Buy-to-let: are new build houses worth it?
Renting out a new build property can be exactly what it says on the tin. Brand new, clean and no previous tenants to account for. But does it make a good investment? And what’s the best way to manage it?
First things first, the basics of good investment still apply. So you’ll need to carefully consider yield and the rental market in general, along with property management expenses.
Beyond that, an understanding of ‘off-plan’ property (buying a property on spec from a plan, before it’s fully built), is important – as is an analysis of the maintenance and running costs for a new build property, along with new build mortgages and new build buy-to-let (BTL) insurance.
You’ll also want to create a mental map of the best places in the UK for a new build investment – hotspots – how to choose a new build property and, just as important, how to solve any problems before you commit.
Assents Property – London, with decades of new build industry experience is well positioned to assist through their acquisition services. They can also let and manage your investment after the property is completed.
The new build rental market
Depending on your corner of the UK, you’ll have noticed a ballooning increase in new build property over the last decade. The government has committed to building one million new homes by 2020. Property investment experts RW Invest report a 10-year high in construction levels in 2018.
According to Savills, new applicants for new builds grew by 31 per cent in Q1 2019, compared with the same period in 2018. London, the London commuter belt, Glasgow and Edinburgh have seen a particular surge.
Affordable, reasonable pricing, along with Brexit fatigue, have been key factors in the renewed interest (an improvement has also been seen in the second-hand market, but is more pronounced for new build).
Investing in new build homes
So, are new build houses worth it?
In any property investment, rental yields and your running costs will always be key. Will your new build property make enough money to cover your running costs, and keep you driving a profit?
If you’re going for off-plan (see our defintion below), nothing is set in stone. The property might look great on paper but what happens if the spec changes before you get the keys? Or if the build schedule slips? Allowing for this in your sums is essential, as you may need to rethink your target tenants, move-in dates and overall strategy, often at the last minute.
More positively, new builds often come with great selling points. They suit a certain type of prospective tenant, from families to commuting professionals. Often in sought-after locations, close to areas benefitting from regeneration, they make an attractive listing.
You may also benefit from lower prices when buying earlier in the build process, with some developers offering discounts of up to five per cent. But this brings its own risks and you’ll need to go back to that initial question: is a new build property going to have a good enough rental yield to cover my risks and costs?
Off-plan property investment
So what does ‘off-plan’ mean? Simply put, it’s a property that hasn’t been fully completed yet, and isn’t ready for tenants to move in. You’re often looking around a partially completed building site and discussing a property on paper, or from a model.
One crucial positive here is that, depending on your agreement, the developer and other factors, you do have an opportunity to shape the property. There often isn’t much (if any) flexibility, but it’s worth getting in touch with the developer, and having a say on any areas you can.
There are also some interesting opportunities for potential capital growth when going for off-plan and most investors will get a 10-year warranty.
New build maintenance and running costs
New builds are just that – brand, spanking new. They don’t usually come with aging fixtures, or the need for refurbishment. This is good news for your tenants, too, and many may be specifically looking for a new build, for this reason. They also tend to be more energy efficient.
From electricity to plumbing, you’ll be one of the very first to test drive it, and see the paperwork. You’ll also probably have a direct contact for any questions or problems within the development company (if not, get organised and find the right person).
New builds do come with their fair share of problems, though, from built-in flaws to teething problems that refuse to go away. Make sure you’ve run a thorough check on the planning, and the property itself, as it builds or until you get the keys. A ‘snagging company’ can help you with this, or you can put together your own snagging survey.
Insurance for buy-to-let new builds
Like any buy-to-let property, a normal home insurance policy won’t cut it. Your mortgage provider will usually insist on you having a specific landlord insurance policy, featuring key protection like buildings and contents insurance, as well as liability cover.
You’ll need to state the age of your property when applying for your landlord insurance. Assents Property – London will be able to recommend some competitive insurers who specialises in Landlord insurances.
Where are the new build buy-to-let UK hotspots?
We’ve mentioned the sector’s fast-growth areas above, with London and Scotland coming out on top. But where do tenants want to live, and where are the hotspots in 2019?
