When investing in a buy to let property, one of the big questions is whether to buy a new-build house or a previously owned property. Should you go for the brand new city-centre apartment or for the charming house on the outskirts?
This situation can become even more challenging if you have not been able to check the properties yourself. For example, if you don't have the time to drop by to check the houses you have in mind. Or even more difficult, you live hundreds or even thousands of miles away.
How can you even decide when you are not able to see in person the properties you have in mind? In this case, besides checking the brochures the real estate agent has provided you, you will have to pay close attention to the data. The numbers. How this investment will perform in the short, medium and long term to produce income and growth you are looking for.
What should you consider when deciding either to invest in a new property or in a previously owned one?
1. Property type
So what property are you going to invest in? New build or previously owned? New build properties do have their appeal: brand new water and electrical systems, modern space distribution and endless possibilities of making it look the way you want for your potential tenants.
Regarding paperwork, there is certainly less hassle involved compared with a previously owned one. Letting agencies that offer new-build units often provide an end-to-end service too. This means that the person selling you the property may also offer you access to mortgage finance, as well as tenant finding and arranging management services too.
Older properties, by comparison, have more character and tend to be larger than the typical new-build. If you go for a previously owned unit, you will have the option of a unique property with its own personality. At the same time, older properties tend to be cheaper than new-build ones.
What about bureaucracy? Previously-owned properties, also referred to as secondary properties, can differ from one to another in the amount of time and resources needed to complete the purchase. It usually depends on how clear the previous owners - who can be private or business, have settled the purchase-sale procedure.
2. Price per square foot
This criterion can vary based on the property type you have in mind: is it a house? Or a flat? Furthermore, location significantly impacts the price per square foot. Prices in Manchester, London, Edinburgh, Birmingham vary dramatically.
Still, in this blog the focus is to contrast new vs "old" properties, so let's take a property type to illustrate the difference in cost. In this case, Birmingham flats cost per square foot.
New builds units come in at approximately £375 per square foot, while previously owned ones would be around £250 per square foot. That is a difference of £125 on average per square foot from old to new-build flats. This translates to £100,000 difference of the full price on a typical 800 square foot apartment.
What if you really like that new build property, and are happy to pay the premium? Then, we will have to pay attention to the rent and the capital growth that a property is able to provide.
3. Rent
Buying a top tier new build property can be a good move if you consider charging higher rents too. What would be the difference in rent per square foot between a new build and an old one?
Taking the example of a flat in Birmingham, on average rent per square metre in a new build apartment would be £14 compared to a previously owned which would be £12. That's a 15% difference, not sufficient to make up for the difference in purhase price.
So does this mean you should always buy a secondary property in Birmingham?
It's not as simple as that. The next question is what the difference in capital growth is.
4. Capital growth
The difference between the initial cost and the increment in its market value is one of the most important criteria to consider when investing in the long term.
As it can be seen on the chart, even where there is a rise values for new and older flats, new-build appreciation is significantly higher over the last five years compared with a previously owned property.
In other words, new-build properties increase their value at a faster rate - meaning that depending on your investment strategy, they may actually be the better option..
5. District
The previous chart was referring to the average growth in value that flats - new-build and old, present in Birmingham as a whole. However, this value revaluation can change from district to district.
This is why you shouldn't just consider the city you are thinking about buying your property in, but also the district where the properties you have in mind are located. To do so, you can check the different district by checking the postcode. This is something that BellPepper does as part of its in-depth analysis into properties on behalf of clients.
6. Competitors
How much are your competitors asking for rent? If you have an old property probably this wouldn't be an issue because the older the property the more likely to be unique in features and rent (this of course doesn't apply to older blocks containing identical flats). But if you are thinking about investing in a new build unit, this would be interesting for you to keep in mind.
Imagine you want to invest in a new-build apartment that is part of a large housing development where there are also many other apartments with similar characteristics. It is entirely possible that other investors will be looking to rent their properties to tenants at exactly the same time. Therefore, there would be a large amount of competitors, and discounts on the rent may have to be offered in order to avoid long void periods.
Thus, it is important to analyse not only the property itself but also the area and the competitors to find out if the property will have the desired return on investment in the time frame you have in mind.
So now you have a list with some key indicators to keep in mind when choosing between a new build or secondary property. What can you do next?
We can get you started with our BellPepper Home Report for free. What can you find in it? In this document, you can check some relevant insights to invest such as location and demographics and supply and demand. After entering some details about the property you have in mind and its location, you will receive your first insights to make your investment decision easier.
Take the first step to more Intelligent Property Investing.