Off-the-plan: Is it for you?

A couple of weeks ago we discussed the benefits of apartment living; if you’re sold on that, it’s time to weigh up whether purchasing an apartment off-the-plan is the way to go.

With new developments still springing up across Melbourne, off-the-plan sales are becoming more common. Developers need to secure a certain number of sales before a project can go ahead, so if you’re in the market for an apartment it’s worth weighing up your options. Buying off-the-plan can be risky, but there are also multiple benefits for savvy investors and owner-occupiers.

The price is right

Often, buying off-the-plan is cheaper, and incentives may be added to the sale. That’s because the developer needs to secure enough sales for construction to go ahead – so prices may rise once construction begins. Depending on the area you’re planning to buy in, you may be able to secure an off-the-plan apartment for less than an established dwelling. The deposit is set at today’s price, so you won’t pay more at settlement even if prices rise in the meantime. That waiting period also gives you breathing time to save more (so you can borrow less), and shop around for the best home loan.

Keep in mind that, should your financial situation change before settlement, you’re still obligated to settle. And you may need to contend with factors like rising interest rates or falling property values that will affect your ability to get finance when settlement time does roll around.

Nothing to see here

A big disadvantage of an off-the-plan apartment is that you’re buying sight unseen. There’s no way of walking through the space to get a real feel for it because it simply doesn’t exist yet. While developers will give you an excellent idea of what to expect, it’s a risk. For that reason, ensure the developer and builder are of the highest calibre. Don’t be afraid to investigate their past work and make sure they’ve got a solid track record of delivering on what they promise.

Remember also that until all the relevant council approvals go through, there’s a chance the development won’t go ahead. Rare, but it does happen! For your own peace of mind, make sure any upfront payments like your deposit are held in a trust by an independent party until settlement.

Investment opportunities

Speculative investors can take a big risk with off-the-plan apartments by betting that the market will rise so that they can sell for a quick profit. It’s a risky strategy. When buying off-the-plan, it can be difficult to accurately predict what the property will be worth down the track. And if you’re buying it as an investment, it can be challenging to pinpoint expected rental returns.

Investing for the medium or long term is a smarter bet. If the development is close to schools, public transport and other amenities, and is well designed, you give yourself the best chance of seeing an increase in its value. Proximity to these amenities, as well as features of the building like pools and gyms, are also desirable. It will make an investment more attractive to future tenants.

Possible oversupply

If purchasing off-the-plan as an investment, be aware of the risk of oversupply. Even if you bought early for a great price, when the project is completed all the investors who bought apartments – regardless of when they bought them -will be chasing tenants. If you happen to be in an in-demand area where other developments are also in the works, expect even more competition.

On the flipside, there’s potential to see capital gains before construction is even completed if other similar apartments in your development sell at higher prices.

Tax benefits

For investors, there are various tax depreciation benefits available, and the newer the property, the more you’re able to maximise these. For example, you may be able to claim depreciation for fittings and fixtures.

What to expect

There’s always the chance that the finished apartment won’t look as exactly as expected. However, when buying off-the-plan you get more ability to customise the property by choosing colours, tiles, and fittings, whereas in an established dwelling you would have to renovate after moving in. Buying off-the-plan also gives you greater choice when it comes to selecting an apartment with optimal position and aspect. The other downside, of course, is the waiting – it could potentially be years until moving day.

For those who do their research, buying off-the-plan can be a clever move.