What is the Difference Between Off-Plan and Turn-Key Buy-To-Let
As a new buy-to-let investor, you need to understand the difference between turn-key and off-plan buy-to-let property investment.
Buy-to-let is one of the most popular property investment strategies for both new and experienced investors. Building a buy-to-let portfolio is a great way to create passive income that can help you save for retirement or your other goals.
Success in property investing, whatever strategy you choose to follow, is dependent on doing your research and understanding the market that you are going into.
That means you need to know about the area you are investing in, the demographics of the population, transport links, etc, but before you even look at areas you need to understand the different investment products available.
With buy-to-let, there are two distinct types of investment – turn-key and off-plan.
Turn-Key (or regular) Buy-To-Let Investment
Turn-key, or regular, buy-to-let properties – as the name suggests – is an existing property that an investor will buy to rent out to tenants.
An investor will get their return on the buy-to-let property investment through rental income or by flipping the property for more than was paid.
Off-Plan Buy-To-Let Investments
There is another type of buy-to-let property – ‘off-plan property’. These types of properties are known as off-plan because they have not been built yet or they are still in the process of development and construction, so investors are buying a plot of land that is due to be developed.
Off-plan properties have not yet got a structure built on the land and are pre-constructions. These off-plan property investments are marketed by property developers to early buyers as developments so that the buyer can secure a better deal, which will benefit them financially.
Comparing Buy-To-Let with Off-Plan Properties
Regular buy-to-let properties are already built. They have probably been on the market for a few years and have had a history of owners as well as tenants. The properties will be situated on existing land and will likely already have communities and social networks formed which an investor can research and work out of the area is a good area for buy-to-let investment.
An off-plan property is essentially the same thing except it is not yet built and so there may not be existing communities if it is a large new development.
If you go back about 20 years off-plan purchases were quite uncommon and virtually unheard of in the United Kingdom. In today’s world, off-plan investments are a strongly established mode of purchase for buyers and investors in the UK. Buyers nowadays are more engaged in this method of property sale and they realise that there are lots of investment opportunities with an off-plan property.
Advantages of Off-Plan Buy-To-Let Investments
Buying a property off plan will come with great deals and discounts. If you purchase a property off-plan, the price will likely be discounted to a value that is much lower than the actual market value of the property in the near future once it is built. Cities such as Sheffield, Manchester and Liverpool, offering some of the strongest potential returns on property and currently have a very strong rental market, is where a lot of off-plan property purchases and investments are made.
Buying off-plan properties can be more appealing for property investors because of the lower purchase price as opposed to waiting for a property to be constructed, then purchasing it.
Once the building is completed the market value will generally exceed the off-plan price giving instant capital appreciation.
Another advantage of buying properties off-plan is the selection. Whilst regular buy-to-let properties are already built and will need to be refurbished, off-plan properties haven’t been constructed yet so as an investor you will have a bit more say in the location of the property on the development and the features that the building has. For example, you can be more selective about the feature of the property, e.g. parking, etc to make sure that the unit suits your own needs, tastes and budget.
The developer will often assure rents for 3 years or a similar period and many will offer a buy-back option after a number of years, for example, 5 years. This means that you can be assured of making a decent return provided the development completes. In this way, off-plan buy-to-lets are much more hands-off and managed than a regular turn-key buy-to-let investment.
If you are not looking for the typical buy-to-let strategy with your off-plan property you can additionally resell the property (flipping) on to another investor once the property has been completed. This can quite easily be done with an off-plan property because most off-plan investments will require you to make a deposit of just 10 – 20% of the property’s actual value. This makes it simpler and more affordable to secure the property.
Risks Involved with Off-Plan Purchases
Buying an off-plan property has been seen as less risky for investors because developers are now offering deposit guarantees for more security and peace of mind. However, there is always going to be more risk with off-plan because it is not ‘touch and feel’ like a completed or buy-to-let property.
Although uncommon there have been cases where the constructor or developer behind the project may go out of business before the property is complete, creating a massive hurdle for the investor.
The way to avoid this is to do your due diligence on the developer – do they have a track record of completing these types of developments?
If you make your purchase through an investment company then they will have done their research and will generally only work with established developers whom they trust.
So, like any investments, there are risks associated with buying off-plan so it is important to do your research on the development area and the track record of the development company.
Advantages of Turn-key Buy-To-Let Investments
The time frame involved with a turn-key buy-to-let property investment strategy will be shorter than that of an off-plan property because the houses and apartments are already built. There is no waiting time for contractors and developers, etc. The only time you will need to factor in for the preparation of the property is the refurbishment work (if any is needed).
Risks Involved with Buy-To-Let Purchases
Tenants and Rent:
You will need to find a tenant for your new investment property. You can do this yourself or hire a lettings agent, but there is no assured rent or any kind of guarantees when you buy an existing property.
Unlike with an off-plan you are pretty much on your own with a regular buy-to-let and this is why it is important to do your research and get good professional advice
There may also be some extra work that needs to be done on the property to make it more suitable for your goals. You may need to spend extra on refurbishments to increase the value of the property in order to get the most out of your investment.
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