Why should you consider an off-the-plan purchase?
If you're new to the world of property, you may be balking at the high prices that some pieces of real estate command. Thankfully, here in Queensland we still have affordable properties, even in our capital. However, it's still not an amount to sneeze at: You could potentially need hundreds of thousands of dollars for a home in Brisbane, according to CoreLogic RP Data figures.
Unless you have significant equity saved up in your current home, you might find this is a significant barrier in your wealth-building journey. That is, unless, you turn your eyes to off-the-plan construction. Could it be right for you?
What is it?
Put simply, buying a property off-the-plan involves sinking your money into some real estate before it is built. This could be a single property, part of a series of townhouses, an apartment complex or even an entire master-planned community. For larger projects, you will be pooling your capital with a group of other investors. The developer uses these funds to get the construction ball rolling, and after the building process is completed you are left with a brand new home, ready for you to either live in or to rent out as an investment property.
It requires more patience than simply purchasing an established dwelling, but there are also a number of benefits of buying off-the-plan instead.
Risk and reward
Most off-the-plan builds will include some kind of discount.
First of all, there is the fact that most off-the-plan builds will include some kind of discount: A townhouse that would be worth $400,000 if it was already built might only be sold for $380,000 when going off-the-plan.
There are also rewards specifically for investors interested in buying off-the-plan. Depreciation allows you to claim back the costs of certain items within an investment property, and it is at its most effective when applied from the very beginning of the property's life. How much could you save? Over the first five years, that $400,000 townhouse could have depreciated by $35,000 – all money you can claim back at tax time, according to BMT.
Finally, there is the factor of capital gains. As you'll know, real estate tends to increase in value over the long term. The construction of your off-the-plan property might take up to 18 months – a relatively short term in the property cycle. However, in that time, you could find that the value of that final property is actually more than you originally paid for. It's a direct benefit for getting in early.
Is it the right time?
As with anything in property, timing is everything with off-the-plan. So is it the right time to investigate your options? Because these kinds of constructions need plenty of residential land, the cycles of vacant land is a big factor on whether it's the right moment to strike.
With this in mind, you'll be pleased to hear that land price growth is currently moderating across Australia according to CoreLogic and the Housing Industry Association. That is likely it that much easier for construction companies to start offering more off-the-plan builds.
New homes are a great investment, but they can also be a risk – what else would you expect from an investment, after all? It's best to make the right decision before committing to a particular off-the-plan build, or any other strategy for that matter. Off-the-plan builds are often unconditional, so you must know you can see the costs through to the end, or else your deposit may be at risk.
Get in touch with the property mentors here at Think Money if you want to start your portfolio off with a bang, or develop your current holdings towards truly efficient wealth creation.