Upsides and Downsides to Buying off the Plan

Buying off the Plan

Buying property off the plan can prove to be a profitable investment, but it's important to be aware of the many pitfalls that can come with purchasing an apartment before it has been built.

There are plenty of success stories when it comes to buying off the plan: indeed, people have made bucket loads of money buying real estate before it has been built, by on-selling the property at a profit before even having to settle.

The idea behind this kind of investment is that you secure a property today, at tomorrow's prices, explains Chris Gray, author of The Effortless Empire - Building wealth from property.

"As long as you buy at the right price, you might be able to secure a $500,000 property today that will be worth $600,000 when it's built two years later," he explains.

"Also, rather than having to put all the money down immediately, you just need to put down 5-10%, which can even be a deposit bond of bank guarantee. These are like insurance policies that guarantee you will pay the deposit on completion."

This means that on a $500,000 loan, you may only need a $25,000 deposit to secure your investment, with no further funds payable until the property settles 12-24 months later.

As well as this, the property is brand new, so investors will be able to claim significant depreciation deductions at tax time – and of course, there is the stamp duty exemption that shaves thousands of dollars off the overall costs of buying.

However, there are no guarantees that the property you purchase will rise in value.

A prime example of this is Melbourne Docklands apartments, where oversupply drove down prices between the sale period and final construction. Buyers in this development ended up paying far more for their properties than they were worth, because real estate prices failed to appreciate during the construction period.

"Like all properties, off the plan sales can fall as well as rise, so caution needs to be exercised," Gray says.

If you're thinking of buying an off the plan property, there are risk mitigation strategies you can use to help you enjoy a profitable investment:

  • Buy only from developers with a good reputation
  • View finished examples of the developers' previous work, so you can see the quality of workmanship, fixtures and fittings
  • Ask for evidence of previous results: for example, what was the average sale price of properties in the developers' last project, and how much are they worth now?
  • Make sure all of the details are specified in the contract, including specific brands, makes and models for appliances

Source: Your Mortgage Magazine

Information printed in this article is current from: November 2010

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