April 12, 2016
Buying off the plan can be a great Investment focus. There are a number of advantages of taking the ‘lay by’ approach to property investment. Here are a few:
- Asset Selection: opportunity to select the most appropriate property in a development, not just the one that happens to be for sale at a specific point in time
- Depreciation: the Net Present Value of the depreciation write off for a $500,000 property is approximately $170,000 ($145,000 building and $25,000 fittings). Multiply that by a marginal tax rate of, for example, 35 per cent, and your approximately $50,000 better off
- Incentives: for a project to be eligible for construction funding, a certain proportion of sales must be achieved. What this means is that a developer is more likely to offer incentives in the early stages of sales, that wouldn’t be offered once a specific sales target is met
- Saving: the time between exchange (when you pay a 10 per cent deposit and sign a contract of sale) and settlement (when you pay the 90 per cent balance and take ownership of the property) can take up to three years; time you can use to save additional money to contribute to a bigger deposit, or save for the costs of purchase such as stamp duty
- Maintenance: new property will typically have lower maintenance costs by virtue of improved construction techniques and the presence of builders insurance.
Before you run off and buy the first off the plan property you see, understand that there are also risks involved with investing off the plan when inadequate research is conducted:
- Development risk: ensuring the project delivery team has the skills and capital to deliver a project on time and to the required quality. Due diligence must be taken to ensure that the contractual obligations of the developer are adequately satisfied
- Value: ensuring that the property is priced in line with comparable recent sales. Failing to do so leads to settlement risk that, in the worst case, can result in inability to settle and loss of deposit
- Asset suitability risk: ensuring that the property on offer is that required by the local demographic in terms of type, design and quality
Of course, no risks can be eliminated entirely. The fundamental philosophy of investing successfully is having an understanding of the relationship between risk and reward. Minimise your risks, but more importantly, understand them so that you can make informed investment decisions.