Is buying a new build a good investment?

When it comes to investing in property, there's lots of different avenues to choose from, whether it's buying a property to rent out, or doing up an old property to sell on.

For many people new builds are an enticing option. They're modern, low-maintenance, and often come with all the fixtures and fittings a landlord might need.

But, investing in new builds isn't for everyone. Some people are put off by the so-called 'new build premium', and the risks of investing in something that's not yet been built.

In this article we look at the things you should consider before investing in property generally, and the pros and cons of new builds specifically.

How to invest in property

Although property investment might conjure images of high rises owned by large companies, or dramatic building renovations, most people who invest in property do so on a much smaller scale.

45% of the 1.5 million private landlords in the UK own just one buy-to-let property, and about a third of landlords originally bought their buy-to-let property to live in, rather than to rent out.

Becoming a landlord isn't the only way to invest in property, either. Many people purchase properties to renovate or extend, and then sell on for a profit.

Others take a more long term approach, buying property with the hope that it is a more secure place to keep their money than a savings account. The rationale behind this sort of investing is that property values can increase at a faster rate than savings in a bank account can accrue interest - plus you have the added benefit of having somewhere to live, until you decide to sell.

Like all types of investing, property investment, is all about balancing your appetite for risk with your financial aims. In particular, how you decide to invest will depend upon how much money you have available to start with, and how much you can afford to spend each month.

Property investment involves a number of ongoing costs: from monthly mortgage repayments, to safety standards upgrades, to renovations & maintenance costs. Before you take the leap, it's important to make sure you're fully informed about what you're getting into.

If you're unsure if property investment - or buying a new build - is right for you, we'd recommend talking to an independent financial advisor. They'll be able to provide advice specifically tailored to your circumstances and aims.

Things to consider when investing in property

Inevitably, the most important thing when it comes to investing, is finance.

The ultimate aim of investing is to - hopefully - make money, and the way you should approach investing in property is the same. For example, instead of thinking about which property would make the best home, a property investor might consider:

• Would someone want to rent this property? And if so how much would they realistically pay each month?
• Is there scope to improve the value of this property, through home improvements, renovations, or an extension?
• Is this type of property likely to be in demand in the future?

All of these questions are ways of figuring out the answer to the real financial question at the heart of the investment: 'am I likely to make more money from this investment than I have to put in?'

However, with property investing it's not just as simple as 'spend less than you get out. Because property is very much a tangible asset, there are plenty of other things to consider too.

• The area is just as important as the property you're buying

When you're weighing up where to buy, think about the wider area: is there demand for homes here? Are there lots of renters? What are it's future prospects? For example, areas that are going to be near large infrastructure projects - such as Crossrail - generally see a rise in demand and value. On the other hand, homes in more rural areas, further away from centres of employment and activity, tend to be harder to find tenants for, even if they're technically worth more.

If you want to find out more about what's happening in a particular area, or are interested in tracking house price trends at a local level, head here.

• You may not always be able to find tenants

If you're buying a property to rent out (as many investors buying new builds do) it's important to consider what you'll do in periods when you can't find tenants. Think about whether you'll still be able to afford your monthly mortgage repayments, and consider setting aside a contingency fund.

• The realities of being a landlord

Until you become a landlord for the first time, it's hard to get a sense of the level of responsibility you're taking on. Part and parcel of this investment strategy is a requirement to be on hand 24/7 to resolve any problems tenants might have, and to ensure you keep your home up to any relevant legal standards eg. minimum energy standards. On top of this, you'll need to be able to pay for any unexpected emergencies - like broken boilers - at very short notice. Luckily there are ways to reduce this burden, for example: management companies can take on the day-to-day responsibilities of being a landlord, for a share of your rental income.

• Mortgage options

If you're looking to use a buy-to-let mortgage, you'll usually require a larger deposit (generally at least 25%) to qualify. You'll also have to provide evidence that your rental income will be higher than your monthly mortgage repayments.

• Property values change

Like with any investment there is a risk that the value of your asset will go up as well as down. Although there has been a positive trajectory to house prices for the past decade, this hasn't always been a steady journey upwards. For example, house values saw a decline in 2008 and 2009 as a result of the financial crisis. In some areas of the North East, for example, property values have only just begun to reach their pre-crash heights.

If you take a long term strategy with property you'll generally be able to ride out the bumps in value, but, like with other investments, there's risk you'll end up losing money.

• Rental values change

Like property values, rental values also change, and tend to be more volatile than the sales market. It can take just one large development, some purpose built student accommodation, or a new working trend, to rapidly reduce the demand for rental properties in an area, and forcing local landlords to lower their prices.

This effect has been seen most recently in the fall in rental demand for city centre properties during the coronavirus pandemic. As many people's priorities changed, and working from home became much more common, demand for smaller, centrally-located rentals was overtaken by demand for larger properties with gardens and home offices. As a result rental prices in city centre locations, like central London, had to drop in order to attract tenants.

• You may not be able to access your money quickly

Unlike withdrawing money from a savings account, it takes time to release equity from a property - particularly if you need to sell.

• It can cost money to release equity

Selling a house isn't free, you'll have to consider estate agent fees, capital gains tax, and legal costs - at a minimum. There are costs to equity release and renting out too (for example: marketing & maintenance costs).

Pros of investing in a new build home

When it comes to investing in property for the first time, many people are attracted to new builds.

In part this is because new build homes come with particular benefits that make them a good investment, and in part because the actual process of buying a new build can be easier logistically.

