When buying property off the plan there are some serious risks you need to consider or you might end up with a bad investment.
When investing in property, one of the things you’ll probably ask yourself at some point is, “Should I buy existing property or should I purchase property off the plan?” It’s a question that a lot of people wrestle with. And so, today, I wanted to talk about some things to consider when buying off the plan. Both the benefits of it as well as some of the risks that are associated with it.
So, hey, I’m Ryan from onproperty.com.au. I help people find positive cash flow property. And a lot of people do email me asking what do I think about buying off the plan. In fact, I was on a webinar with Ben Everingham last night and someone asked this very question.
What do you think about buying off the plan? They were saying, if it’s got a decent yield, does that mean it’s okay? The fact is, there’s a lot of things that you need to consider and thing about so I thought it’d be great to create an episode. At the end of this episode, you’ll be more educated and you’ll know the things to look for if you are actually considering going down this route.
First, let’s look at some of the benefits of buying off the plan as well as why people seem to get so excited about this type of investment. Well, I think, one of the most exciting things as a human being full of emotion, which we all are, is buying something brand new is extremely exciting just for the fact that it’s brand new.
It’s all of this really nice fixtures, really nice fittings, brand new everything. And chances are, you’ve probably never moved into a house and lived in it and been the first person that’s lived in there or in a unit. And so, to get something that’s brand new versus something that’s existing and old and a bit worn down is obviously very exciting. It makes us feel good about ourselves and our place in society.
There’s also a lot of marketing hype around new build properties. They’ve got signage. They’ve got sales people. They’ve got models of it. They’ve got walkthroughs. And so, it can very exciting with all the marketing hype and things like that to try and get the best of the best in terms of property.
You also have the opportunity to lock in prices. So, you purchase the property and it might be a year or 2 years before that development is finished. But, you signed it a year or 2 years ago and you got a price at that point. So, there’s the opportunity to lock in the price. You have a smaller earlier commitment. You do need to put down a deposit. But, obviously, you don’t assume a loan for the development until you actually take over that property and own it yourself.
You also have the opportunity for depreciation. Because it’s a brand new property, you can depreciate a lot of things. So that can help for tax purposes for some people. So, that’s kind of the exciting things and why people think about it. But, there are actually a lot of risks when buying off the plan properties that people don’t think about.
So, I really want to cover them because they’ll never talk about these in the marketing flyers that you get or in the consultancy call that you talk to people about this sort of stuff. They’re not going to talk about these risks.
They’re just going to talk about how great the area is, how great this development’s going to be, how you’re going to lock in your price now. And so, I thought we’re going to look at two types of risks. There’s risk when actually buying the property. But, the larger risks are actually the ones after you’ve property, what happens then.
I just want to start by saying that there are some good new build properties out there – new build developments and things like that. There are some that are really, really successful. And so, if you can find them, great. But, there’s a lot of duds out there as well. I just want to talk about the risks and I’ll leave it up to you to assess whichever new build you’re looking at and you can assess whether these risks apply or not.
Some of the risk when actually purchasing the property is actually inflated prices. One of the draw cards of off the plan property is that you can lock in a price now. If the market goes up, then you’re buying a property at less money and, therefore, you’re going to make money instantly as soon as you settle. But, the fact of the matter is, in a lot of cases, that they’re actually taking in the potential growth of an area into account into the sale price of the property.
Let’s say, a property development is going to take 2 years. They’re likely going to predict; what is this property going to be worth in 2 years’ time? What is the market going to do? And then, they’ll try and sell you that property today for what it’s going to be worth in 2 years’ time if the market goes up. Now, obviously, if the market stays stagnant, if the market goes down and you’ve actually paid the price for what it’s going to be worth in 2 years, then you could actually be behind. And we see this with a lot of people. So, in a lot of cases, the property is over valued.
