Buying an off-the-plan property can be a sensible strategy, as long as you’re prepared to do your homework and consider how it might be beneficial to your own personal financial situation.
Let’s start with the basics
Buying an off-the-plan property, means putting down a deposit for a property that is not fully constructed yet. The volume of off-the-plan properties being sold today, has increased significantly over last decade accounting for approximately 11 – 12% of all residential sales in 2017. An off-the-plan property may not be completed for months, or even years, so it’s important that you consider the risks of such a strategy as well as the benefits, and also how it fits in with your overall personal financial goals.
Benefits of an off-the-plan strategy
There are many benefits of buying off-the-plan, and we’ve highlighted a few of these below:
- It allows you to get started with a smaller deposit
Many developers will allow you to get started with 5 – 10% of the property value instead of the typical 20% that is required for a standalone purchase. This may allow you to get onto the property ladder earlier, with the view of being able to save the remainder of your deposit while the property is being complete as this would only be required at settlement of the property. It’s important that you ensure your savings strategy is disciplined and will achieve what you’ve set out to do as otherwise it can create further risk for you.
- The property market could rise during construction
As we all know, property markets can rise and fall, which you would have exposure to while your property is being constructed. If the property market happens to increase in value while yours’ is being constructed, this could be a significant windfall for you given you’ve only put down 5 – 10%. It’s important to be aware that markets can move in both directions and ensure that you’re prepared for either outcome.
- You could save on stamp duty
Stamp Duty is a state-based tax and many will offer significant discounts on stamp duty for new and off-the-plan property. This could also allow you to get onto the property market ladder sooner rather than later given less funds would be required. It’s important to speak to your mortgage broker about what concessions may be available to you depending on where you’re looking to buy.
- Tax benefits of new property
Generally, the tax benefits are greater for new property than they are for old, under the current negative gearing rules. The depreciation rules allow you to depreciate both the building costs of your property, in addition to the costs of fixtures and fittings, which can create potentially significant tax savings for you. It’s important to obtain a quantity surveyor’s report in this instance, which will provide you with an overview of the deduction amounts and allow you to legitimately claim your tax deductions.
While there are many benefits to buying off-the-plan property, let’s consider how you can combat some of the risks.
How can you protect yourself from the key risks?
- Research the builder and developer you’re buying from
It’s important that you research both the builder and developer that you’re purchasing from. Do your homework on previous buildings that they’ve worked on, consider their team and track record, and ensure that they’re financially sound.
- Partner with an investment-savvy mortgage broker
An investment-savvy mortgage broker can save you both time and money, as well as handling the entire loan process for you. As your mortgage broker works with the various lenders daily, they will also be aware of those discounts that may not be published that you could have access to.
- Ensure that the building quality is up to scratch
You can ask the developer to go and view previous properties that they’ve built to consider how the fixtures and fittings have aged. They will also typically provide you with a breakdown of the materials used, so you can do your homework and ensure that it meets your standards.
- Consider who your tenant is going to be
An ‘owner-occupier’ style dwelling will typically lead to a better investment outcome than a small apartment that can barely fit a single mattress. Consider where you might like to live and the type of tenant that your property will attract. The right tenant can not only save you money, but a great deal of unnecessary stress also.
- Choose your property early in the process
A key advantage of buying off-the-plan is having the first choice of the property within a particular development. For example, you might be looking to purchase within a small block of boutique apartments, and it’s quite clear that the two 3-bedroom apartments with ocean views will have the best long-term outcome. By getting in early, you can ensure that you have the first choice for your own property.
- Ensure your deposit is placed in trust
Ensure that any deposit or down-payment that you provide is placed in the solicitor’s trust account, rather than directly in the developer’s own bank account. The developer should have the financial strength to take the property through to completion, which removes some of the unnecessary risk for you as the property investor.
Buying property can often be an anxiety-producing process. Ensure that you partner with the right people and that you set yourself on track to achieving your financial goals.
To your financial success!
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LoanSuite Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.