Many people see new builds as a good investment because they're:

• Chain free

Because new build properties are sold directly by the developer or house builder, you don't need to worry about property chains. 'Chain free' property transactions tend to be quicker, and are less at risk of falling through because they don't rely on other people getting mortgage approval, or selling their home first.

Read more about how to manage a property chain here.

• Move-in ready

One of the most commonly cited benefits of new builds is that they come 'move-in ready'. Not only will no one have lived in the house before, but there'll be no maintenance or renovation work to make the house ready for you - or tenants - to move into. On top of this, some developers even offer furnishing packages, which can be particularly handy if you're thinking of renting the property out.

• Customisable

Because new builds are often in the process of being built when you put in an offer, you can sometimes work with a house builder to customise elements of the property. These can include things like the layout, or specific fixtures and fittings. The earlier you approach the developer in the building process, the more you're likely to be able to make changes.

• New build homes tend to be more energy efficient

EPC data shows that 80% of new builds have the top energy efficiency rating (A or B). This means they are very likely to meet the minimum energy standards required for private rental properties (so you won't have to make expensive upgrades - like installing double glazing, or a new boiler - before finding tenants).

• NHBC 10 year warranty

The NHBC warranty is an insurance policy that comes as standard with many new builds. The policy covers your deposit (up to 10%) in the period before the property is fully built, and then any problems with the builder's work once you move in. For the first two years NHBC will also act as a mediator if any disputes do arise about faults with the building work.

Read more about the NHBC warranty here.

• Low maintenance costs

Because the building is new, maintenance costs in the first few years of owning a new build are generally very low. This is a particular perk for buy-to-let investors, who are obligated to keep their homes in a certain standard of repair for renters.

• Developer incentives

Many developers and house builders use incentives to encourage buyers to purchase new builds. These include things like offering to pay your stamp duty or legal fees, or discounts if you fulfil certain criteria, such as being a care worker, or in the army.

Cons of investing in a new build property

However, new builds aren't right for everyone, and there are several things that can put investors off. These cons include:

• New build premium

According to the latest Land Registry data, the average price of a new-build property in the UK is: £302,956. This is almost £50,000 more than the average price of an 'existing' property (£247,471).

Unfortunately once you move into your new build property it's no longer seen as a 'new build' and will therefore likely lose some of its original value. This means that buying a new build should be part of a long term strategy. This will help you ride out any 'loss' in value as house prices increase.

Curious about how much a property is worth? Check for free, with our online valuation tool. Try it now.

• Waiting for construction

Purchasing a property before it's been built always comes with risks. According to the New Homes Review, 37% of new build homes are not completed on time. And, there's always the chance that a developer could run out of money mid-project. While the NHBC Warranty can provide financial support in these situations, it's important to consider whether you're ready to take on this level of risk.

Fortunately there are many reputable and well-funded developers operating in the UK, and while you can never know for sure how an individual project will go, a bit of research can drastically reduce your chances of ending up in this sort of stressful situation.

• Recurring charges

If you buy a new build on a leasehold basis, it's fairly common for your lease to include some annual charges, such as a service charge, or ground rent. These charges are designed to go towards the maintenance of the building and communal areas. However, it's important to make sure you can afford to pay these fees on top of your mortgage repayments.

• Smaller

According to research by LABC, homes built in 2010 onwards are over 4m2 smaller than homes built in the decade before. This means that: not only are new builds more expensive than existing properties, you're also paying more per square metre. After a few years of renting out a small new build, you may find that it is no longer as appealing to tenants as it was when it was brand new.

• Snagging issues

According to the New Homes Review - who ran an independent survey in 2018 - 91% of new home buyers experienced 'snags' or defects with their new build home. The most common complaints were very small, such as: sticking doors, and fences that are not quite straight. However these issues still take time and money to resolve, and can be annoying if you were expecting a house that's 'move in ready'. To prevent issues like this causing a problem, it's a good idea to get a snagging survey done before completion. This is a quick, non-intrusive survey that takes place once the building has been finished, and picks up any small 'snags' or defects with the building work.

For more information on surveys, head here.

• Limited scope for improvements

While a new build might be a sensible choice for a buy-to-let investor, if you're looking to make a profit in other ways, a new build is unlikely to be the best choice. New build properties are generally built as part of a big development, with developers trying to make the most profit they can from the land. This means they often build the properties to the maximum size possible. And, because the property is likely fitted with all the latest modcons, large scale internal renovations like redoing the kitchen will probably cost you more than you'll make back.

This doesn't mean there are no ways to add value to new builds. We cover the best ways here.

• Limited scope for price negotiation

Although many developers offer incentives, it is often more difficult to negotiate on the actual asking price for a new build. Before you commit, decide whether the incentives are enough to make buying a new build a good deal for you, or whether you might be better off negotiating a lower price on an existing property, and using the difference to improve it.

Read more about the pros and cons of buying a new build here.

So, is buying a new build a good investment?

Whether buying a new build property is a good investment, or not, will depend on your personal situation, your financial aims, and the types of investing you're interested in.

On the one hand, new build homes can make good buy-to-let investments. Not only are new builds generally part of big developments in key locations, they're move in ready, and require much less maintenance in the first few years than older properties. This means they're cheaper to manage, and often quite attractive to tenants too.

On the other hand, a new build property should be considered a long term investment. The premium price attached to new build homes means you're unlikely to make a profit if you plan to sell it on very quickly.

On top of this, new builds aren't great investments for those looking to make a profit through improvements and extensions. If you're interesting in investing in property for this reason, you'd be better served looking for an older property - or a piece of land.