In the last few years we have heard a lot about off-plan property investment, arguably more than any other investment vehicle, some good, some bad and some indifferent.
So what is Off Plan Property Investment?
Off-plan property investment is buying property off the plans or blueprints; property that is bought from developers before construction is completed.
Because you are buying something that doesn’t yet exist off the strength of developer’s plans, computer generated images and a lot of faith, off plan investment can be seen as a somewhat high risk investment strategy.
Done properly, the additional risk can make for additional profits. Buying off the plan is risky, but the developers aren’t oblivious to this fact no more than we are. Off plan prices are can be heavily discounted.
Where this fails is that if construction is never completed then all the money is lost, and there is no instant equity, only a huge loss. However, you should never pay all the money up front for an off plan property, it should always be bought with staged payments.
However, There are ways to minimise the risk, because you should always be looking to tie payments into construction stages. For example, a developer will be looking at staged payments in time periods, but if you can make it a 10% reservation fee, another 10% when the foundations are completed, another 25% when walls and isolation are complete, another 30% when the floor is complete and the final 25% on completion then you are laughing.
What if the home never gets built at all?
None of the above helps if you lose the 10% or 25% deposit if something prevents the development from ever being completed, nor will it help if this happens and you can’t get your money back.
You can reduce risk in these areas by doing comprehensive research into the developer and the development.:
Check the Developer:
Is it their first development? If not do they have a chain of successes or failures under their belt? Talk to the developer, talk to owners on their previous developments? Check their financial history.
Check the Development:
Check the title of the land. Check for planning permission, and then ensure if the plans change that they don’t invalidate the planning permission or break building regulations in the area.
Try to Future Proof your Investment
Other things that can muck up a property investment are other buildings that go up in the area and block views, not to mention increasing competition in the rental market. Try to find out about planning permission on any adjacent plots, and what percentage of this and any other developments are being sold to investors. If you do all the research you can then you can really minimise risk.
The checks above are just guidelines from a general investment property strategy; if you are making your first foray you should always seek property investment advice before taking the plunge.
Some Advantages of Off-Plan Property Investment
One of the biggest advantages of buying a property off-plan is that it gives you more control over fittings and décor. This allows you to ensure that all of this is completed to the exact standard you desire, as well as to boost the property’s value and appeal with any particular added fittings you have in mind.
It can also be useful if prices are predicted to rise significantly by the completion date. It can allow you to get in early at a lower price, secure the property with a deposit of around 10%, and later benefit from a brand new build which has already worth more than you are paying for it.
Having your property secured before completion also gives you more time to form plans on how to use your investment. By the time it is completed, you should have had time to form a pretty good idea of how you will secure the very best returns and be ready to put your plan into action more or less immediately.
Disadvantages of Off-Plan Property Investment
Most of the disadvantages of investing in property off-plan come from risks that do not occur when purchasing completed properties. For example, the uncertainty of the property market itself is a key risk factor. If property prices fall between the date you agree the price and the completion of the property, you will have already lost money on the date of purchase.
The risk of delays will also be greater than when purchasing a completed property. These will generally be an inconvenience rather than a deal-breaker, but nonetheless delays can be far more significant. It is possible for the building process to be delayed far longer than the purchase process of a completed development could ever be.
Another risk factor is that you will lose out if the developer goes bust before the build is completed. If you have already paid your deposit, you are likely to lose it and have no property in return.
Purchasing off-plan properties with a mortgage also carries some risk factors that need to be considered. While many banks are happy to lend for off-plan purchases, the agreement will often only stand for six months. If the build will take longer than this or gets delayed, you may find yourself rushing to agree a new mortgage. If circumstances change, particularly if property prices fall significantly, this may also lead a bank to withdraw its offer.