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Is This Shortcut The Long Route In Disguise?

By Andy Shaw | January 23, 2010

Originally Posted 25th August 2007

A common question I am often asked is, would I buy a new build property or would I recommend that someone else did? Firstly I’d say no I don’t, but that doesn’t mean to say I wouldn’t.

I think when some people make the choice to go into property investment I think what happens is that they are overloaded with information, and frankly they don’t know which way to go. So what happens at the end of it is an emotional trip whereby they become certain that if they do not do something now that they will not take action and all their efforts will be wasted.

They’ve studied everywhere and they want this elusive fortune that everybody except them is able to get hold of, so in an emotional state they make the decision to take what looks like the easy route. You know the one, the one where everything is done for you, all you need to do is sign on the old dotted line and cough up either a small or no deposit to get to be the proud owner of your first investment property.

Now I am not saying that buying a new build property is wrong, I am saying buying a new build property is wrong when you do not know the market that you are buying in. Without this due diligence then you are just throwing the dice and hoping it will work out. The funny thing is it certainly will work if you have the cashflow to sustain whatever comes along for the next 10 years or so.

Those who do not know their market and have not done adequate cash flow provisioning are suffering the worst fate that any property investor can suffer, repossession. I am asked by people regularly how they can get out of the mess they are in; they bought £1,000,000 portfolios or much more and they are now being eaten alive by mortgages with tenants paying a lot less rent than they have going out, or no rent. The worst case I have seen was a £4,000,000 portfolio that only cost £25,000 to get hold of, but only has 1 tenant in the whole lot of it. These poor people were losing nearly £20,000/mth and were already 4 months behind with their mortgage payments when they spoke to me.

The lure of easy money is very clear when I look at new build, but in my estimation only 5% to 10% of the new build properties deliver all that good that was promised. The rest under perform. Now if you can handle that under performance then there really is no big deal, and why not sit and wait to make your money. Just beware of the pitfalls. The biggest rise in auction properties is coming from newbie property investors getting rid of their new build properties.

There’s an article below that a member sent me from the Daily Telegraph which really demonstrates just how precarious this market really is and just how seriously this market can damage your wealth. Flats that were previously sold for £249,995 last year were sold at auction for just £140,000.

Just buying any old property and expecting to make 10%/year growth doesn’t work! You have to know you’ve made money and released your equity or you have to buy in an area where there will be more than adequate demand.

Think about it, if it’s a new build and there are ten in the block in a town where they are not building any more new builds for at least 18 months, and they are not building within 500 yards of this one, then it is probably a good bet (still a bet mind if you haven’t done your due diligence).

If it’s a new build with a 30% discount and cashback on completion in a block of 50 flats in a town centre where they have recently built over 1,000 new build flats then it is probably a bad bet. It’s not rocket science is it?

You cannot just abdicate control of your money to some developer whose job it is to sell you his property for the maximum he can make out of it.

The advantage you have when buying a single unit at a time and doing it my way is that you are protected from the herd, when new build you are running with the herd and none of the herd is likely to have much of a sense of direction, as they have all probably made the decision to buy in the same way you will have done.

Now I am not saying don’t do it, just consider that this little shortcut may well be the long route in disguise.

Best Wishes

Andy

Telegraph article, read both pages of it

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/07/23/cmbuytolet23.xml

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