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Buying an apartment off-the-plan

Buying off-the-plan has proven a popular investment strategy with property buyers in Australia for many years. But while it may seem like an easy option for first time property investors, it’s vital to do your homework before taking the plunge into buying apartments for investment in Perth.

Buying apartments for investment off-the-plan essentially means buying a property that has yet to be, or is in the process of being built.

It can range from little more than an artist’s impression of the property through to a property in a building construction that is nearing completion.

Units, townhouses and stand-alone properties can all be bought off-the-plan in locations ranging from inner city to regional areas.

Buying apartments for investment off-the-plan has its merits and plenty of buyers have made a success of it. But there are also pit falls, particularly for inexperienced buyers.

Why buy off-the-plan?

There are a number of good reasons. You might want to tap into an investment market outside the state you live in (for example, a Sydney buyer who is interested in the Adelaide market) and don’t have or want to spend the time physically visiting and viewing properties.

Rather than looking at resale investment apartments, where you want to have a clear picture of the property’s condition, buying into a brand new building can be a safer bet because you are guaranteed that there will be no wear and tear on the property.

Know the risks

While there are plenty of pros to buying investment apartments off-the-plan, would-be buyers should also be mindful of the potential pitfalls associated with buying a property before it’s been built. One of the most common myths about buying property investment apartments off-the-plan is that you can tap into tomorrow’s property prices today. This is generally a fallacy.

There is no guarantee that prices of investment apartments will continue to rise and there’s every danger that they may even fall before the property is complete, as history has shown. If that happens, you could find yourself saddled with a property that ends up being worth less than what you paid for it - and that could be a problem when it comes to financing.

If the lender values the property at less than the original purchase price, you may find yourself short of funds to complete the transaction at settlement. That could mean having to make up the difference out of your own pocket, a sum that could run into tens or hundreds of thousands of dollars in the worst-case scenario.

Pick wisely when buying apartments for investment

Buyers should be very wary of any promises made by developers or agents as a reason for buying into their development.

Ask the developer to show you their portfolio of completed projects as well as providing you with the opportunity to speak with previous customers.

As with any purchase, a testimonial from an independent and satisfied genuine customer of the developer can go a long way towards increasing the likelihood that your own buying experience will be a good one.

It’s worth talking to friends, relatives and colleagues to get firsthand feedback on their off-the-plan purchase experience. If you can’t get a suitable recommendation from someone you know, you should consider approaching a developer or agent with a few questions to ensure you are armed with all the relevant information before making a commitment to buy.

It’s also important to ask the developer how they are funding the new development and what will happen to the deposit that you are paying. Your deposit should be held in trust by an intermediary until completion of the investment apartment.

If insufficient presales occur

Unfortunately not all property investment apartments actually come to fruition. This is particularly the case for large high rise projects although smaller developments may also suffer this fate. Despite the lavish launch and large marketing spends not all developments attract sufficient presales interest (sales off-the-plan) and unless the developer has access to large amounts of equity the project is unlikely to be funded sufficiently to commence.

Fortunately in Australia, buyers are protected from losing their deposits should a project not proceed as deposit monies must by law be kept in a trust fund. The issue with a project not proceeding is it may take up to three years before a project is cancelled and the deposits are refunded. During this time a property investor may have missed out on many other investment options believing that they had secured an apartment and as such have been severely disadvantaged with regards to opportunity costs.

Caveat emptor

Successfully buying off-the-plan is not just down to finding the right developer. It’s important that you have a clear idea of what you’re buying so that you don’t end up disappointed.

For example, if you’re thinking of buying a 62 square metre two bedroom apartment, make sure that you have a good understanding of exactly how big that is. A simple way is to go and view similar sized apartments in your area. It will be too late to change your mind once the property is built if you decide the size is too small for what you want.

For investors, there are considerable advantages to buying off-the-plan. But as with any investment, due diligence is still important. It’s also important to have a sound investment strategy in place. All investment properties should be bought with the intention of holding for at least five to seven years if not longer.

Some developers will also help you to manage the property after it settles, whether through an in-house department or a relationship with a local agent.

This can be a big help for investors particularly when buying in another state. But it’s important to look closely at how many other new properties are coming onto the market at the same time to ensure you’ll be able to find tenants and achieve an attractive rental return.

The developer may give you an indication of what kind of  apartment rent Perth suburbs offer and the rental you should achieve upon completion of the property - but don’t take their word for it. Check with an agent in the area you plan to buy in as to how the rental market is performing and find out what comparable properties are renting for. It’s a good idea to ask for an independent rental evaluation to be carried out by a property manager in the area.

The team at Investor Assist can help every step of the way so don’t hesitate to get in touch and let us do the hard work for you. It’s what we’re here for.

 

DISCLAIMER: This information is of a general nature only and does not consiture professional advice. We strongly recommend that you seek your own professional advice in relation to your particular circumstance. Investor Assist Pty Ltd Builders Registration No. 13818.