There has been an explosion in buy-to-let investment - in particular investor clubs - in the past three years. While this can be a profitable way to invest, it is crucial to beware the pitfalls.
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Buyer beware
Buy-to-let investment can be a minefield. It is not helped by advertisements from companies in an unregulated industry, telling how you can make a million pounds, even in a falling market. With property investment clubs now estimated to be buying up one-in-four new-build apartments, but with a number of syndicates having already shut down and investors left out of pocket, there are fears that the overcrowded market will drive prices down further.
As many as 250,000 homeowners have remortgaged in the past two years to join a property investment syndicate or to buy a rental property.
Top tips for investing in a new-build property
Even with the end of the property price boom, buy-to-let can be a viable medium- to long-term investment strategy. Here are our top tips:
- Check with estate agents specialising in new-build properties to see if they can offer a better deal than property investment clubs. Estate agents do not charge purchasers’ fees.
- If you are arranging a buy-to-let mortgage, lenders want clients to put in deposits of their own. Most lenders will not accept 'gifted discounts' as deposits - so be careful of those 'deposit paid' offers.
- Be aware that new-build homes are sold at a slight premium, so you will have to set your rent to cover your expenditure. This may make your property more expensive to rent out than a resale one. However, your property will be in better condition and result in cheaper utility bills.
- If you are one of several investors buying at one scheme, or are part of an investment club, you may find other investors releasing their properties for rent at the same time as you, providing you with like-for-like competition.
Benefit from bulk buying and off-plan discounts
Buy-to-let companies try to negotiate special deals with housebuilders. In return for buying a large chunk of a new development off plan, the agent will obtain a discount on the purchase price, often 15 to 20%.
This sum should then be passed on to the buy-to-let investor. Someone who has negotiated a mortgage to cover 85% of the value will then own a property with minimal outlay on their part. In a rising market, this could be seen as a sure-fire investment. In a stagnating market, however, the small print should be scrutinised.
Investor clubs are by no means the only source for an off-plan apartment. Many developers will do a discounted deal, depending on the volume.
Cracking down on rogue investment opportunities
In May 2005, the Department of Trade and Industry's crackdown on 'Become a property millionaire' seminars and investment clubs led to the compulsory liquidation of five companies: Sterling Mansion, Mansion Investments, CM2 Services, Furniture Right and Seal Properties. Hundreds of investors lost between £30,000 and £50,000, after being lured into the schemes.
The schemes promised that investors could build a million-pound property portfolio in just 12 months. Most lost their membership fees and ended up with no property. A membership fee - as high as £50,000 in one case - gives investors access to new-build flats at discounts of 20% or more off the usual selling price. Property investment clubs are not regulated by the Financial Services Authority, meaning there is no compensation scheme available if a company collapses or is wound up.
The good guys in new-build investment
The majority of syndicate schemes operate efficiently and honestly. However, bad press could spell the end of the road for special property seminars of the sort run by Inside Track , one of the largest property syndicates, which negotiates a discount with a developer and passes that on in full to the investor.
Inside Track charges nearly £2,500 for two people to attend one of its two-day seminars and claims that it sells one in every 12 new-build units. The company's chief operating officer says that the discounts are genuine because the housebuilder can save on certain marketing costs by selling to an investment club, while a presale reduces the housebuilder's risks.
Some property drops below the pre-discounted price but the discount itself provides 'insurance' against falls in value. However, a valuation of 2,600 properties bought by Inside Track investors showed a combined rise of £80 million on an original cost of £395 million.
This article was last updated on 20 August 2006