New homes or old : is new-build good for buy to let?

We asked Upad.co.uk, the rental experts, for their advice on whether new builds are good for buy to let:

A survey by Ludlowthompson showed that, of property investors intending to expand their portfolios in the next six months, only 12% intended to purchase newly built properties. Asked the same question back in March, 26% said that new-builds would interest them.

There’s no doubt that the housing market has suffered from an over-supply of new-build properties, as developers who overbuilt during the boom try to clear their stocks, urged on by the banks who want to recoup their more speculative lending. The problem is particularly acute for those who built blocks of apartments – exactly the area that many buy to let landlords might be interested in.

On paper, this clearance stock looks as though it might be a perfect buy to let proposition: prices are low, meaning that landlords can have some flexibility over the rents they charge. This in turn will help to minimise void periods: properties will be filled and earning their keep much more quickly. Investors who can snap new-build up while its cheap could have a great capital investment which will appreciate while the housing market slowly recovers.

But investors are right to be wary. An over-supply of property for sale can, all too easily, turn into an over-supply of property for rent. While the general mood of the rental market is improving, things are not yet stable. Unemployment remains high and some predictions have it going higher for some months to come. In such circumstances, first jobbers are likely to share with friends or even stay with their parents, meaning that this usually reliable supply of new tenants may not be there. And with horror stories from the student sector of loans in chaos, “pile ‘em in cheap” apartment blocks are a risky investment indeed.

When developers have built huge apartment blocks or even several similar blocks together, properties quickly become commodities.

James Davis, Upad.co.uk’s CEO and a landlord himself, counsel’s caution: “As always, investors thinking of going into this market need to do their homework first. The thought of a property bargain can be dazzling, especially if you have an annual bonus burning a hole in your pocket and the bank’s only offering you 1%, but buying a property that you can’t let out at a profit is an expensive mistake to make.”

James says, “The golden rule is to consider supply versus demand. Developers who can’t shift new build stock might be offering it at knock-down prices, which can look as though it means you can afford to take lower rents.

But if a dozen other landlords on the same street have had the same idea, which can mean that everyone is competing in a race to the bottom, with everyone trying to undercut their neighbours. What is worse still is that if there isn’t consistent and sustainable demand for rental property in the area, over-supply can mean that some properties end up being left void for much longer than normal. It’s essential that those thinking of buying new build do their research – not only into rental prices for the area, but that they also look at how many other similar properties are likely to come onto the market at the same time as theirs.”

Those who can afford to buy up entire developments may find themselves in a stronger position, as they can control supply and thus rents more easily. Discounts available for the purchase of entire blocks are considerable, and those with the assets to do this will find themselves advantaged over smaller investors purchasing just one or two properties in a street full of others doing exactly the same thing.