Many investors gravitate towards purchasing off-the-plan developments due to the perceived benefit they offer.
Off-the-plan developments are often marketed as an easy way to enter the property investment world and the glossy brochures can certainly make them look an attractive choice. Being new builds, investors can maximise depreciation and minimise maintenance costs, which assists with boosting returns. Although this seems promising, due diligence needs to be exercised before signing the contract. Here are some tips before purchasing an off-the-plan development as an investment.
Be wary of guaranteed rental returns
Many developers offer a ‘rental guarantee’ to entice investors. It can sound like an attractive option at the time – the market rent may be $350 a week, the guarantee $500 a week. Sounds too good to be true? That’s because it is. Once the rental guarantee expires, the investor is forced to accept rent at the market value. Due to it being significantly lower, this may cause financial problems for investors relying on a high cash flow. A further consideration is that guaranteed rental returns are rarely an extra – rather their cost is factored into the sale price.
Don’t rely on capital growth
Capital growth by definition is speculation. Many investors are attracted to off-the-plan developments as they get to purchase at today’s prices then not have to settle for an extended period of time – by which values may have increased. This is an appealing notion for investors – they gain capital growth before they’ve even settled. Despite this, it’s important to acknowledge that short-term capital growth is not always guaranteed. Often it’s the opposite – an investor will pay a premium price only to find that it is valued considerably less at the time of completion.
With Melbourne at risk of an apartment oversupply, investors need to consider they may face vacancy issues or declining returns once projects are completed. It’s no secret that investors make up a huge portion of off-the-plan purchases, which means the competition to rent out your apartment will be high. There have already been reports of investors discounting rent or offering enticements to tenants in over-supplied inner city areas.
As with any investment, it’s important to do your research and crunch the numbers prior to making a purchasing decision. Off-the-plan developments can be a risky investment for the inexperienced investor, especially if caution is not exercised. It’s important to consider all aspects and decide whether the development supports your investment strategy.