Manchester and Liverpool
Liverpool and Manchester are some of the UK’s best opportunities. Investment in building, plans to develop 10,000 new homes in the city centre and a surge of young professionals give Manchester its national advantage. Liverpool is a famous student city, benefitting from graduating students going into work and looking to rent a well-placed, modern property. It also has the fastest-growing city centre population.
No surprises here, London comes out on top for lots of buy-to-let investors. The Royal Docks are creating significant buzz, with great riverside locations and transport links. Woolwich is also attractive, again with great transport links and lots of local investment.
Best areas for buy-to-let in London
London property prices continue to overshadow any other part of the UK and as a result, making a profit in the capital is more challenging for buy-to-let.
In general, east London offers the highest yields, with north London performing worst. Out of all the London postcodes surveyed, five of the areas with the smallest yields were in the north, whilst half of the top performers were in the east.
What should you look for in a London buy-to-let area?
With a city as expansive and diverse as London, it can be tricky knowing where to look. Uncovering the next hidden gem takes research, local knowledge, and more than a hint of luck.
However, keep these five things in mind and you’ll be on the right track:
- Transport links
- Schools in the area
- Regeneration projects and plans
- Local amenities – shops, bars, restaurants etc.
- Distance to universities and/or work hubs
Best buy-to-let spots in east London
East London boasts some impressive yields, with highs of nearly 5 per cent. East Ham (E6) performed best overall, with yields of 4.81 per cent. Stratford (E15), Plaistow (E13), Poplar (E14) and Chingford (E4) all also came within London’s top 10, with yields well over 4 per cent.
Newham is a particularly interesting area to invest in. With Stratford’s vast regeneration ongoing since the London 2012 Olympics, the E15 postcode has an average rental yield of 4.45 per cent, which is comfortably above the capital’s typical percentage.
Newham also includes top performer East Ham (E6), where the average monthly rental value stands at £1,421, against relatively modest average asking prices of £354,162.
And if you drop to south east London, you’ll find maybe one of the best places in the whole of the UK for rental yield. Bexley boasts more affordable properties than central locations, and rental yields for Thamesmead (SE28) average at 4.46 per cent.
If that’s not enough to make you consider Bexley for your next investment, it also has one of the lowest average house prices of any of the London boroughs with Thamesmead standing at £296,439.
Going into 2019, east London has again taken the lead in terms of rental yield. Areas from Stratford to Chingford have rental yields of at least 4.20 per cent.
Best buy-to-let areas in north London
North London has dropped in overall yield into 2019, with five of the capital’s smallest yield postcodes. Highgate (N6) has performed the worst this year, with average property prices around £1.5 million but rental yields struggling at just 1.93 per cent.
Nearby Hampstead (NW3) might provide a better opportunity with similar property prices but a healthier rental yield of 4.20 per cent.
Best areas for buy-to-let in west London
West London offers a mixed bag to landlords looking for top-ranking London property opportunities. On the one hand it’s the traditionally more leafy, expensive part of the capital, for renters and buyers alike, with west-central areas like Chelsea and Kensingtonfetching upwards of £2.5 million on average.
There are deals to be found, though, with relatively central areas such as Hammersmithboasting a 4.47 per cent yield, healthy rental value and a more realistic average sale price than neighbouring postcodes.
In the rankings, Kensington (W8), Paddington (W2) and Chelsea (SW3) all dropped inside the 10 worst buy-to-let areas in London, whilst Hammersmith (W6), Westminster (SW1) and Tooting (SW17) made the top 10 best locations.
Best buy-to-let areas in south London
Next to east London, the rest of the capital’s offerings pale a little, and rental yields in south London are down on what they were a year or two ago. Greater south London is particularly affected, with commuter towns taking a hit.
In 2018, we reported that Bromley was faring well but this popular area has suffered declining yields over the year, and is nowhere near the top.
However, if it’s commuter spots you’re keen on, Southend-on-Sea ranks ninth in the UK’s overall top 25, with an average yield of 8.02 per cent. Read our article about the buy-to-let market in Southend-on-Sea for a more detailed picture.
This is still well above the average for the capital, though, and current fluctuations may not be representative of the long-term trends.