Leveraging without debt: Investors turn to off-plan property to boost returns

With stock markets at record highs & interest rates at record lows, savers & investors are increasingly taking greater risks in the search for yield.

Leveraging — investing using debt — has long been used by investors to boost returns when prices rise. For example, an investor who purchases a buy-to-let property for £100,000 with a 50% mortgage can double her percentage capital gain if the property’s value rises (5% gain on £100,000 is equal to 10% gain on £50,000) so long as rent covers interest payments. However, it works both ways and any price falls are equally magnified.

Some investors though are using off-plan property to benefit from the upside of leverage while minimising the downside risk.

Developers market and sell off-plan property at current market values but as the property won’t be ready for several years in some cases, the buyer need only put down a deposit on the property, paying the balance on completion.

Deposit levels vary but are generally in the 25–35% region. This means the investor can buy at today’s prices whilst paying only a fraction of the cost but capturing all of the capital gains between now and completion, should prices rise. They then have number of years before they need to commit the rest of the cash — or worry about tenants for that matter.

On completion the buyer can hold on to the property as a buy-to-let or sell on the open market having leveraged her deposit without actually taking on debt.

Notes: the content of this article has been drawn from our experiences and interactions with buyers & sellers in the new homes market, it is anecdotal and does not constitute advice or guidance of any kind.

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