An off-the-plan purchase utilises time in the market rather than an add-value or discount purchase strategy. Keep the following factors in mind when purchasing an off-the-plan investment property:
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Research how the six market drivers’ work together to influence property values and rental yields. Specifically look to see if these drivers are at work in the market you’re researching. The drivers are:
- Yield variation
- Infrastructure
- Population
- Supply and demand
- Economics
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Demographics
- Read all of the data reports you can get your hands on. There are a wide range of resources available to property investors, including:
- rpdata - Fantastic resource for data on the markets. Well worth a subscription.
- Residex - Great resource for comprehensive suburb reports - for free.
- onthehouse.com.au - Another source for free suburb reports as well as a comparative sales report.
- SQMResearch - Subscribe to their newsletter for timely information about the markets.
- Realestate.com.au - Research properties, read blogs and commentary on key markets and find lots of free sales and demand data on the largest property website in Australia.
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Low density, boutique properties are typically a better choice than high-density buildings. They’re easier to get financed and profits tend to be greater in those structures with less than 40 units.
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Purchase during the first stage of a development, as you can expect to buy at the lowest price possible. Your profits will drop in conjunction with the stage, so only purchase during stage 1.
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Pay for a valuation summation at the beginning of your contract. This needs to include both the cost of the land and the building.
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Buy in the “meat and potatoes” range of $200,000 to $500,000 dollars. This is where the majority of buyers will be shopping, so if you decide to sell, you improve your chances of selling quickly. Also, keep in mind that the properties value will grow and you don’t want the price range to limit your options of future buyers.
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Don’t buy with the intention of selling before completion. With rare exceptions, markets simply don’t move fast enough to make this strategy profitable. Don’t enter into a contract unless you’re able to complete the transaction.
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Choose an off-the-plan that will settle in 12 to 18 months. It’s simply too difficult to accurately plan beyond that. Since you will only have invested a deposit into the transaction, the increase in property value at the time of settlement should be enough to give you 100% cash on cash return.
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Be certain you can pay the deposit without limiting your choices elsewhere. For example, if a great property investment comes your way while you’re waiting for the off-the-plan to settle, you should have enough money set aside that you can take advantage of the opportunity.
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As developers must pre-sell a certain number of properties to receive funding, use this fact to your benefit by asking for certain inclusions that set your investment property apart from the crowd. During your market research you will come across information that can help you determine what features will appeal to your target demographic.
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Limit your portfolio to no more than 20% of off-the-plan properties and have an adequate buffer set aside to cover any shortfalls. This will limit any potential damages in the chance of zero capital growth or a decline in the valuation before settlement.
- Be aware that lenders have the option to change their lending criteria (e.g. 20% deposit instead of 10%). Keep an eye on the market you’ve purchased in so that you’re not caught unawares at settlement.
Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success! Get more from Sam Saggers, register for a FREE property investor night – click here
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