So, they’re charging you too much for what it’s worth. Both because they’re taking into account growth and also, because they can do a lot of marketing and a lot of sales in order to sell them for more money than they would be comparably worth to other properties on the market that are already in existence. So you just need to be really careful there, you need to be really savvy.
The best way to combat this is, rather than just looking at the unit and looking at the prices that they give you and comparing it to other prices in that same off the plan construction, actually go away and say, “Okay, I’m looking at a 2-bedroom unit that’s got 1 bathroom and an en-suite, this sort of size.” Go away and look for products on the market today. So, existing units that are similar to yours – 2-bedroom with an en-suite, balcony, whatever it may be.
Try and find ones that match yours in a similar area and look at the prices of those and then compare them to each other. Because these are the properties you’re going to be competing with when you actually own your new build property and so, it’s important to know, “Okay, what’s the price difference? Am I overpaying for this property or not?”
So, inflated prices are a big risk because, as well, a lot of properties are sold through property marketers who get a big commission when they sell you one of these off the plan properties. So, there’s a big commission bagged in which can increase the prices as well.
You also need to be careful when buying for falling property prices. If you lock in a price today and the market doesn’t go up as you predict. But, it actually goes down, well you’ve locked in the price and so, what they market as, “This is the best thing. You lock in prices now, you’re going to get it cheaper.” can actually work against you because if you lock in the price and then the property market goes down $100,000, then you’re still locked in on that price. So, be very careful with falling property markets.
There’s also rising interest rates can happen in between when you decide to purchase the property and when the construction is finished. Your situation may change in that time as well. Maybe you’ll lose your job or have kids or decide to travel, etc., etc. Which may make getting a loan hard or may make it hard to re-pay the property. 2 years is a pretty long time in my eyes for situations to change, jobs to change.
I’ve had a friend of mine. I was talking to him just the other month and he was talking about his job, how he loves it and how he could see himself working there his entire life – unless, of course, the company gets liquidated. And just the other day, the company unfortunately got liquidated and he’s now without a job. He’ll probably find another one. He’s a good worker and things like that. But, situations can change that can affect your ability to purchase this property or whether or not it’s actually good for you.
There’s also the risk of bankruptcy with the development. The development could become bankrupt and not get finished, etc., etc. I believe that risk is pretty rare. That doesn’t happen all the time. It does happen, but it’s not going to be super common. But, it is a risk, so I thought I would talk about it.
But, what I really want to talk about is the risk after purchasing a property. And I want you to listen to these risk and then think about comparing it to maybe purchasing an existing property instead and the risk associated with that.
The biggest risk that I see and it kind of all comes down to this – is the potential for oversupply and competition. So, oversupply, let’s look at that. If you buy off the plan, let’s say you buy in a unit complex that has 150 units. When the construction is finished on that unit complex, all of a sudden, 150 properties are flooding the market.
They might be sold to owners already, so let’s say 30% of those are to renters. All of a sudden, 50 new properties are available to renters in a market where there might only be 10 properties a week that come up. This can lead to oversupply as well if there’s other developments in the area or in neighboring suburbs and things like that. Then, a market can get oversupplied quite quickly.
I’ve seen this most recently in Darwin where things were going really well in Darwin. But then, all of a sudden, we’re seeing vacancy rates or 9-10%. People can’t rent out their properties. Tenants can go around, look at properties, they can negotiate and haggle on price. That’s not a situation you really want to be in.
You want to be in a situation where you can charge more because there’s so many people coming through the door. Oversupply can be a big issue in these developments and something that you need to think about. Because it’s not actually going to affect you straightaway, it’s only once completion of the property or even further down the track if more developments are happening after yours.
Oversupply can cause an issue with the value of your property, the value of renting your property, etc.
The other is the competition within the block itself. If you’re purchasing a unit within a block of 150 units, you’ve got 149 other units that are basically the same as yours that you’re competing with. So when it comes time to get a tenant, when it comes time to sell your property, chances are there’s going to be multiple properties on the market at the same time.
