Hi All,
My first post in this forum. I’m looking at getting into PI. I plan to buy a new or near-new unit in a high growth area by borrowing 100% of the purchase price (interest only loan) using some of the equity in my own home. I don’t want to spend more than $350K on my first property as I don’t want to expose my own home too much and I don’t want to go under if the rental property becomes untenanted or the tenant defaults and won’t leave.The ten year average growth for units in the area I am looking at is 17.4% per annum which seems very good. There is a desperate shortage of quality units in the area. I think this may be due to the strict rules on subdivision in the area scaring developers off.
Anyway, I just noticed 2 units being built in a good spot (near shops, school, bus stop). I am thinking of calling the builder to see if they are already sold. If not, I would consider making an offer, but before I commit I am keen to hear from seasoned PIs about the wisdom of this plan.
If the builder agrees to sell to me off the plan what risks to I face? Obviously I will have progress payments invested in a property which is not paying me rent. If the builder drags his feet finishing the unit I am exposed for even longer. On the other hand, with the expected level of capital growth does this matter?
Obviously I would prefer to buy a completed unit with a current lease. However, as I said, this simply isn’t an option in the area I want to buy. Any units that come up for sale are usually old and run down. I want a new unit to maximise my 2.5% depreciation deduction and to minimise vacancies and maximise rent.
I would appreciate any comments or advice.
Buying a brand new anything off the plan rarely results in you buying the property cheaper than the market.
The reason is that almost all developers will add a premium to their product to cover things like agent commissions, advertising and rental guarantees if they are offering them and other holding costs.
The other danger with ‘off the plan’ is the contract quite often will have a clause in it saying the builder/developer will supply a certain fitting, or something ‘equivalent’. What can happen is at settlement you take possession of a property with inferior fittings.
Developers word contracts very carefully and totally in favour of themselves. I have heard of people having the contract cancelled by the developer before settlement during a boom time as they think they can sell it for more, and the opposite will happen where the market drops and you are left with a property at settlement worth far less than you paid for it.
Before you go ahead, check out the resale price of EXISTING similar properties, preferrably quite recently built. Then you will know the true value of the ‘off the plan’ version.
Also, get any contract with a developer looked at by a suitably qualified real estate lawyer before signing, or, if you want to ‘secure’ the property without obligation, make the offer ‘subject to approval by your legal advisor within xx days of the Vendor (developer) signing the contract’. You can build into the contract a penalty for taking longer than an agreed length of time as well. In fact, you can add or subtract anything in the contract that you like. Of course, getting agreement from the developer to any changes may be more difficult.
As far as depreciation, any I.P built after 1987 will give you a special building write-off, as well as the normal depreciation of the fixtures and fittings. So something built in the last few years will still be good value for that purpose.
Do not rush in – the deal of the century comes along every day.
Cheers,
Marc.
[email protected]Totally agree with Marc.
Also be aware that the market has flattened. Don’t expect the 17.4% to just keep going. I heard of house in Sydney the other day that was bought for about $450,000 a couple of years ago and now had to be sold for !!!$270,000!!!!!!!!!
I think in the current market you are better off looking for something with good returns, rather than looking for capital growth.
If you say you want to borrow 100%, do you mean you borrow 80% LVR (Loan Value Ratio) and fund the other 20% plus closing costs through your own home or do you want to have a higher LVR with MI (Mortgage Insurance).
Also I suspect that the property would be heavily negatively geared.
If you buy something a little bit older, you may be able to do it up (often a coat of paint, some new handles, etc is enough) you may get a lot better value for money.
And if depreciation of the building is very important to you, buy something that is about 15-20 years old. But if the premium for the depreciation is more than the depreciation is worth, there is no gain.
Thanks for the responses. I’ve always been a bit sus on off-the-plan purchases and you’ve confirmed my doubts. Interesting comment about going for return rather than growth. I’ve been trying to find out what a ‘good’ rate of rental return is. people talk about 5% being the average, but is there an easy way to work out what the average return for any given suburb is? I haven’t been able to find data on the web about rents, only median prices.
Hi jack620,
Buying off the plan (OTP) is not all that bad if done properly. Few good things about buying OTP:
1. If you get into a 12 month plus settlement with the developer then at the time of settlement you can refinance using the increased value of the property. You mentioned your target area has gwown 17.4% pa over the last 10 years or so. If the trend continues, you will have a no cash down investment opportunity. For e.g. you buy the property today for $300k with more than 12 month settlement. The property grows at 15% pa and you settle 12 months from now. New valuation is $345k. Bank will lend you 90% of the new valuation ($310k) but your price is $300k. That leaves you $10k for funding closing costs.
2. You can negotiate the deal with the developer in a way that you only pay a small deposit and no progress payments. You then pay the money at settlement only. That way you do not loose interest on your cash deposits until settlement. You can use instrumnets like deposit bends to fund initial deposit.
Hope this helps.
Sanjiv“There is no passion to be found playing small – in settling for a life that is less than the one you are capable of living.†– Nelson Mandela
In my very limited experience, a builder will rarely give you a good price before he has completed. By coming to him before he is completed you look real keen. That converts into top price. It might be worth talking to him but showing little interest, and then see if he is actually selling. Once the place goes on the market then you would be maybe best served to wait and see if the price is reduced if it doesn’t sell. In this current market, it may not sell for a while. You may get the unit a lot cheaper by waiting 6 months or more. It may be sold by then, but are you really after paying full top price in the current market?
I love that saying and fully agree, the deal of the century does come by every day. Don’t feel like you are missing out. If you do miss out, then feel like you are learning. The next deal will be even better, and you will be glad you waited.
kjs
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