Property analysis #9 - off the plan

Ever considered buying off-the-plan? You know, buying the property before it’s even built, based on the existing plans for the property and your expectations of it. While there are potentially some great benefits to it, it’s certainly not a strategy without risk. Let’s have a look at what can be achieved though…

To demonstrate I’m going to look at this off-the-plan (OTP) listing at 2/4 Hillview Avenue in Rowville, Vic. Now this one in particular is already under contract, but I thought it’d still be a good one to analyse. Note already, that OTP doesn’t have to mean inner city apartments – but we’ll check out one of those next time.

So, I’ll look at what we could do after having it rented only after the first year of ownership; it might be faster, but for simplicity we’ll assume that this will take a year to complete and be ready for lease. In this case, the only expense for the first year would be an approximate 10% deposit, in this case being about $46,000, and the interest on that amount. Don’t worry; our investor will be using equity in an already existing portfolio to foot the bill.

Alternatively, he could use a deposit bond, where an insurer will agree to pay the deposit on your behalf.

Another great benefit to purchasing OTP is the savings on stamp duty. In fact, you may have noticed whilst browsing realestate.com.au that almost all OTP listings proudly advertise the savings on the stamp duty you’ll pay on purchase. This is because stamp duty is effectively calculated on the value of the property at purchase. In the case of OTP purchases, this will be simply the land value, as the actual building hasn’t been constructed yet. For a unit like this one, it wouldn’t be unreasonable to expect only a few thousand in stamp duty, instead of over $20,000 for a completed townhouse at the same price.

After construction, we can also claim massive amounts in depreciation. Using our depreciation calculator, we can estimate about $17,000 total claimable for the first year after completion. This is due to the high quality fittings, and recent construction. You’ll find that with most new properties, and especially with OTP purchases, the tax benefits offered by depreciation can make a huge difference to your cashflow.

So, in the second year when the property is actually rented, our rough figures indicate that it might actually be just on the positive cashflow side; about $10pw after tax. Given the way that the Melbourne market is moving at the moment, with a little luck the completed property will already then be worth a fair bit more than what the investor has paid for it off-the-plan. This is one of the cool things about OTP strategies; you get to control a property and enjoy the capital growth, without actually owning it for some time.

While there are clearly many benefits to OTP properties, this kind of deal is certainly not without risk. It’s a bit of a wait before you can settle on the completed property, and during that time, things can go wrong. Property prices in the area might fall or become unstable. Also, the developer could fall short on promises or not meet deadlines. Worst case scenario, the developer could go bust and suddenly you’re left with nothing.

However, we do know that in most cases, the higher the risk, the higher the potential return. Purchasing off-the-plan could be something to consider as the next step in your investment strategy, so have a look into it. Never hurts to do some research. Let me know what you find.