Thinking about buying off plan? Let me give 5 Property Investment Strategies for Beginners you probably haven’t thought of when thinking about buying a new build investment property.
Property Investment Strategy #1 – Buy near Build to Rent Developments
Build to Rent, or multifamily property as it is sometimes called is a relatively new concept outside of the United States. However, its a growing asset class in major property markets around the world so if you haven’t heard of it yet, you will.
What is Build to Rent?
Build to rent property is essentially what it says on the tin, it is a new residential development property which has been specifically designed for rental rather than any other purpose. The British Property Federation has written a good summary of what build to rent is, so if you want to read more, you will find it here.
The principal difference between build to rent and most of the residential development is that it is typically owned by a single company, which is usually a big pension fund or property investment fund. When doing your research tracking some of the new build to rent developments will give yous some great ideas about where might be great locations to invest in, let me explain.
Research and Analysis
Large investment funds who own build to rent properties, spend hundreds of thousands of dollars every year on their property investment strategies. They have a lot of resources focused on what the long-term trends will be in a specific location, what the demographics are and they focus on buying in areas where they expect to see long-term growth in both rents and capital values.
Let these large investors do the heavy lifting, look locations where they own or are buying. These companies do not buy in locations with poor long-term prospects.
Pool of Tenants
One of the other great advantages of these build to rent developments is that they constantly have a lot of apartments to rent, they spend thousands of dollars every year promoting their developments in the media and on property portals so that they can be sure they will have a constant flow of new tenants.
Leverage their investment. Not all of the people who want to live in that area will end up renting in the build to rent development, either because there isn’t the availability or because they don’t like the property for some reason. You can target these tenants for your investment.
Be Realistic with Rents
A word of caution, you need to be realistic. You will not rent your property out for more or likely even the same as one of these build to rent developments. The properties have lots of extras and advantages for tenants. So use the rents these developments are charging as a good guide to the top end of the rent you you are likely to receive for your investment.
Property Investment Strategy 2 – Buy a Three Bedroom Apartment
Three bedroom apartments are really hard to sell, I hear you say, yes they are! So you need to think about that if your intention behind buying is to ‘flip for a quick profit’. However, buying a three bedroom or larger property can be a great strategy for long-term investors. Let me explain why.
Why do Developers Build 3 Bedroom Apartments?
Three bedroom apartments are very difficult to sell and most developers only generally build them because, either:
- Their is a specific sub-market demand for larger units, which is very unusual especially in large cities; or
- Because planning authorities make them build them as part of their permissions to build a new development
They are hard to sell!
Because they are unpopular, three bedroom apartments are very difficult to sell. It is typically not until the very end of the sales cycle that a developer is able to sell three bedroom apartments. The problem for the developer is that they have a lot more capital tied up in larger three bedroom apartments, simply because they are larger and cost more money to build.
You can drive a Hard Bargain!
The great thing about buying a property which is very difficult to sell compared to a smaller apartment (which most developers don’t have any issues selling) is that you have a lot more negotiating power. Especially, if you are buying very early in sales cycle. Most developers know that it won’t be until right at the end of the sales program until they are able to sell the larger units and they may well accept a ‘cheeky’ offer from you to get their cash in now, rather than take a risk on a future sale.
Popular with Sharers
Three bedroom units are also very popular with sharers. If you have three people all earning an income they are likely to have a larger budget for renting. It is also very hard to find larger units for rent, so you are likely to find you are able to keep your tenants for longer. Reducing your ongoing costs for getting new tenants.
Hard to flip
Buying a three bedroom apartment can be a great property investment strategy, however, you also need to bear in mind that if you do want to sell the property it may be harder to sell and it certainly will be almost impossible to flip at a profit relative to the risk you are taking on.
Property Investment Strategy 3 – Buy at the End of the Financial Year
Ever heard the saying the best time to buy a used car is at the end of the month, because this is when car dealers are likely to be struggling for sales and will do a better deal. Guess what? It is the same for property developers, there are always times where they simply just need a few sales in order to hit their targets. So when are the best times to employ this Property Investment Strategy?
End of Financial Year
The end of the financial year is a big crunch time for many developers. For listed developers they have their end of year financial accounts which they have to report sales figures on and for smaller developers they have banks and equity providers breathing down their necks.
These developers are far more likely to do a quick deal with a better discount if they can get the deal recognised before they close their financial accounts and can report the sale.
Just before the End of the Calendar Year
The end of the calendar year is another great time to speak to sales directors and increase your negotiating power.
Property Investment Strategy – Health Warning
This property investment strategy comes with a health warning. It will only work if you can get into an unconditional contract with the developer. Most developers cannot recognise transactions which are not legally binding, so don’t go an speak to a developer on the last day of the financial year, your sale won’t hit their books. You need to allow at least 15 days to exchange contracts.
Property Investment Strategy 4 – Buy a Completed Development
A property investment strategy used by professional investors, which property investment beginners do not consider enough, is buying a completed property. It is possible to do great deals buying completed apartments and this has a number of other advantages.
One of the biggest advantages for beginner investors buying a complete apartment, is that you will get almost immediate income. You won’t need to have your deposit out for a long time generating no return.
Developers want to close the Site
You can negotiate a really strong deal on completed
Health Warning – Get your Finances in Order
If the property is already completed, you will likely exchange contracts with a fixed completion date. This means you are contractually bound to complete the property on a particular date, which may only be a matter of a few weeks away. Make sure you agree to a completion date you can meet. If you’re an offshore buyer, it can take up to 6 months to arrange your mortgage. So make sure you will be able to complete the transaction by the fixed date. If you don’t, you risk losing your deposit and could even be sued by the developer for not completing on the property.
Property Investment Strategy 5 – Buy an ‘unpopular’ Unit
Most people won’t tell you this, but their are some apartments in developments, which are just difficult to sell. Sometimes there will be obvious reasons that an apartment will be unpopular because it is close to a road, or near a railway track. However, sometimes a particular layout or location in the building is unpopular for no real reason. A good property investment strategy is to go after these units.
Ground floor apartments
Ground floor apartments are often overlooked by investors, with the concern that they are less safe than an apartment on higher floors. The truth is, many ground floor apartments benefit from a private patio or small garden. For tenants, private outside space is hard to come by, so whilst you may not get a higher rent for a ground floor apartment, you may be able to let it more quickly than one on a higher floor with no outside space.
Apartments with an awkward room shape or a structural pillar through a room will likely be priced to reflect this. Speak to a furnishing company to see how they would suggest furnishing the property and you may well find that if done cleverly, the awkward shape is in fact useable and rent you achieve for the property may not be impacted any way near as much as you had first thought.
Health Warning – Cheap doesn’t necessarily mean it’s a better investment
Don’t be tempted to buy an unpopular unit just because of the price. If your strategy is to sell the property in a few years, you will most likely be selling to an owner occupier, so think carefully about what their requirements might be. A ground floor unit with no outside space and a bedroom directly fronting a busy pavement is going to be hard to sell. Likewise, an apartment directly over the entrance to the car park is unlikely to bother your tenants too much, but for an owner occupier, they are not going to want to compromise to such an extent.
So think carefully about why the unit is unpopular, and if it’s likely to be difficult to resell in the future. Cheap doesn’t necessarily mean it’s a good investment!