I recently lived in a townhouse complex and there was about 60 or 70 townhouses. And it seems like at any point in time, there was at least 3 properties for sale and there was at least 2-4 properties for rent. And that was just 70 townhouses. So all of these townhouses, they’re all slightly different, but basically the same. But if you make that in blocks of units, it becomes even worse, especially in these large unit blocks.
The reason this can be so bad is because more often than not, you’re going to find a desperate owner or a desperate seller who needs to get out. So they’re willing to discount their rent or they’re willing to discount the sale price of their property in order to sell it or rent it quickly. And this then becomes the comparable point for every other property in the block.
So let’s say you want to rent your property for $400 a week, that’s what the market’s worth. But, the guy, a couple of units down from you, had a divorce or he’s really negatively geared and he really needs a tenant in and he can’t go 3 weeks or whatever it might be without having a tenant. And so, he decides to discount his property to $350 per week.
Well, now, let’s say someone’s looking at moving into the area and they’re looking at different units and even though yours is probably worth $400, they’re going, “Well, why would I pay $400 for this unit when I can get this one just a couple down, which is basically the same, for $350?” And so, that works with renting. It works with selling as well. So, that causes a lot of issues for people when it comes time to rent or to sell their properties.
Often, with off the plan properties, especially if you’ve been given a rental guarantee, then the rental yield will likely be lower than promised. So be very weary of this. Again, go ahead and do your research into what existing properties in the area are renting for. And don’t believe what they say when they say it’s going to rent for this. Often, they will give a 12-month or a 2-year rental guarantee at at certain amount. Basically, if you ever see someone offering a rental guarantee, this is a way to sell overpriced property – by pretending that it rents for more than it does. And so, they’ll sell it for a bunch of money more than what it’s worth. They’ll use a bit of that profit to pay your rental guarantee. And then, at the end of the 2 years or the term or whatever it is, they disappear. Basically, if you see a rental guarantee, it’s a really, really bad sign because it’s a marketing strategy. There’s no reason for someone to offer a rental guarantee if their property is at market value because then that property would sell. So, yeah,
Basically, if you ever see someone offering a rental guarantee, this is a way to sell overpriced property – by pretending that it rents for more than it does. And so, they’ll sell it for a bunch of money more than what it’s worth. They’ll use a bit of that profit to pay your rental guarantee. And then, at the end of the 2 years or the term or whatever it is, they disappear. Basically, if you see a rental guarantee, it’s a really, really bad sign because it’s a marketing strategy.
There’s no reason for someone to offer a rental guarantee if their property is at market value because then that property would sell. So, yeah, rental guarantee is bad. Often, rental yields are lower than expected. And so, do your research into actual existing properties and try and find out the rental guarantees there.
The last risk that I wanted to touch on was that there’s little to no opportunity to add value in these properties. This happens both for new build houses as well as off the plan blocks of units and things like that. It’s very hard to add value to your property. I had a friend of mine who’s property – he purchased off the plan. It didn’t workout very well for him. He was looking at his property and he was like, “Okay, how can I add value to this property to improve my financial situation?” The only opportunity he really had was to render the outside of the property; which would cost him a fair chunk of money and probably wouldn’t increase his rental yield at all or maybe slightly. And the value of the property, again, probably wouldn’t increase in value greatly. So, he didn’t have a lot of
He was looking at his property and he was like, “Okay, how can I add value to this property to improve my financial situation?” The only opportunity he really had was to render the outside of the property; which would cost him a fair chunk of money and probably wouldn’t increase his rental yield at all or maybe slightly. And the value of the property, again, probably wouldn’t increase in value greatly. So, he didn’t have a lot of opportunity to increase the value of his property because it was brand new anyway. And so, this is one of the problems. If you do get in this situation where it is hard and your property is worth less than what you purchased it for or it’s just not growing as well. If you buy an existing property, then often,
If you do get in this situation where it is hard and your property is worth less than what you purchased it for or it’s just not growing as well. If you buy an existing property, then often, there’s opportunities to renovate, to add an extra bedroom, all of this sort of stuff. But, with new build properties, there’s little to no opportunity to do that.
