Expert Advice: by Sam Saggers
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Investing in off-the-Plan (OTP) properties is quite a profitable trade. It’s a fantastic way to take full advantage of market growth, but in order to enjoy maximum growth potential it's important to understand and follow some key factors when using this kind of investing strategy.
Off-the-plan comes with its own jargons and if you don’t know what pitfalls you should expect, what traps are there and how to analyse the key indicators to make bigger gains, then you probably shouldn’t put your hands into it. Most people who face failure in this trade are the ones who don’t follow proper guidance. They think dealing with OTP properties is the same as dealing with a conventional property and after a few short months they realise that they have made the biggest mistake of their lives and now they are in the ditch.
So, here, we will talk about what OTP properties are and how to deal with them if you want to make the best capital gains. Let’s start with getting to know what OTP properties are:
What are OTP Properties?
The term ‘Off-the-Plan’ refers to a transaction in which the investor buys the property before it is built and then settles the payments on completion. It is a contract between both the parties and usually investors pay a down payment or a deposit. The interest of investors here is to invest a minimal amount and then let the property price grow.
PAY NO STAMP DUTY
In New South Wales, a contract that is off-the-plan and house and land packages will get a 100% stamp duty concession (if construction has not commenced), as opposed to a contract that is “Under Construction” that will only get 25%. Currently tapping into the NSW Home Builders Bonus can save you thousands of dollars in upfront fees (low money down), meaning you may be in the green from word go! However, the amount you save is determined when the slab is poured. The off-the-plan stamp duty exemption is only available until 1 July 2012 – so if you’re looking at this strategy for property investing then now is the time to take action as you could save yourself thousands of dollars in upfront fees.
There are no shortages of off-the-plan properties marketed online, however the trick is finding the right deal, and for that an investor needs a check list! So, how do you make sure that you will have a profitable trade with the property and you won’t lose anything? The 7 Point Checklist below is a well proven guide designed to direct the investor towards selecting those off-the-plan opportunities which offer the best value.
1. Get to Know The market - Understand the market cycle for future growth
Understanding the property market is a top priority in your considerations. Without understanding how the property market works, it is nearly impossible for a person to make huge gains with OTP properties. You need to understand what cycle the market is in before venturing into it – meaning you must understand which area you need to invest and at what time.
For example, the market in Melbourne is currently in decline after peaking in 2009. It's very possible that buying into the market, including buying an off-the-plan could result in property values which do more than just stagnate – they decline, leaving the investor in a negative equity position. You must invest when the property market in a particular region has touched its low and will rise in the next couple of years. If a market is flat and is going even flatter, you shouldn’t put your hands in it. Instead, look into markets that are flat but are trying to recover and showing positive signs. Look into investing in a market which is at the bottom of its cycle and is growing upwards. There are one or two property markets in Australia where the off-the-plan strategy will fit this scenario perfectly – allowing the investor to enjoy tremendous value this investment strategy can promise.
2. Choose boutique properties and don’t get involved in estates with high density.
Steer clear of high-rise or mid-rise units and try to buy in estates with less than 32 dwellings in the complex; unless close to the CBD, then just steer clear of high rise. This is important because larger complexes offer more risks simply due to the number of individuals involved in the purchase. When it comes time to settle, there's always a few people who can't - pushing your risk higher. Other positives about boutique properties is the fact that they are easier to manage, and are always in high demand, so if you needed to get out for some reason, it wouldn't take long to do so.
3. Always buy in stage one of a development
Obviously, it makes the most sense to buy a property at the deepest discount. In the case of an off-the-plan property, the best value is when the property is in stage one of development. It's very important to always buy in stage one. As the saying goes, “the early bird catches the worm,” and in the case of buying an off-the-plan, the early bird gets the best price for their money.
Often, inexperienced investors can be taken in by unscrupulous real estate agents who recommend that someone buy in because there's only a small percentage of units available – inferring that the investor would be missing out on something and foolish to do so if they don't buy in now.
An experienced investor won't fall for that trap, knowing that the property is in the later stages of development, and that any value he or she might obtain from the property is a great deal less than if the unit(s) had been purchased in stage one.
Remember, stage one is always the best price – we advise mostly against considering any other stages because it is likely you will be paying much higher prices for less value.
4. Keep it to 18-months (or sometimes less)
An 18 month time frame or less allows a property to mould well for profits and with just a deposit down you should secure 100% cash on cash return.
Limiting your investment time frame will keep you from putting yourself at too much risk, as determining your financial situation in 18 months is much easier, and the estimations more reliable than trying to forecast your financial situation 3 to 5 years in the future.
5. Always have the plan valued at the commencement
Have the plan valued at the commencement so you know you are paying the plan’s value in the beginning and not the value at the end. This will also ensure you are not buying a hugely overpriced property and can help to avoid being stuck with a property that has not moved in price (meaning
6. Don’t get in above your head
Buy properties under $600,000 that will appeal to the entire market if you need to sell. I always advise my clients not to get involved in property that falls into the lifestyle market, i.e. property with values $600,000 and up. I recommend that they stick to what I call “meat and potatoes” properties (properties ranging from $200,000 to just over $500,000.) I make this recommendation because the vast majority of buyers in the marketplace are searching for properties that lie within the $300,000 to $450,000 dollar range, opening up a much larger pool of buyers should you need to sell the property.
7. Always plan to settle and confirm borrowing capacity first
Don't get involved with an off-the-plan if you don't plan to follow through. Always plan to settle. It's important to confirm your capacity to borrow before signing on to an off-the-plan, just as it's important to be certain your finances (including your job) is secure and will remain so for the foreseeable future. Never buy to sell midway through the project’s construction.
Right now, there's some great markets that lend themselves well to an off-the-plan strategy. For example, the inner city section of Brisbane, within a 5km radius offers some fantastic opportunities as does Western Sydney, both offering some great upside in using time in the market to be your friend.
Always remember, even though “time in the market and not timing the market” is more important, it helps to know what’s going on with property markets, so you can get a boost from buying off-the-plan – which is the main aim isn’t it?
Finally, I'd like to share a bit of advice gained from a decade of marketing off-the-plan properties:
A buyer should ideally have an extra 10% buffer for market movement and they should not change jobs during the time they are buying. It's important to be fairly rigid with your position. An off-the-plan purchasing strategy is not for first time buyers, rather it's for well educated portfolio investors.
Come along to our next Property Investor Night and we will cover off-the-plan property investing for success plus many of our other strategies for making serious profits.
Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
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