantee. An assurance is more of a promise from the developer that they will pay your rent regardless of occupancy over a given period. A guarantee takes this further as it essentially binds the developer to pay your rent for a given amount of time, both usually 2-5 years. It does this as the developer will need funds to back up rent in worst case scenario of the property making no money.

 

 

Cons

 

• Material prices increasing – Recently (2022) material costs have shot up, this has then created a massive increase in the build price of new-builds. In an increasing number of cases this is making off plan apartments more expensive than 2^nd hand property. This means you need to be more vigilant when it comes to the price you’re paying for an off-plan apartment.

 

• If developer goes bust, you will lose your money – Probably the number one reasons investors avoid off-plan. If a developer goes bust before completion, you will not get any of your deposit back. To avoid this we at Fabrik carry out due diligence on the developers we work with, we recommend you do the same.

 

• Wait for completion for income – You could wait up to 3-years from putting down your initial deposit until development is complete and generating rental income. This I where you need to balance the deal you can get compared to how long completion is. So, the further away completion hopefully the better deal you can get.

 

• Buying from, images, CGIs, and floorplans – As the property does not exist you are having to imagine the quality from images alone, this is not the same as going to a property and seeing the quality for yourself before buying it.

 

• Can’t refinance above purchase price until 6 months after completion – If you are wanting to refinance the property to pull some funds to re-invest, you won’t be able to do this until 6 months after completion.

 

• You won’t have opportunity to add value – Unlike a 2^nd hand property where you can buy an old property needing work, thereby adding value very quickly, this is not an option for off-plan.

 

2^nd-hand Property

 

Pros

 

• Know what you’re getting - The property will be a real tangible asset that you can see and visit before purchasing, so you know exactly what you are getting.

 

• Negotiate better price – Chances are the seller will be far easier to negotiate with on the price. By finding faults and work required you can start taking this off your offer price. In addition, its is likely that the seller bought at a much lower price and has already seen a lot of growth on the value, so the margin they can make on the property is going to be far higher. Providing you more room to negotiate.

 

• You will already know occupancy – In a lot of cases these properties come with tenants already in place. You will also be able to request historical tenancy, so you know with much more accuracy the likely income over a year.

 

• You will know running costs – Along with the occupancy details, you can also ask for all the costs on the building, so you can calculate with even further accuracy your margins of profit or may discover a margin of loss.

 

• Active property investment – With secondhand property you can participate in a n active investment strategy such as Refurb and Re-finance, which you can read more about here. This means you can make money a lot quicker than with a passive off-plan strategy. However, this does take a lot of time and education so is only an option for someone wanting to become a full-time property investor.

 

Cons

• Maintenance issues – Older properties will need a lot more maintenance, in addition they do not come with the same warranty as an off-plan. All maintenance costs will be your responsibility

 

• Down valued if it has a low leasehold – Obviously if you have a freehold this is not an issue. However, if you are buying a secondhand apartment then you will want to check the leasehold. A low leasehold of around 60 years (for example) could dramatically decrease the value of the property or even make it un-investable

 

• Energy performance may not be as good as off plan - Older buildings were not built to the same standard as modern ones. Everything from minimum EPC rating, glazing, old gas boilers, cavity insulation, materials etc.… will reduce the energy ratings making bills more expensive.

 

• Landlord may be obligated to replace boiler and fork out for other eco related costs – As a landlord you will have some responsibility to make the building as livable as possible. This will include removing old boilers and possibly having insulation installed. All this comes at extra cost.

 

• Property may attract worse tenants – Where a lot of off-plan apartments are created to a high standard to attract good reliable tenants, older properties may not come with the same level of luxury. This will mean a cheaper rent, which means lower income tenants such as HMO tenants. In a lot of cases these tenants can become more work and will not look after the property.