Buying off-the-plan (OTP) can be attractive for property investors but can also be risky. What are the pros and cons?
- Stamp duty savings: stamp duty is calculated on the improved value of the land plus any construction already completed at the time the contract of sale is signed. This means that purchase pre-construction can save thousands of dollars in stamp duty.
- Buying a brand new property can result in large depreciation deductions, possibly saving significant amounts of tax.
- If you buy well in a rising market, you can potentially make a capital gain during construction. By the time the property is completed, it could already be worth more than you paid for it.
- Buying OTP gives you time to plan ahead: after paying 10% deposit, it could be up to 2 years until you have to pay the balance.
- Property prices can go up and down. You may end-up with a capital loss when the property is completed. Worse still, if your lender values the property at less than your contracted purchase price, they may not lend you enough to complete the purchase, requiring you to use more of your own funds or lose your deposit.
- Over-supply can be big issue in areas with very large numbers of OTP developments. This can affect both prices and the ability to find tenants.
- Buying OTP means you have to assess the quality, layout and value of a property from a plan – you don’t get to see it before making a commitment. You may not get what you expected.