Buying an investment property off-the-plan: 6 things to consider
There’s something about that moment you realise you’ve become a property investor. That sense of achievement; knowing that you’ve reached a financial milestone that puts you in ‘the club’.
A whole new topic of conversation opens up to you at social gatherings, as you find yourself comfortably using words that used to hold mysterious allure. Terms like ‘yield’, ‘capital growth’ and ‘negative gearing’. Now, there’s a feeling of acceptance from your peers, as you perceive a new level of kinship, like you’re now part of the tribe, boosting your self-assurance to new heights.
And property developers absolutely know this. In fact, they dig deeply into it to sell you the dream, years before your property is even built. Welcome to the world of buying off the plan.
Slick brochures; well-presented sales people; even convincing referrals and endorsements from respected property industry experts and influencers. Yep - developers know how to make a planned development look very enticing, with imagery and narrative designed to appeal to all those emotional triggers.
And for those who have dreamed about becoming property investors and find that they now have the means to make it happen, the allure is almost irresistible.
Unsurprising then that of the 71% of investors that own just one investment property, according to the ABS, the majority of these were bought off-the-plan.
Are you thinking about an off-the-plan investment purchase? If so, read on to learn more about the financial considerations you need to be aware of with this route to property investor status.
Six things to consider before buying an investment off-the-plan
Is that deal too good to be true?
Tax efficiencies
Financing risks
Rent guarantees
Other investment fundamentals
Developer reputation
1. Is that deal too good to be true?
New build developers frequently offer enticing discounts, particularly during the early stage releases. There’s a very rational reason behind this: they need to secure a certain number of buyers before the project's financial backers (often a bank) will give them the go ahead to build.
As a result, committing early can often mean the purchase price is significantly less than the price when the property is built. There are, however, exceptions.
Buyer beware
If you’ve ever heard that expression, there’s a good reason for it. Not every new-build property is created equal. For example, units built in high density developments may not offer sufficient capital growth, particularly in the short term. If lots of investors, who bought off-plan and want to cash-in as soon as the build is ready, all sell at once then the supply of very similar properties suddenly rises, driving down asking prices. And if all these shiny new units have little difference between them all, then you’re relying on a strong rental demand when the build is completed. Without it, you may be looking at landlords dropping rents to attract tenants.
As ever, it’s best to do your research and obtain professional and legal advice before committing to a deal you’re attracted to. There are often several fundamentals around choosing an off-the-plan investment, and any investment strategy should consider them. More on this below.
2. Tax efficiencies
Stamp duty incentives are common with new build projects, so check your State or Territory’s current position to confirm what you may be eligible for. If you’re planning to rent out your investment there may also be other deductions available to you. Speak to a tax agent and consider getting a full depreciation schedule from a surveyor, once your property settles.
3. financing risks
Depending on when you decide to go ahead, commit and pay your deposit, there are a few risks to consider. Any future changes in interest rates could affect your borrowing capacity and increase the cost-to-finance, so it’s a good idea to get preapproval before paying your deposit, even if it feels strange doing so months - possibly years - before you need the funds to be paid to the developer.
Also, you may be buying at a premium, particularly if you do so in one of the latter releases. Remember those investment fundamentals we mentioned above? Well, it’s the same for banks: they need to underwrite the risk to the developer, and so the developer needs to secure as much future revenue as possible to keep the banks happy. Plus, the developer needs to finance the sales and marketing stage - how else do they make those glossy brochures look so slick?
Often this premium ‘feels’ worth it because of the newness of it all, coupled with the expected capital growth - after all, agreeing to a price in today's market means it’ll probably be worth more when it’s built, right? Again; buyer beware! If the market is definitely going to rise, then all good - but who has a crystal ball? Nothing is certain.
Another fundamental is whether you’re buying in a high- or low-density development. In high-density projects (think tall apartment blocks) there will be many similar properties available at the same time, which may make rental rates competitive or (if investors want to cash in at the same time) drive down the valuation. This could mean that, on completion, the bank’s valuation changes the loan-to-value ratio, which could affect your repayment amount or could mean you’ll need lender’s mortgage insurance (LMI), if the LTV is 90% or higher, depending on the lender.
4. rent guarantees
A developer may offer rental guarantees as an incentive to investors planning to let their new property to tenants. While on face value these may sound great, the price may be inflated to cover the developers risk and they are often time-limited.
It’s a good idea to check the rental market in the property’s area to see what the rents are for similar properties now and get a sense for demand. How has the rental market performed recently and where is it likely to be when you take possession? Comparing these findings with the developer’s guarantee may reveal whether the incentive is worth it, or not.
5. other investment fundamentals
Buying an ‘investment-grade’ property should always be the goal, and this is just as possible buying off-the-plan as it is buying an established property. And if you can acquire one with some of the advantages listed above, then even better. But what does ‘investment grade’ look like?
Scarcity is an advantage, so low density is generally preferable to high-density developments, as mentioned above, and it’s a good idea to go for properties that owner-occupiers are also interested in. If your property has the kind of livability people clearly want then it’s usually a good sign. Any individual or specialised features to the property to set it apart from others in the area may also underpin its curb appeal and growth potential.
Looking to buy for less than the intrinsic value is the preference for established investment property purchases, however this is harder with off-the-plan, as mentioned above. Nevertheless, pushing for the best deal possible by making yourself appear like the right kind of buyer can help. Preapproval, a solid financial situation and good credit history are some of the factors that appeal to developers, so use them to negotiate.
Buying in an area of strong - or at least up-and-coming - demand is another fundamental. Check out the local area before committing to gauge its core livability features for the rental market you’re aiming at. What’s the community like? Is it well served with retail, social and entertainment spaces? Are there signs of gentrification, or likely to be in the foreseeable future? How well is it connected to areas of business? Finding a location that’s likely to see demand for homes increase in a few years could be a sound investment for both rental yield and longer-term capital growth.
6. developer reputation
Unfortunately we’ve all heard horror stories about poor developments. Sure, the media loves a scare story, but there’s no smoke without fire, so it pays to check out the developer you are considering. A history of previously successful projects and consistent relationships with respected builders and other tradespeople are often good signs.
Buying off-the-plan can feel like a relatively easy way to become a property investor or add to your portfolio, and developers are experts at making it seem that way. And if you do your research then you’re much more likely to make a sound investment choice over a poor one.
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