Big Red House

Buy to let has been a thriving investment product for quite a few years now, the fact that many would be purchasers cannot afford to get on to the property ladder has made sure that there is always enough demand for rental property.

Now with the increase in interest rates and the decline of many buy to let mortgages numerous investors have stopped investing in buy to let and are instead looking at other avenues like overseas, flip sales and re-possessed property.

Does this mean the end for buy to let investment? Well let’s look at the factors. The first thing you learn about in any Business Course is the simple principle of demand and supply.

Less Supply + More Demand = Increase in Prices.

More Supply + Less Demand = Decrease in Prices.

So how can we be talking about the decline of Buy to Let if demand is so high, has supply really outweighed demand?

I do not think it is as simple as that, true, there is high demand for property at the moment, and true, this has driven prices up in the last few years. This in turn has led to many properties being priced out of potential purchasers price ranges.

So with property being so expensive now it is harder to purchase a buy to let property that will guarantee you a decent yield. Is it possible to find a way to satisfy the demand for property without increasing interest rates to such a level that you create a slump in prices there by making property more affordable?

Could increasing interest rates not be a double edged sword? Let’s say we have a 1 bed flat at £150,000 that a First Time Buyer wants to purchase, on an 85% LTV mortgage he will be paying approximately £610 pcm. Say the Bank of England increases the interest rate to 6.25%, so a 0.5% increase.

Also let’s speculate that this has a detrimental effect on property prices and they fall by 10%. That same 1 bed flat is now worth £135,000, so if a First Time Buyer was to buy on an 85% LTV mortgage his monthly payments are now £597.

A £13 difference for the First Time Buyer but a nightmare for everyone who already has a variable rate mortgage!

So the problem we have in this country is that there is maybe too much demand for property, this leads to the rises in property values we have had over the past years being achievable where in many other countries a collapse may have happened a long time ago. I think that the Bank of England knows this, they realise that the situation must be monitored closely but any thought of a crash are very premature.

The future may not be rosy but it is not all doom and gloom either. I believe that the slowdown has for the main part helped the property market, stabilising prices and injecting a sense of reality into investors that were gearing themselves too highly.

What is “Off Plan” property purchasing?

An off plan property is a property that is sold before it has been constructed and where the buyer only have the property plans provided by the architect as a guidance of how the finished property is going to be. Today off plan property refers more or less to all new developments that are sold before the termination of the construction of the property and not as it used to be only properties in the initial stage before the construction had started.

One of the biggest differences between a resale property and a property in a new development is the seller. Off plan properties or new developments are sold directly by the developer whereas traditional resale properties are normally sold by a private owner.

What are the advantages of purchasing property “Off Plan”?

Reserving a property at Off Plan stage (typically you will have just the Architects floor & site plans, elevations and specification to base your decision on) has proven popular with a variety of investors and home-buyers for many years.

Buying property Off Plan offers a number of benefits. The major benefit and attraction for potential purchasers is the capital growth which can accumulate from the Off Plan stage through to physical completion of the property.

For example, you could reserve an Off Plan property and secure a price of £200,000. If the property takes 12 months from the time of Off Plan reservation to build completion and the property market increases in value by 10% per annum, the value of this property upon completion would increase to £240,000.

Another factor to consider in this time is that no mortgage will be required until completion, so no monthly payments to make through the build process. Purchasers can benefit from substantial gains in capital growth in a buoyant market by committing only a nominal reservation fee and exchange deposit. The introduction of exchange bonds further minimizes capital outlay, where the buyer pays a bond premium which guarantees the developer a payout of the equivalent of the exchange deposit sum if the purchaser does not complete on the property.

Many property buyers will not feel comfortable to commit to buy a property which they can not physically see, inspect, etc. This provides a great benefit for astute buyers who can secure the most desired plots at Off Plan stage. For example, the plots which offer the best views (may not suffer from noise from nearby roads, trains, etc. compared to others on the same development which may). It goes without saying that the most desired plots in a development will be the ones to benefit from the greater gains in capital growth. Off Plan investors could also secure a prime plot which will maximize their rental return and minimize void periods.

Buying Off Plan can also provide investors with substantial profits on their initial capital outlay over a relatively short period. The source of profit in this instance coming from the capital growth through the build period. I refer you again to my previous example indicating the potential increase in property value in a buoyant property market.

Particularly if an investor had the opportunity to reserve a prime plot Off Plan in a development, the capital growth would be maximized in comparison to less desired properties which in turn should maximize your chance of achieving a quick sale at the market value at that time. A similar principle can be applied to completed property, but mortgage payments would have to be paid from the outset. This could potentially eat into investor profit, particularly if the property was not let or there was a shortfall in rental income in comparison to mortgage payments and associated ongoing costs.

In conclusion, buying property Off Plan can provide many benefits for the astute investor and home buyer alike. This is particularly a popular option in a property market where values are rising and buyers are confident in the rise continuing until at least completion of their chosen property.