With property experts warning of an impending oversupply of apartments in Australian capitals we couldn’t help but wonder whether buying off the plan property is still a good idea for investors.
According to Moody’s Investors Services, a staggering 117,518 new apartments will be built in Australia in the next 24 months.
There are several differences between buying an existing dwelling as an investment property versus buying off the plan. Here are the pros and cons to weigh up to determine whether buying off the plan could be the right investment opportunity for you.
- Buying off the plan can be a good investment if you do your research
- There are several advantages to buying off the plan such as lower upfront costs
- Buying off the plan comes with risks like delays, oversupply, and developer snags
Pros of Buying Off The Plan
It’s Brand New
A major advantage of renting out a brand new property for investment is that it won’t require the same kinds of ongoing maintenance costs and repairs than that of an older property. For extra peace of mind, you have a warranty on the property so you know you won’t have to foot the bill if any unexpected issues crop up. All newly built properties in Australia come with the seven-year builders guarantee, so if anything goes wrong structurally or internally in the seven years after completion the builder must make the necessary repairs.
Stamp Duty Concessions
In some states, new builds are eligible for stamp duty reductions, where you could potentially save thousands. For instance, if you buy a newly constructed home for under $550k in NSW you don’t pay any stamp duty. If you buy an off-the-plan house and land package you only pay the stamp duty on the land, not the whole package price.
More Time To Save
Unlike an established property, the initial capital outlay you need to secure an off-the-plan property is only a 10 per cent deposit, where you pay the rest on completion. This gives you extra time to save while it’s under construction, putting you in a better financial position and reducing the amount you have to borrow by the time it is completed.
When you pay the deposit for an off-the-plan dwelling you lock in the current market value. This is beneficial because it won’t be completed for a few years during which time the market value is likely to rise. So you can effectively earn capital growth without having to pay any interest on a loan.
When buying off the plan as an investment you may be eligible to claim depreciation on fixtures and fittings come tax time. We recommend getting a depreciation schedule from a quantity surveyor once the property settles. Check with your accountant or financial advisor to see what tax deductions you’d be eligible for.
Cons of Buying Off The Plan
Buying off the plan is definitely not for the faint-hearted or impatient. There’s uncertainty with what you’re actually buying and it’s not uncommon for the proposed completion date to be pushed out due to disruptions.
If the market takes a hit during construction or there is an oversupply of new builds in the area come settlement, the property value could be driven down to less than what you already agreed to pay for it. This would negatively impact your ability to secure finance for the full amount and diminish its resale value if you intended to flip the property soon after completion.
Mitigate this risk by checking with the council what plans there are for future developments in the area in the next three to five years. Also, check what comparable new properties are selling for to avoid paying too much.
Also keep in mind you’ll be competing with all the other investors that bought in the building trying to rent out their apartments at the same time, which may drive rental prices and your potential rental returns way down.
Make sure you review the contract thoroughly for what happens to your deposit if the project never gets off the ground or if the developer runs into financial problems or goes bankrupt. Better yet, before getting to the contract stage perform a thorough background check on the developer to make sure there are no cash flow or quality control issues with previous projects.
Also, be wary that developers can make changes during construction (like choosing cheaper finishes) without your permission. So your understanding of what you’re buying from the display model may not be an accurate representation of the quality of finishes and workmanship you end up with.
Buying off the plan certainly does have its advantages, but as with any investment, there’s uncertainty and risk that comes along with it. So before signing on the dotted line you must pay your due diligence and do thorough research on the developer and market to confirm that it is really the right investment move for you.
Take a look at these common property investment traps and how to avoid them to maximise your chances for investment success.
Larissa Gardner is a blogger, social media strategist and marketing coordinator at
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