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Buying a new rental property

Buying a new build to let out?

Despite bad economic conditions, the UK's private rental sector is outperforming many other investments. On the whole, the government is pleased with it, and wants to see more growth.

‘Build to let’ is a term which refers to the building of new developments specifically for buy to let investment rather than owner-occupation. The announcement last year of a £200 million build-to-let fund means that many such developments might be finding their way into the market in the next couple of years.

Many of us will be thinking, then, about buying new build rental properties. But what are the positives and negatives, and how should we go about it?

The pros of buying new build

The pros of buying new build seem clear:

  • The house is… well, new, and so it shouldn’t require any major repairs for at least a couple of years.
  • The property is likely to be a good energy performer, with decent insulation, double glazing and energy efficient systems.
  • The transaction is ‘chain-free’. The seller is a developer who doesn’t need to buy another property themselves, so they’re not going to pull out because their own purchase falls through.
  • The home is a blank canvas. Depending on how early you exchange contracts, you can dictate pretty much anything – bathroom tiles, cupboard doors, doorbell jingle – making it easy to tailor the home to your perfect tenant.

The cons of buying new build

The cons, as you might expect, are less obvious.

  • Lenders’ requirements for new build funding are generally stricter. You might be limited to a particular postcode or development, you might be required to give information on the type of building and construction, and you’ll almost certainly need a larger deposit.
  • The property is ‘on notice’. The developer can’t guarantee when it will be finished, and you’re at the mercy of the building schedule. Completion might not happen until a long while after contracts are exchanged.

New build has two other pretty big problems associated with it:

…it tends to be small

In September 2011, RIBA (the Royal Institution of British Architects) released a report called the Case for Space: the size of England’s new homes. In it, they claimed that the average new property was 8% short of the recommended minimum size.

To clarify, the recommended minimum size is according to the London Housing Design guide. The guide is the only one of its kind in the country, and its recommendations still fall quite short of others in Europe – 50 square metres for a two-person, one bedroom flat, for instance. That will leave your tenants sorely lacking elbow room.

…it tends to be expensive

Remember the kid in school who never opened their new action figures because they’d instantly lose their value? Well, homes (sort of) work the same way.

Simply by virtue of having been lived in, a property loses value. Something called a ‘new build premium’ is added to a new build property in anticipation of that lost value, and it can be hefty. The worst thing about a new build premium is that there is no definite percentage, as there’s no way of saying how much value a home will lose.

Tips for buying new build

I’m not going to sugar-coat it – new build probably isn’t for inexperienced investors, and it definitely isn’t for those without a good amount of capital to invest from the outset.

If you want to invest in a new build property, remember the following:

  • Make sure the property is big enough for your tenants. Ask for measurements and floor plans, and don’t be fooled by the use of undersized furniture in the show-home (yes, this is a common trick!).
  • Be wary that a lot of features you’d expect a property to have are actually optional extras for a new build. This might include bathroom fixtures (toilet paper holders and towel rails), telephone connections, light fittings and even flooring. Find out which essentials will cost you extra.
  • A lot of mortgage offers have an expiry date, often six months after the offer is made. Ask for a ‘longstop date’ before this expiry date – if the mortgage still hasn’t completed before this date, you can withdraw without penalty.
  • ‘Snag’. This means scour the completed house for any small faults, much as you might with an inventory – this could be cracks in the plaster, doors that don’t shut properly, loose fittings, etc. If you aren’t very thorough or observant, take a friend or hire a snagging company (or better yet, ask if the developer does it themselves). Make sure any issues are sorted before completion so you can rent the property out as soon as possible.
  • Make sure that the developer is part of the NHBC (National House-Building Council).

Once you've chosen your new build buy to let property, you'll need a buy to let mortgage! Get a free quote from TurnKey Landlords

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Amelia Vargo is an online marketing executive for CT Capital. Amelia writes for Turnkey Mortgages, Turnkey Landlords, TurnKey Bridging, TurnKey Life and Commercial Trust.

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