London's Olympic Village has been sold to the Qatari ruling family's property company in a deal that leaves UK taxpayers £275m out of pocket.

Qatari Diar, the oil-rich state's investment arm, and UK property developer Delancey Estates teamed up to buy the athletes' village next to the Olympic Park in east London for £557m.

After the 2012 Olympic Games, the village will be converted into a neighbourhood with 2,818 homes, including 1,000 family homeswith three or four bedrooms. The rest of the properties range from studio flats to five-bedroom apartments. The area will also include a schoolwith 1,800 places for children aged three to 19, shops, bars, clinics and parks.

The Olympic Delivery Authority, which sold the site, had already sold 1,379 of the residences in the 11 blocks of the athletes' village to Triathlon Homes for £268m in 2009. They will become affordable housing such as shared ownership or socially rented apartments.

Qatari Diar and Delancey plan to turn the bulk of their share of the residences – 1,439 properties – into private rental accommodation, rather than selling them. They say this will create the first UK private sector residential fund of more than 1,000 homes to be owned and directly managed as an investment.

At the moment, the apartments in the village do not have kitchens as athletes will eat at dining halls. They will be fitted out for long-term residential use after the games when kitchens will be added and new floors put in. The first tenants are due to move in in late 2013.

The joint venture also acquired six adjacent development plots with the potential for a further 2,000 new homes. The deal includes a profit-share that should provide income to the public sector in future.

Jeremy Hunt, the culture secretary, hailed the sale as a "fantastic deal that will give taxpayers a great return and shows how we are securing a legacy from London's Games". The village cost £1.1bn to build, but the ODA insisted it never expected to recoup building costs. "It was an entirely empty site, it didn't have any infrastructure, roads or parks. There was always going to be a public sector contribution to help put those in," said a spokesman.

He added: "We weren't just looking for the highest bidder, but for the best owner with long-term commitment." He said the ODA supported the property investors' plans to turn most of the residences into rental accommodation.

Jamie Ritblat, chief executive of Delancey, said: "This acquisition reflects the first truly great residential investment opportunity in the UK; offering the chance to break the mould and create a sustainable leasing model to provide first class accommodation for those who see the chance to rent long-term, as the way forward."

The ODA had to dip into the Olympic contingency fund and use £324m of public funds after a private developer, Lend Lease, failed to put forward a funding package in 2009 due to the financial crisis. That money will now be repaid to the Olympic budget out of the village sale proceeds – this has been uncertain during the economic downturn.

Qatari Diar already owns the Chelsea Barracks site, which it bought from the Ministry of Defence in 2007, and it will redevelop the US embassy in Grosvenor Square, London, as well as the Shell Centre on the South Bank.

The Qatari property developer has been embroiled in a high-profile row over the £3bn Chelsea Barracks scheme, which recently received the green light two years after Prince Charles intervened over plans for the 13-acre site. In June 2009, the developer withdrew its planning application after the Prince of Wales wrote to its chairman, the prime minister of Qatar, saying his "heart sank" when he saw the modernist design by Lord Rogers.

Qatari Diar's then-partner, the CPC Group owned by the Monaco-based property developer Christian Candy, launched a high court action to claim £81m in compensation after the scheme's collapse. The architects behind the revised plans are Dixon Jones, Squire and Partners and Kim Wilkie.