Thinking of buying off the plan investment property?
Buying off the plan property is one topic which generates more grumblings, rumors, and misinformation than any other investing strategy. When it comes to property investing, timing matters, right?
In context to “buying off-the-plan” does it mean safe, predictable returns and annual rental increases?
The purpose of buying off-the-plan is no management fees, vacancy periods with security of a long term lease, so you can live comfortably knowing your future is financially secure; buying a block of land without actually seeing the property before sale, right?
What’s the reason why many property investors like to buy off-the-plan? Obviously they want to make sure its as safe or as less risky investment with reliable and high rental yields…yet are they’re speculating that the property will be worth more when it is completed?
Is off-the-plan properties a good solution for investors needing to organise finances or first home-buyers which don’t have enough equity to purchase?
Would an established property which you can buy today, whereby value is easy to confirm and rental return is more assured? Confirming an accurate future rent return is also nearly impossible, as this is affected by demand and supply.
Where the development is large, depending on release dates or time frames, there could also be a sudden oversupply as all the completed developments become available and you could get far less rent than expected causing further financial distress to you.
While buying off the plan is an option may offer benefits, it’s important for both investors and home buyers alike to perform their due diligence and understand where many trip up.
Buying off-the-plan property, in reality…unless you’ve done this type of property investment strategy before, does it really mean the value of a good investment property is underpinned by attributes such as:
- Land size
- Land value
- Property style
When looking for an investment it is vital to focus on the tangibles which over time change because need to establish the value of your finance commitments in context to your investment finance criteria:
- Target Market
- Population growth
- Unemployment rates
- Consumer sentiment
- Supply and demand
- Dwelling approvals
- Median value growth
- Rental yields/rates
- New DA applications
- Project commencements
You cannot just move a house and land and drop in in a more desirable or handy location a few years after you buy it, right?
Even at great expense, you’re most likely not able to change orientation of land, position of block of townhouses/apartments or what surrounds the property. In reality, you have no control over the supply of new property coming onto the market around you…
Good investment property is often very hard to buy because you are put in a competitive environment, while risky investments are often easy to buy. Buyers need to understand the market and why they’re opting for off-the-plan instead of an established property.
Buying off-the-plan property carries far greater risk than an established property and has little advantage.
It’s very difficult to establish whether buying off-the-plan property is at a fair market value, even a registered valuer cannot forecast future values accurately to assure what you’re buying is going to be what it is worth when completed.
When you tie up your borrowing capacity on a yet-to-be completed project, you may not be allowed by the bank to borrow for additional investments, as your true position cannot be determined until the property is complete and owned by you.
If you’re getting a loan to buy property off the plan, what if the property has a value less than you agreed to pay?
Firstly, you may not be able to borrow enough cash to complete the sale because your bank will use the valuation, not your purchase price to determine how much they will lend you.
Off-the-plan, while this may sound straightforward, there are a number of considerations to take on board. If you cannot complete the purchase due to lack of funds, you’ll be forced to move forward at risk of losing your deposit.
Buying off-the-plan property and tracking changes: For example, off-the-plan apartments run work on the concept of putting down a deposit today and waiting for capital growth to kick in by the time the property is completed.
To avoid a potential purchase disaster, property investors need to put in the hard yards and do their on-the-ground research. The most crucial factor is knowing your target market, demographics, infrastructure, and whether the market is going to be over or under-supplied and to understand specific economic impacts of the area.
Due diligence: As a property investors you would talk to local councils or visit Department of Infrastructure website to find out about projects that are underway or in the planning stage.
Buying off-the-plan property by analysing supply and demand: it is critical to understand the strength and amount of supply in the existing market, because as a property investor you also need to be aware of other properties becoming available.
Equally important are population growth and job opportunities in the area; this data can be used to compare the last Australian Bureau of Statistics census against the most recent census to get a snapshot of how an area is changing.
For investors, historical trends such as vacancy rates and rental yield growth rate are indicators to consider, including how vacancy rates performed over last five to ten years and which figures have established a sub-two percent as a good benchmark.
Buying off-the-plan contracts: Buying off-the-plan property involves entering a contract to buy a property that is not yet built. Investors therefore need to find a professional lawyer who is able to comb through the details of the contract with them.
As a property investor you need to make sure you are happy with the length of sunset clause you understand the full extent of the contract in every complete and detailed ways as possible…
Buying Off-the-Plan Property