A very common question we hear from investors entering the market for the first time is, “Should I buy an off the plan investment property?” Sometimes this question is framed as, “Should I buy a new investment property?” We’ve all probably wondered about this at some point.
It’s a ‘loaded’ question, as there are a number of variables to take into account before we can give a valid response. Your budget, ongoing cash-flow requirements and even your appetite for risk, are factors that always need to be considered before you make any serious investment.
Now, if you were to ask us about small to medium scale property development that you control, then we think that this can be a wonderful way to manufacture equity and accelerate capital gains. We would always advise you that there are risks, and you do really need to get the right advice, and know what you are doing.
The common definition for an off the plan property investment, is where you purchase a single property as part of a large development project that is yet to be built.
There are quite a few compelling reasons to buy an off the plan investment property:
- You can claim much higher tax deductions (depreciation) with new properties.
- If you happen to buy a new house and land package in an area that’s beginning to boom, it will be worth much more on completion than what you bought it for. In a booming market, you may even be able to sell the property for a profit prior to completion.
- While there is an initial holding deposit (or deposit bond) of 5 to 10 percent, the developer doesn’t usually ask you for a fee to secure the property.
- A building guarantee often up to 7 years.
- The construction timeline may give you extra time to build up your deposit.
- Government grants and stamp duty concessions may be available in the state or territory where you are buying.
- Tenant appeal. Tenants love moving into brand-new properties.
An off the plan investment property can work out to be a great investing approach under the right circumstances, however here are a few things to consider:
- You will invariably pay a large premium to the developer because it’s a ‘new build’. Rather than current market value, the purchase price is usually based on a ‘notional’ value on completion.
- It’s unlikely that you would be able to add value to an off the plan property. An example of adding value could be adding an extra bedroom to an older property, or building another dwelling on the existing land.
- An oversupply of identical properties results in little ‘point of difference’. This can lead to lower rents and a direct fall in your property’s value if there are distressed sales in your project.
- It’s unlikely that you will get far negotiating with the developer on the purchase price.
- There can be developers discretion around re-sizing and changing floor-plans. Investors are sometimes shocked at the lack of space and overall build quality of the property they have purchased.
- Building defects (especially for newly built apartments) are common, and despite builder’s warranties being in place, huge costs in the form of special levies can be passed onto owners years after the building is complete.
- Timeline blowouts. An estimated 12-month construction project can often become an 18 month plus
- There have been many cases where the developer has gone into liquidation before the project is finished.
And if that doesn’t put you off…
A finance pre-approval for an off the plan investment property purchase may be useless, as it will almost certainly expire prior to completion, meanwhile lending conditions could be completely different by the time your property is built.
At this stage the lender may not offer you finance for an off the plan investment property for a multitude of reasons:
- The property is given a low bank valuation.
- The project may end up in the lender’s postcode blacklist.
- The property may not meet the lender’s minimum floor space requirements.
And what if your life circumstances change during construction – health, family, incomes etc – what will you do to complete the deal in this case?
Fundamentally, buying an off the plan investment property is a high risk exercise, because you are buying a promise of something that doesn’t exist yet.
The unfortunate irony of this approach to property investing is that it falls way outside the risk profile of most property investors, who are inherently quite conservative.
The prevalence of off the plan property investment for first time investors may be a clue as to why the overwhelming majority of property investors only have one property (and many sell their investment within 5 years).
This leads us to our final point: