Hello it’s Dr Ro here in the Maldives and today I’m talking about risks with off plan property.
And it is to do with property investors for those of you watching you will have seen some of the other short videos I’ve been doing.
Today’s mistake is to do with people getting very excited about property. They are very busy in their jobs or in their career, or maybe they’ve got cash kicking around. What often happens is they get lured in by off plan developers.
Now when I say off-plan developers I’m talking about people who sell apartments, one- or two-bedroom apartments. You’ll often see them advertised in glossy brochures. When I go speaking internationally onto some of the big stage events often what will happen is I be there and outside in the general public area, there are these companies with models and brochures and pictures of these beautiful high-rise apartment blocks being sold to investors.
In places like Singapore, Hong Kong, Australia often UK developers will be promoting these developments to those people over there. Showing them the glossy brochures, showing them where they’re located often it is east London, south London, central London, possibly Manchester, Birmingham those sorts of places. And what they don’t tell people is that the whole block is often being sold to investors.
Now warning signs here. This is for the uneducated people that don’t understand how this works.
Here are the warning signs.
Be careful if a developer is offering you a brand-new apartment and telling you, here is the number one warning sign, that everyone buying is an investor. Everyone is buying and investing there. You’ve got serious challenges in the future because it is exit strategies. If you haven’t watched the previous video I did, go and look at exit strategies.
There are very few exit strategies on new developments. If 100 units, or 70 units or 150 units are all being sold to investors. What happens when those investors at some point want to sell those properties on?
So for me one of the things I think you should be looking at is small developments, where there’s very few investors, mainly owner-occupied people that are living there. Helping to give that market a genuine market value. And even then with the brand-new development it’s very, very rare that the market value they tell you is the market value. Because they’ve just created that market value.
And that is the challenge you’ve got. So one thing to look for is that there are lots of investors buying. Number two if they offer you a guaranteed rent for one year, maybe two years. Imagine 60,80,100 investors all buying there getting a guaranteed rent on tenants that maybe there may not be there. Generally speaking, those guaranteed rates are higher than the market down here.
So the developers do it to entice you in. And of course the challenge you’ve got now is you’re there for a year with a guaranteed rent, along with all the other investors. And what happens at the end of that period Is it comes off a cliff because you along with 88, 90, 98, 100 other investors, have suddenly got a property which has come out of a guaranteed rent. You go to a local estate agent, local letting agency and they say to you, well there are 100 units there, we can’t fill those. In fact, the market rent is about 800 750 and that’s when the market is strong. In reality, there’s another 85,90 people all trying to fill those units. We could probably get you 600.
Of course you get upset because you want to get the higher rent you had before but it was an artificially inflated rent. So you have to drop your rent and the problem with that is it’s an apartment block, so it’s a leasehold property. Leasehold properties have other costs, including things like ground rents, service charges, etcetera.
So all of a sudden you’ve got the mortgage going out, the service charge, the ground rent, management fee. Nine times out of 10 those properties barely break even. Most of the time they’re actually negatively cash flowing.
So my warning signal is this if you’re a brand-new property investor don’t be lured in by off-plan developments. I was teaching just recently for the Legacy education group on the three-day basic training. We had Rich Dad students in the room, we had people from different areas in the room and there were people in the room buying properties in Manchester off-plan, and they didn’t have cash flow. We ran the numbers on them, we looked at management costs, we looked at mortgages etc.
So we literally had to tell them if you buy these properties you are likely to lose somewhere in the region of £20-£25,000. One gentleman’s wife was so adamant that she wanted to own an investment property, she said to him, “no, no, don’t worry let’s just go for it. I’m sure we’ll get some capital growth.”
That is a buy and hope strategy, that is all that is.
So if you’re watching this and it even resonates be really careful about looking at off-plan deals. Get yourself educated properly and do the numbers. If the numbers stack up, then possibly. But even then you’ve got to look at how many other people are buying there as well.
You’ve always got to be thinking about exit strategies.
Dr Ro. I’m going back in the ocean, see you soon.
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