Off-The-Plan Purchase And Its Risks
With the belief that property price will always go up, a lot of investors can be easily enticed with opportunities on multiplying their money through property.
With the belief that property price will always go up, a lot of investors can be easily enticed with opportunities on multiplying their money through property. So many times have I seen on my Facebook newsfeed, an advertisement that goes something along the lines of: ""Invest now in a vast growing suburb. Total development cost including site is $2.7mil and the end valuation will be at $5.5mil, it will be a 50% return on your money"". A 50% RETURN, YOU SAID!? SIGN ME UP! (A 50% return means, if you invest $100,000, by the time the project is finished, your money will be worth $150,000).
Is it too good to be true? Maybe, maybe not. What we are playing with here is “the future”, an event which we do not have control over. No one has a crystal ball, therefore, as an investor, we need to be super careful before investing in an off-the-plan purchase like this. Remember, all the projected profit is still “on paper”, and until the project is finished and the units can be flipped/sold, the profit cannot be realised. Further to this, depending on where the market goes, the end valuation of the finished project might be less than what was initially projected. If the valuation goes “haywire”, you can look at suffering huge losses of your capital here.
Is off-the-plan investing riskier than house-and-land investment then? While both are gambling on the capital growth and upward market trend, with home-and-land investment at least you have more control over the quality of the build i.e. what features and add-ons you want to have, the colour combination, etc. This will provide a greater opportunity for you to ensure that your product unique in the market.
For off-the-plan purchase however, most of the time you do not have control over your build, thus, the project might result in multiple similarly-looking products that can cause market saturation. Why would someone rent or purchase your unit compared to the other, since they all look similar, priced similar and have similar features?
Other off-the-plan examples are apartment builds. This is even a riskier venture, especially with high-rise apartments. You can seriously lose a lot of capital due to lower variation caused by oversupply and hundreds of similarly-looking products.
As much as I try to steer away from off-the-plan investments, there still offer some advantages, including:
- You leave the stress to the professionals. Let them do all the calculations, the build, etc. After all, you yourself wouldn't know any better of what the market might want anyway, would you? Same with managed fund or superannuation. You just leave your money to the professionals who will give you a good return.
- The location of these off-the-plan properties is often great i.e. close to amenities, shops, etc.
- If market truly goes up, you might reap a big reward (or in our term, Return of Investment a.k.a. ROI).
Off-the-plan or not, property is a long game. If you can hold that property for a long time, you're always in it for the win. So, my tips when you're purchasing off-the-plan:
- Check the demography of the area to ensure the economy is strong. Prices and growth are always driven by jobs and financial condition of the residence in the area.
- Check for sold price of similar products in the area. It would take up to 2 years for an off-the- plan build to finish. And remember, the developers might NOT be using their own money (that's why they try to lure you to invest in the first place), yet they have factored in their margins in the build price. Then on top of it, the marketing costs, etc. Therefore, often, the build price is already increased way more than the current market price. This is why you have to make sure that the purchase price (and the projected evaluation/profit) is according to what it should be.
- Check if you need to pay strata fee or not. I can't stress this enough, but strata fee is a cashflow killer! And often, these off-the-plans purchases are in the likes of townhouses and apartments, which are attracting strata fees.
- Check the inclusions and features you get with the property you're purchasing and make sure you're comfortable with them. Remember, the end products wouldn't always look like what they were promised at the beginning. This can be due to an increasing cost, thus, at the builder's discretion they get to change some of the specs.
- Get a solicitor to run through the contract papers to make sure you're comfortable with everything that is set in there. To minimise risk, you always need to have control, meaning, you always have to understand what you're getting yourself into. Your solicitor can also help you with adding special exit-clauses to minimise your investment risks.
- Check cashflow, check cashflow, check cashflow! This what allows you to hold your property for a long time.
As with any form of investing, there is always an element of risk. However, a savvy investor would do due-diligence and not just easily believe with the returns promised by the developer/seller. Off-the- plans or not, if executed properly, will give you handsome returns.