Me and Ben talked about it in the webinar, but we love when people invest in property that have multiple ways to make money. So they’re going to get capital growth. They’re going to get positive cash flow.
There’s ways to manufacture or create growth, as well as purchasing in a rising market. So, rather than just trying to make money one way hoping that the market’s going to go up, they can make money multiple different ways. And so, one of the things I don’t like about off the plan is that there’s little or no opportunity to actually add value to the property after you’ve purchase it.
So, be really cautious when purchasing off the plan, especially if someone is marketing it to you or they’re acting as like a free consultant and this is a really good deal. Generally it’s not. Go ahead and do your own research and look into it. There are some great off the plan purchases that you can get. Especially, let’s say you purchased off the plan in Sydney or Melbourne 5 years ago and the whole market’s gone up. Then, obviously, you would have done well. But, would you have done just as well if you purchased an existing property in Sydney or Melbourne at the same time?
There are some great off the plan purchases that you can get. Especially, let’s say you purchased off the plan in Sydney or Melbourne 5 years ago and the whole market’s gone up. Then, obviously, you would have done well. But, would you have done just as well if you purchased an existing property in Sydney or Melbourne at the same time?
I’m not actually sure on the stats as to whether new build properties outperform existing properties. But, I do see a lot of people come to me and say they purchased new build off the plan properties and it didn’t go well. There is a lot of
There is a lot of risk associated with these. That doesn’t mean they’re always bad investments, there are some good ones out there. But, there’s a lot of bad ones out there, too. I would definitely do your research, look into the area. What
What other existing properties are around? What are they selling for? What are they renting for? And then, seriously as yourself, “Okay, I want to buy this property off the plan. If I use that same money and purchased an existing property, what would that property do for me?” Like, what would it rent for? What depreciation would I get? What is the benefit to you taking the extra risk to buying off the plan versus actually buying something that is already existing today.
And I think if you do that exercise and say, “Okay, I’m thinking about off the plan. But, let’s look at existing properties in the area.” What’s the rental yield on those? What’s the area going to do etc., etc.,?” You might find that off the plan isn’t as exciting as they kind of tell you it is. So, this is a bit of a bleak episode. I’m sorry about that. But, it just came up last night in the webinar and I thought it’d be a great time to approach this topic and to talk about this. Because I
I’m sorry about that. But, it just came up last night in the webinar and I thought it’d be a great time to approach this topic and to talk about this. Because I want you to go into the market educated. I want you to make your purchasing decision knowing what the rest of the market is doing. Knowing what the risks are when purchasing a property. And often, with these new build, off the plan properties, you’re not actually looking at the whole market.
You’re not actually assessing all the risk associated with it. It’s just so easy to get caught up in the hype.
Don’t worry, I know all about it. It’s just so easy to get really excited about this sort of stuff. I almost built a new build property myself, but didn’t end up going ahead with it. It’s so easy to be drawn in by the “new”, by the exciting, by going to the display homes and seeing how awesome they are.
It just gets you really excited as a person. You’d be crazy to not get excited and to imagine the opportunities. But, there are risks with this. And if you’re doing it for investment purposes, then, you need to look at the numbers.
You need to look at risks and to say, “Could I be putting my money somewhere else that would actually perform better than purchasing off the plan?”
So, yeah, always do your research. I wish you the absolute best.
If you’re interested in seeing existing properties that have a high rental yield and a good chance of generating a positive cash flow, then I do have a members area over at onproperty.com.au where I share a new property listing every single day. So if positive cash flow is your thing, you’re interested in investing in positive cash flow, then go to onproperty.com.au and join the member’s area there.
Thanks for listening today, guys, and until next time, stay positive.