What is the best location for residential buy to let?
Location is really important, but why? What should you consider and be mindful of when comparing one city or town with another?
- Regeneration in specific areas can be paramount – the future vision that creates industry hubs, perfect job opportunities for post-graduates and attracts university leavers to stay. It creates relocation opportunities for young professionals and a trendy social scene that all young professionals and families want to be part of. And for the investor it means high capital growth and high year-on-year rent increase.
- Distance – tenants want to be in walking distance to where they work & play and this can dictate a premium. Convenience is proven to maintain high occupancy levels.
- Under supply of homes due to the housing crisis in the UK. There is approximately one buyer to every four renters and certain locations have seen an influx of young professionals looking for long-term tenancies. Naturally it means demand far out-weighs supply in many cities and towns.
- Strong economy – low unemployment, good infrastructure and leading universities.
Buying purpose-built residential buy to let off-plan
Investing in off-plan residential property is as simple as it sounds; you are buying off an architects’ floor-plan and the property is yet to be built. Many developers that present off-plan opportunities to investors offer a number of benefits.
- Off-plan prices are around 10% -15% lower than the market value during construction and by the time the development has completed, the apartment would have increased by this margin and increased in line with current market value too.
- In some areas, you can make up to 40% growth within 3-4 years when purchasing earlier in the construction phase.
- First pick of units – with the entire phase available this is another reason why investors like to invest early into the development. High floors, units with balconies and penthouses or duplexes are often the first to be snapped up.
- If the project is buyer-funded you will likely earn interest on the deposit you have paid to the developer for your property, normally between 2% -5% p.a.
- If the development is buyer-funded or the developer requires pre-sales, there will be pre-launch two-four months before the construction start date. Commonly with a residential property, the incentive will be connected to the appreciation, with an additional discount from the purchase price.
How are Residential off-plan buy to let projects funded?
This needs to be broken down into two sections. Funds are required to buy the land and cash-flow/funding is needed to build the development.
Buying the land
The developer will set up an SPV so each development site has its own entity and depending on how the build is funded the developer will ring-fence the monies used exclusively for a development.
Commonly the land is purchased with use of:
- Profit made from the last completed development
- A Bridge-Loan (see below)
- An investor or consortium of investors seeking a return once the project is complete
- An investor or consortium that will buy the free hold from the developer
Building the Project
Commonly the land is purchased with use of:
Buyer-Funded is when the developer uses client funds for the build. This is not a bad thing and designed to work extremely beneficial for both parties. It’s cheaper for the developer to pay interest to the investor (commonly 2% -5%) than a bridge-loan or other forms of borrowing.
Bridge-Loan is a short-term loan used either until permanent financing has been obtained or money has been earned from profit eg: completion of a project.
Contractor funded – if a developer works with a large contractor to build-out the project, the contractor may provide funding.
Development Finance companies that specialise in residential and build loans only. A range of different types of finance to suit the developer: build to let, commercial; mezzanine.
Peer-to-Peer is another investment model going on behind the scenes. Instead of the buyers funding the build, the developer will borrow from a company who has attracted “lenders” earning a fix term interest paid monthly on the money they lend.
Self-funded may not be the most common way for a developer to finance a development –often there is not enough profit from one development to fund the entire next project – certainly a contribution of developer funds could get a project of to a great start.
Combination – with a brief overview of the most common developer lending and funding options, often there will be a combination of two of the above eg: Bridge loan and buyer-funded.
Read full blog “How do developers fund their off-plan property developments?”
Fixed assured rental income verses non-fixed rental income
The reason you’ll see some projects offering a fixed assured income but others stating you will achieve “circa 6% net per annum” is dependant on area, town/city and development company.
A developer’s core business is to develop in the right high-growth area, where demand exceeds supply and you purchase the property at a great off-plan price – the incentive to offer you an assured rental will not be beneficial to either party.
Each city and town have different rent rises and some are increasing as much as 4% -5% per annum – this is a good reason to start off on a non-fixed income.
All the hassle-free, hands-off conveniences still apply, and your developer will introduce you to the Property Management Company a month or two before completion of your property. If you’re buying an already-operational property the introduction and income will be immediate.
What happens if I am not happy with the management company?
Look at your current property management agreement and check the terms and break clauses and subsequently give them written notice you will be terminating your agreement. Simultaneously find a new management & letting company you are happy with. Once you have agreed on new terms, the transition process for you should be seamless.
What are the risks of buying off-plan?
The REW Property Due Diligence Check is so imperative to the process. We’ll ensure that the common risks and developer pitfalls are either mitigated or do not exist on a project – otherwise, we’ll not take it on.
Construction delays occasionally happen with off-plan development for several different reasons. A developer may have an issue which causes a delay, but time lost can often be made up by the contractor and the project will still complete on time. The most common reasons are: site testing and clearing; a hold-up with funding or the Contractor not meeting its deadlines.
The developer protects unforeseen delays with a Long-Stop date in the purchase contracts. This gives a buffer of up to 12-months to complete the development – if something was to happen out of their control.
A project that fails to be delivered is normally due to the project not being ring-fenced properly or cash-flow not being managed properly. A project should always have someone e.g. a quantity surveyor, an architect or a company, cost-managing the project efficiently.
For more information on this subject please read our blog “What are the risks of buying investment property off-plan?”