Off plan investing is defined as buying property from developers before the building is completed, sometimes well before the foundations are laid. Whilst in a poor property market this method of investment is much less used, it is a strong tool for the property investor in times of growth.
This method of buying has been utilised by a large percentage of property investors over recent years to seriously increase their net worth through property investment - so what are the benefits and what are the risks in doing so?
Benefits of Off-Plan Investing :
Developers will often offer Assetz for Investors a genuine discount in return for bulk purchase of units in a development, particularly if it is early on. They do this as development finance is easier to obtain and cheaper if the development is partially or completely pre sold.
These discounts provide you, the investor, with a cushion of profit in case of any problems. This additional profit can be substantial - for example if you have put down a 10% deposit and the discount was a true 15% off, then the property is worth 17.6% more than the price you paid - that means you have already shown a paper profit of 176% of your deposit. For example :
Take a discounted £85,000 selling price of a £100,000 property. Your deposit 10% of £85,000 = £8,500, the equity in the property = £100,000-£85,000+£8,500=23,500 - a 176% return on your £8,500!
When completion comes and you put down a further deposit to bring your total deposit to 15%, even if prices have not risen any further you still have equity of £12,750+£15,000= £27,750, a 117.6% return on your deposit! If prices increase even just a little then your profit will be substantially greater due to your geared investment.
- No interest to pay whilst the building takes place, yet if prices are rising you receive this capital gain.
- With deposits often well under 15% at exchange on off-plan developments you have less cash tied up than if you had put down 15% deposit on a completed development.
- No need to find tenants, pay for furniture or pay interest in any void periods.
- If prices fall you have a safety net represented by the amount of the property discount - people buying on the open market would have NO SAFETY NET! A 10% discount would effectively provide you with a 10% market-price-fall insurance policy!
- You can sell on to a buy-to-live owner later on before or just after completion to take out your capital and profit.
Risks of Off-Plan Investing :
The benefits of off-plan investing, taking a long term view, far outweigh the risks - however if you are taking a short term view and intend to buy and sell very quickly then be careful and keep a close watch on the local prices in the area to minimise your risk. In poor or falling property markets off plan investing can be dangerous.
The key problems with off plan investing are related to the benefits. by committing to purchase a property well in advance of its completion you are minimising the outlay to take a stake in the future potential growth. However, if the property market falls over this period you are committed to purchase the property that may be greater than the valuation at point of completion. Whilst clearly financially costly, the solution is to put down a larger deposit and stomach a short-term capital loss before prices recover. If the property purchase has not exchanged then the investor can walk away from the transaction and in all likelihood would only have costs of reservation deposits and possibly some legal and mortgage costs. If the investor wishes to pull out after an exchange than they are at risk of being sued for damages for the loss of profit on the sale from the vendor or being sued for specific performance to complete under the contract by the vendor.
The critical success factors in succeeding in off-plan investing are :
- Obtain genuine discounts or buy in property hot-spots.
- Buy in a rising market ideally to further extend your equity and hence safety margin.
- Buy in good rental locations to ensure your mortgages are well covered to at least 130% at the new valuations.
- Buy in good rental locations to ensure rent shortfalls will not eat into your equity and reduce your portfolio growth ability
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