Buying Off The Plan Investment Properties

Buying property ‘Off the Plan’ is very common in Melbourne. There are many positives and some negatives but property developers often need to sell 60% of the units before the bank will commence lending on the project. Accordingly, most developers need to market and sell a number of units before construction can commence.

Positives

• Let’s focus on the example when an investor buys a one bedroom unit for $400,000 and is required to pay a 10% deposit. A bank guarantee for the $40,000 deposit will cost the buyer $800 pa for the two years to settlement. This is virtually the only cost the investor will have up until settlement.
• The property is brand new which maximises the annual depreciation benefits. The depreciation deduction is anticipated to be say $5,000 pa compared to next to nothing for a 20 year old established apartment.
• There is a big stamp duty saving when buying before construction has commenced. The investor will pay approximately $2,000 at settlement on a $400k property compared to $19,660 if they bought an established property in Victoria. This is a saving of around $18,000 and the investor also borrows $18,000 less.
• The investor’s after tax cost of servicing this property (once settled) will be approximately $125 per week or $6,487 pa. This compares to $241 per week ($12,583 per annum) for an established property (see cashflow projections over page). As settlement is not for another 2 years, we encourage first time investors to put aside the $150 per week so a cash reserve is established prior to settlement.
• Entering into a forward contract for a fixed price of $400,000 means the investor is getting into the property market at today’s prices and will benefit from any increases in value over the two years. Accordingly, it is possible that the investors’ property is valued at more than the purchase price at settlement.
• Buying a unit ‘Off the Plan’ usually only requires an initial 10% deposit. By contrast, a ‘house and land package requires funding the land purchase plus draw down borrowings for builders’ progress claims. The investor is effectively funding the house construction, whereas ‘off the plan’ unit investors only require funding for the balance of 90% at settlement which represents a significant interest saving.
• Please note the investors 10% deposit or bank guarantee should never be at risk. The deposit is legally the investors’, so if settlement does not occur as a result of the developer or vendor not performing, then the deposit is returned.

Negatives

• If property prices decrease between purchase and settlement date, this may create difficulties in obtaining an adequate valuation to secure finance to settle the property. You should ensure that you have sufficient equity in your home or other property so finance is not an issue in the event of a market dip.
• There is an element of concern because you do not see the ‘end product’ before you buy. It is important to deal with reputable developers who have a history of delivering exactly what has been marketed. Display suites, marketing material and detailed specifications provide investors with confidence and the developer has contractual obligations and warranties that also provide investors with confidence. Unemotional investors are normally less concerned than homebuyers.