5 things to ask as a first time property investor
5 things to ask as a first time investor

Thursday 25 August 2022

When first looking at investing in property, it can be very confusing and stressful. There is an abundance of questions first-time investors ask to get a better understanding of property investment and where to start. We have collated a list of the top 5 things to ask when investing in property for the first time

How much is the reservation fee & exchange amount?

A reservation fee is the amount of money you put down to secure the property and take it off the market. This is usually a non-refundable amount and typically ranges from £1,000 - £5,000. From reserving to exchanging on the property, the maximum time period to do so is usually only around 28 days – much quicker than your typical residential property.

The exchange amount, which usually varies between 10% - 30%, is the rest of the money needed up front to purchase the property. This is not an amount that can be borrowed on a mortgage, you must have this as available cash. Therefore the question to ask yourself is, can you afford this?

When is the property completing?

If you are buying an apartment off-plan that is not yet completed, you must be aware of when it is completing and does it fit with your strategy? A rental property is there to make you money so can you afford to wait a few years for an off-plan property to complete or do you want to get immediate income? Off-plan & already completed developments both have their own benefits, so what is the strategy that you want to follow?

What is the ground rent & service charge amount?

These are both annual costs charged by the freeholder - the person who owns the land in which your apartment is built on.

Ground rent has been a hot topic in the news recently, with the government committing to abolishing ground rent to £0 and offering leases of 990 years. The main reason for this is that some developers were exploiting leaseholders/apartment owners and increasing the fee every year, some even doubling every year. However, for a while now mortgage companies will not offer lending on a leasehold property if it is any higher than 0.1% of the purchase price, reviewed on Retail Price Index every 10 years, so only ever increasing in line with inflation. This mitigates the risk of the developer hiking up the charges to unreasonable amounts. So ground rent conditions is something you need to be asking when purchasing your apartment.

Service charge is necessary with apartments because the communal areas need sufficient upkeep so it does not fall into disrepair. This is charged usually depending on how many sq ft your apartment is and the amount is determined by the area your property is located in and the facilities it has. The more facilities, generally the more expensive the service charge as someone has to be maintaining these and being paid for it too! Similarly the bigger and more desirable the city to live in usually the more expensive the service charge. However, to give you an idea of price at ERE Property our developments service charge ranges from around £1.50 - £2.60 per sq ft. You should be able to request a breakdown of where these costs are being spent before you purchase a property, or at least the developer will have a draft copy.

What is the protection on my deposit?

Some deposits can be fully protected, others partly and some not at all.
Building warranties in place usually protect 10% of your deposit, so that’s the first thing you need to check – if the development has a warranty in place.

However the remainder of the deposit, if higher than 10%, can be kept in many different forms:

  • Held in an escrow account with solicitors where the money cannot be touched until the build is complete, so is therefore fully protected.
  • Held as a stakeholder which means if the development ever didn’t get built you may own, for example, the land the development is built on.
  • No protection offered at all but the build is fully forward funded.

The latter is least preferred, but the risk can be seen to be mitigated if the developer is reputable and the bank is funding the whole scheme.

In regards to your deposit protection, these are more in-depth detailed questions to be asked that may be more complicated and should be thoroughly investigated by your solicitor – it is their job to look at the legalities and go through everything with a fine tooth comb.

Who is the developer?

At ERE Property we do extensive due diligence, including lots of background checks on the developer. However, it’s always worth doing your own due diligence on who exactly is developing the apartment you’re looking to buy. Has the developer got any previous developments completed that you can have a look at? How long have they been developing, what’s their experience and track record? Do they have a schedule of work for the development you’re purchasing in so you can be aware of the development progression and expected completion?

Hopefully, this article gives you a starting point with what to look out for and ask your Investment Director. As mentioned, this does not cover all the questions you should ask when purchasing a property and you should complete your own thorough due diligence.

If you are interested in investing in property, one of our Investment Directors will be happy to have a chat with you - Call us on +44 (0) 113 380 8930 or email info@ereproperty.com

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