How to Buy off the Plan Without Going off the Rails

November 26, 2013 Sam Saggers

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One of the best things about being a property investor is the financial freedom we can gain, simply by being smart with our finances and understanding the markets.

Among the wide range of choices and strategies we can use to achieve the results we’re after, one of my favourite strategies is buying property off-the-plan. This strategy allows us to secure a high value asset with only a small outlay of capital, essentially locking in “today’s price” for a property which will potentially be worth more at settlement.

Simply put, an off-the-plan strategy allows us to “buy time” in the market. We put down a small deposit and then after the market grows we get to enjoy the gain in equity which can then be used to either pay down debt or purchase another investment property.

Now I know some people who won’t touch them, and others who enjoy the excitement of making a “relatively quick” (within 18 to 24 months time) profit, even with the risk involved (which can be mitigated).

As with any kind of investment, be it property or shares, it is essential that you do your due diligence before committing to any deal.

Rules of investing in an off-the-plan property

1. As with any property investment strategy, you must understand the market cycle and your particular market’s capacity for growth. Look for markets which are poised for growth, paying close attention to the six market drivers:

  • infrastructure
  • supply and demand
  • economics
  • yield variation
  • population
  • demographics

2. Consider low density, boutique properties and/or blue chip locations for the best capital growth potential:

  • High density buildings are more difficult to get financed
  • Profits will be lower in structures with 40 units or more
  • Demand is strong in blue-chip locations, delivering higher capital growth returns

3. Stage 1 of a development will deliver the greatest returns. Don’t invest in subsequent stages as your profits will be significantly reduced.

4. Get an independent “valuation summation” done when you sign a contract. This will give you a true estimation of the value including both the land and the building.

5. Don’t purchase an off-the-plan priced greater than $600,000. In fact, look at the “meat and potatoes” range of $200 to $500 thousand – your pool of potential buyers is greater at this price range, should you choose (or need) to sell.

6. Don’t sell before settlement. Always be prepared to see it all the way through and be sure you have your financing in order before entering into contract.

7. A short 12 to 18 months time frame is recommended. As you are only putting down a deposit, you should be able to secure a 100% cash on cash return in that time frame. If your settlement date is too far out, you increase your chances of missing out on potential opportunities because your funds are tied up in the off-the-plan.

What If My Off-The-Plan Goes “Off-The-Rails”?

While you may be keenly aware that there are no guarantees when investing in property, it can still be frustrating to have things go wrong. What can you do about an off-the-plan that didn’t deliver the capital growth you were expecting?

Depending upon your particular situation, and the property in question, you can:

  • Add value [addition of furniture, amenities other units don’t have, etc] in an effort to increase its cash flow
  • Sell it. Yes, you may take a loss, however you can at least mitigate the loss you may have incurred if you didn’t sell.
  • Hang on until the market grows again and you can recover your losses.

Tips:

Remember that developers are required to pre-sell a number of properties before they can obtain financing. This gives you an advantage as a purchaser in stage 1 of the development, because this is when the developer needs you the most. Use this knowledge to your advantage and obtain better or additional inclusions as part of the deal. This will set your unit apart from the crowd and cost you no more than if you’d purchased a unit without the additions!

Banks are notoriously fickle with their terms. Be prepared, if at all possible, to pay 20% at settlement, even if the bank approves you at 90% – better to be safe than sorry!

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