Should Buy to Let property investors purchase new build properties?
As mention previously, we have decided that we now want to add a 5th property to our Buy to Let property portfolio.
We currently live on a new build housing estate and bought our family home from Charles Church in 2010. Over the last 3 years the development has grown, with new build properties being built by Charles Church, Persimmon and Cala Homes.
In 2011 – 2012, Persimmon built Phase 1 of what they describe as “A development of modern, contemporary 1 & 2 bedroom apartments”. At the time, they were selling 1 bedroom flats for around £85,000 – £89,000. However, whilst we were abroad on holiday in the summer of 2012, they dropped the price of the last 1 bedroom apartment in their phase 1 development to less than £80,000. It was 3rd floor, corner apartment as shown in the image below.
At the time of writing in late August 2013, my wife and I are having difficulty in remembering the exact sale price that this last property in Persimmon’s phase 1 development sold for, I think it was around £79,000, but my wife is probably more correct at a heavily discounted price of around just £76,000.
By the time we got back to the UK after our 2 week holiday in 2012, this last apartment in their phase 1 development had been sold. According to the Sales Agent at the Show Home, it was sold “to a Director at Persimmons”. The property then stood empty for approximately 6 months before there was eventually some signs of occupation.
Fast forward to late August 2013, when we discovered Persimmon were now trying to sell the last 1 bedroom flat in their phase 2 development. The list price was £89,995, but they were offering incentives to close the sale on their promotional weekend.
We viewed a nice, 1 bedroom ground floor flat. A quick discussion with the Sales Agent informed us that Persimmon were willing to drop the sale price by 5 thousand pound to £84,995 if we bought that weekend.
We knew that similar 1 bedroom properties on this estate rented for between £450 and £495 a month, so we were looking at a rental yield 6.35% and 6.99%. At the time the Bank of England base rate was just 0.5%. Typical buy to let mortgage rates were around 3.99% and saving rates were around 1.2%, so on paper this looked like a great Passive Income Portfolio investment.
The Sales Agent also highlighted their were going to be no 1 bedroom flats in the phase 3 development. The overall square footage of the smallest apartment in phase 3 would stay the same, but by making it an open plan kitchen and living room, they were squeezing in a 2nd bedroom in. Persimmons charge for moving a few walls around meant that the cheapest flat in phase 3 now had a list price of £99,995!
So at £84,995, was this new build Persimmon flat a bargain? No – alarm bells started to ring when we spoke to a mortgage advisor. We were told that most Buy to Let mortgage lenders were now only offering 65% LTV (Loan to Value) mortgages on new build properties. This would mean that we would need to make a cash investment of 35% of the sales price, which would be £29,748. All of a sudden this no longer looked like a good Buy to Let investment….
We made our excuses to the Sales Agent at the show home that day and disappeared to check our numbers.
When the Persimmon Sales Agent made a follow up call a few days later, we told them the numbers did not stack up. At a purchase price of £84,995, with a 35% deposit for a monthly rental of between £450 and £495 a month, the return on the investment (RoI) of this new build flat was far poorer than buying 2 older flats at around £45,000 each, with a 20 – 25% deposit that would have a monthly rental of £350 each. For a £90,000 overall purchase price and £18,000 deposit, the rental yield of 2 older properties would be around 9.3% !