Building a diverse property portfolio does not only mean buying in different areas, cities or states, it can also mean buying different types of property from houses, apartments, villas, or townhouses. When looking for properties in these categories many investors come up against the decision of whether to buy new or old. That can mean considering buying off the plan.
As I have successfully bought apartments and townhouses off the plan I know there are many benefits. Buying off the plan can be stress free if strategies to minimise risk are taken. Investors may believe it is better to buy what you can see, touch and feel rather than from a set of “plans” and pictures of artist’s impressions. However for many investors buying off the plan is an exciting part of their strategy in growing wealth through property. It certainly was for me.
Good developer or bad guys
Every building no matter how old was built by somebody at some time by a developer or builder. Developers have a vision and builders have the expertise to build a complex of apartments, townhouses, or villas that meet the needs of the growing housing demand in Australia. They research locations and invest their money and are looking for buyers to bring their dream into reality. A few bad developers can give great developers a bad name.
Most developers cannot fund the development without borrowing from the bank. The bank requires a certain percentage of the complex to be “pre-sold” with a contract of sale and a deposit. So selling off the plan to owner occupiers or investors is necessary to get the project off the ground. With the right developer, in the right stage of the market and in the right location buying off the plan can be a great strategy for building your portfolio.
Benefits of buying off the plan
Buying off the plan has many benefits for investors. It is easy as you only need a 10% deposit to secure a property. You can have a long time (over 12 months) in the market during the build phase for potential capital growth to occur. At completion you are the beneficiary of the equity growth and you have had no holding costs. If you have bought in a rising market (the right market to buy in) this equity growth can leapfrog you into your next investment.
Buying off the plan means you are buying at today’s prices for tomorrow’s market. You are getting in at a great entry price and often saving money. Those purchasers buying at completion will pay full market price at the time. Developers often give great incentives for off the plan purchase such as furniture packs included which can give higher rental yields, or first tenant guarantees so that you are earning money from Day 1 after settlement.
What are the Risks?
The deposit (usually 10% of purchase price) is held in a solicitor’s trust fund, it is not held by the developer. Many investors think they could lose this deposit if the development does not complete or the builder goes bust. However in reality the deposits are refunded to the buyers, often with interest earned if the project does not complete.
The other risk is around getting finance at a future date, when the property is completed. You do need a finance strategy to be in place as full finance approval is not available when purchasing. The property is held under contract with a 10% deposit. As approvals by the banks only lasts 3 -6 months, it is recommended that preserving your borrowing capacity during the development phase is essential. Travelling overseas, quitting your job, starting a new business venture or anything that may weaken your position for borrowing at completion is not recommended.
Have a Contingency Buffer
As part of your risk reduction it is important to have funds to complete such as stamp duty, legal and other fees of up to 5% of purchase price at time of purchasing. Having a contingency buffer for variations in end valuations of a property is also strongly recommended. Valuations in any market can give investors a nasty surprise with an unexpected shortfall that needs to be funded from your buffer. For investors with good equity in other property this is not such a problem, but those who are relying on cash savings, I suggest keeping another 5% buffer of savings for this purpose.
For investors who want to add to their portfolio by buying an off the plan property it can prove very beneficial if you follow a simple strategy. Ian Hosking Richards suggests that buying in a rising market, with a long settlement time, paying a fair market price, having a finance strategy and a contingency buffer can make the process very worthwhile.
Lindy Lear is a successful property investor who had a late start into investing, yet has grown her portfolio to eight properties in three years. She is a qualified property advisor and general manager of Rocket Property Group, and she won the Reader’s Choice Award in 2009 for Property Investment Advisor of the Year. Lindy is passionate about helping others realise their goals through investing in property, and can be contacted at 02 8012 9669 or visit www.rocketpropertygroup.com.au
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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.