There are lots of reasons why “off the plan” investing suits many people, but, as with all investments, there are risks.
I’d like to alleviate the fears around those risks and share with you the pros and cons so that you can make a decision about whether it is an option that is going to work for you.
Firstly, the greatest fear is falling property values. This is understandable and particularly relevant right now as many property markets around the country are in “correction” phase – the phase that always follows a boom. Property values can sometimes drop 10-15% during a correction before stabilising. If you buy off the plan during boom then settle during a correction, there is a chance your valuation may come in low. We don’t want that!
While no one can guarantee that property values won’t drop, you can do everything in your power to ensure that you do your research on both the location and the development to find investments that will hold their value despite market fluctuations.
What you’re looking for is a location that is experiencing strong investment, combined with a reputable developer. Government and private infrastructure improvements are great indicators as they often precede both capital growth and rental demand.
Other fears that investors can have are interest rate rises and bankruptcy or shoddy workmanship of the developer.
While there is nothing you can do to lock in interest rates over the long-term, you can make sure that the numbers on the investment still add up and repayments are affordable at varying interest rates.
You can’t do anything to guarantee the financial integrity of the developer, but you can do thorough due diligence on them. You’re looking for a strong track record of quality buildings.
While there are risks that must be managed, there are also lots of advantages
Firstly, it’s like a promise. You pay your 5-10% deposit now and then have time to save and arrange finance before exchange. You’ve set a goal to buy an investment property and you’re backing yourself and making that commitment that your goal will be achieved.
The fact that you only need to pay a very low initial capital outlay of 5-10% deposit, yet you’re able to secure a high-value asset, this is a great opportunity that you can work to your advantage.
By purchasing early, you usually have a greater choice of properties within the development. You can pick the best of the best or the cheapest of the best – or whatever is the option that meets your investing strategy. You have more options and greater choice when you’re buying off the plan.
You’ve locked in the price. If property values increase, your purchase price is locked in and won’t go up with the market. You’ve often made a win by settlement date. Research from CoreLogic tells us that correction phases in capital cities usually last 18 – 24 months. If you buy an apartment off the plan now, chances are good that we’ll be in another growth phase by settlement.
When buying off the plan, you have different timeframes between exchange and settlement. House and land packages are usually 18-24 weeks while apartments can be two years. With house and land packages in some states, you can benefit from significant savings on stamp duty as you only need to pay it on the land component of the purchase price.
You do need to arrange finance early as you will need a construction loan as well as the loan for the land and you often need to make progress payments during construction.
With apartments, you don’t need to have finance in place until the settlement date – which gives you a whole lot of time to prepare and make yourself look great for the lenders.
If you want to invest in property but are concerned about buying off the plan, do your research, or have someone do it for you so you can make an educated decision about what will meet your investing strategy.
As published in Australian Property Investor