In recent years, buying off-the-plan properties has become increasingly popular, especially with the high-rise apartments in the Melbourne CBD. We will save the high-rise apartments discussion for another time and just focus on the pros and cons of buying off-the-plan today.
1) Higher Depreciation
Off-the-plan purchases have a lot of the advantages I have already touched on with new properties. An off-the-plan purchase is a brand new property, which has higher depreciation benefits.
2) Savings on stamp duty
The stamp duty payable on the purchase is reduced because the property is not yet completed. Perhaps on of the biggest advantages is that there is the potential to secure the property without putting any of your money down. Some developers accept Deposit Bonds to cover the deposit instead of you having to use your own cash. If the property is not completed for a couple of years, this is a much cheaper option and allows you the flexibility of using your cash for something else.
So there is a potential equity gain for the investor to be had, even before settlement. BUT only if you pay the right price for the right property to begin with.
Ok, the good news pretty much stops here. Now, let’s examine the the downsides to the off-the-plan properties.
1) You don’t know what you are buying even if you think you do
First of all, there have been occasions where properties purchased off the plan may have dropped in value by the time the property is completed and ready to settle, therefore investors may find themselves out of pocket. These developments tend to be heavily marketed by skilled project marketers and you have to be careful to see through the spin and focus on the underlying fundamentals of the project itself.
2) More margin for error
Secondly, with some new developments the area and type of produce that is being developed may not have been tested before. This is a warning sign. Past performance is the best indication of future performance, without past performance the future is unknown. Therefore, there is more scope for the purchase price to be set artificially as there is no precedent. You need to factor this risk into your decision making process.
Paying the upfront deposit prior to any valuations being completed commits you to the property before you have a true “value” on the property. Remember you haven’t actually “seen” the property you are purchasing. If there are a number of large developments going on in the same area, it can reduce the value of the property you have purchased even before it’s completed because there is an over supply (remember Docklands in Victoria?)
With large developments, if a certain percentage of the properties are not sold before construction, there is no guarantee the project will commence, which means you may have lost valuable time and missed out on other property opportunities.