What Investors Need To Know About Buying Off-The-Plan

Whether you are buying your very first investment property or simply adding another home to your portfolio, there are many serious considerations to be made.

After all, the type of property you purchase can have a huge impact on its rental viability. Buying off-the-plan could be a smart choice, but it’s important you do your due diligence before signing on the bottom line.

What is an off-the-plan property?

In Western Australia, buying off-the-plan refers to purchases that occur either before the property’s construction is finished or the Certificate of Title is issued – or in some cases both. This differs significantly from buying an established property and, because it may take months or years for the building to be ready for occupants, it’s more important than ever that you are aware of what you’re buying, as well as your rights and responsibilities regarding off-the-plan purchases.

For investors, one of the most attractive reasons to buy off-the-plan is because it doesn’t require a hefty initial outlay. You pay a deposit and then the full amount whenever settlement occurs, which is typically much, much longer than for established properties.

Some of the drawbacks for investors, however, are around the contract and viability of the project. Compared to buying an existing house, off-the-plan contracts can be lengthy and complex legal documents. If you are buying an apartment, then you will be purchasing strata titled lot – there will also be strata by-laws that the developer will have written which you will need to familiarise yourself with.

What’s the difference between off-the-plan vs established?

The most obvious difference is that buying off-the-plan generally means you sign a contract before the property has even been built. You can’t inspect the actual finished product. According to Commerce WA, it also often means that the developer hasn’t yet received “final approval to subdivide land that is being purchased or, in the case of a building, before the building has commenced or been completed”. It’s important that you recognise this and understand there are associated risks with this type of deal compared to buying a property that is already standing.

The other major difference is time. While you can start renting out an established investment property as soon as a settlement is complete (typically 30 to 90 days), with an off-the-plan purchase you will have to wait several months – and sometimes years – until construction is actually complete. While there is the potential for you to earn a capital gain if the property market rises before settlement, you won’t see any rental income until your off-the-plan investment is finished building.

Pros and cons of buying off-the-plan

So, it’s time to make a decision: should you go off-the-plan or not? That choice will depend on your investment strategy, your finances, how much time you are willing to wait for construction, as well as your overall goal for the property. To help you determine whether off-the-plan is the right investment decision for you, here are some of the biggest pros and cons:

Pros

  • Because settlement typically occurs months or years after paying your deposit, you have plenty of time to grow your savings to reduce how much you need to borrow.
  • It’s brand new so no need to pay for expensive repairs or renovations, which you might need to do before renting out an established property showing signs of wear and tear.
  • The developer – not you – is liable for any property defects.
  • Greater exposure to potential tax breaks thanks to depreciation.
  • Potential for capital gains even before settlement if the property market rises.
  • Off-the-plan properties are generally easier to rent out because of their modern living spaces and brand-new appliances.

Cons

  • If there is an oversupply of off-the-plan properties (e.g. CBD-based apartments), history shows you may not experience the same type of capital gains as established properties.
  • If the market dips between paying your deposit and settlement, your asset will be worth less than what you are paying for it.
  • Little, if any, the opportunity to add further value to the property through renovations and extensions.
  • Strata fees may be an additional expense, particularly if there are amenities like elevators and swimming pools.
  • While unlikely, the project may not be completed. However, you should still receive your deposit back, which you can invest elsewhere.

Going off-the-plan? We can help!

As an investor, you have more important things to spend your time on than managing all your individual properties yourself. Rentwest is a team of expert property managers who are highly experienced in the Perth market. Contact us today and let us manage all your investment property needs.

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