Buying Off the Plan Property

What does it Mean? Buying a property 'off the plan' means exactly that - purchasing property at today's prices prior to construction being completed. Most developers of strata projects are required to secure a number of pre-sales as a condition of bank finance. They may even offer discounts to early purchasers.

In most cases you pay 10% of the purchase price and are entering into a contract with the developer. The balance is paid upon 'settlement' when the building is completed. This can be anywhere from a few months up to two years after the initial contract is signed. Most 'off the plan' purchases are apartments but townhouses, villas and land packages are also available.

The Benefits Buying a property at today's prices and settling later is a tempting proposition, especially in a rising market. If the buyer isn't willing to assume the risks associated with off the plan purchases, they may end up paying more for the same property when it is completed and the best apartments in the building may have already sold.

Delayed settlement gives you more time to save for your deposit and plan for mortgage repayments. Another benefit for buyers purchasing new strata units off the plan is the ability to select or vary finishes and fixtures, giving you the opportunity to make certain changes to suit your own taste.

Market Conditions The big unknown when investing off the plan is whether your purchase price will reflect market conditions upon settlement. So is now a good time to buy off the plan? Many Australian cities are facing a housing shortage. Average rent for units in Perth has jumped 25 percent over the past year. Melbourne's up around 17 percent, Sydney and Brisbane are up 15 and 13 percent respectively.

According to the ANZ Housing Snapshot April 2008, a chronic imbalance in the property market (with demand outstripping supply) will continue to push aggregate house prices up - albeit at a more moderate pace. It also predicts record low rental vacancies will continue to push rents higher in years to come.

These are all fairly positive indications. But the days of buying off the plan and on selling prior to settlement at a windfall appear to be limited, says Construction Economist and Director of Washington Brown Quantity Surveyors, Tyron Hyde. "Property should be seen as a long-term investment, especially when you take into account the entry and exit costs involved. The longer you are able to hang on to your investment and ride out any market fluctuations - the safer you will be," he says.

Stamp Duty

One of the biggest advantages for off the plan investors is the significant tax savings you'll receive. Laws vary from state to state, but in Victoria for instance, you'll save thousands of dollars in stamp duty if the construction has not started, or partially completed.

Depreciation Plus

New properties generate the maximum level of property deprecation allowed under ATO guidelines. Investors can claim 2.5% depreciation allowance of the construction cost - which in the case of a new multi-story building - can be substantial. You'll also be entitled to claim the full amount of depreciation allowance on fittings and finishes such as blinds, ovens, carpets, air conditioners etc, which will all be brand new.

Tyron Hyde, Construction Economist and Director of Washington Brown Quantity Surveyors, estimates that a $400,000 high-rise apartment in Sydney could generate up to $12,000 in depreciation in the first year alone. "Tax deductions aren't the main reason you buy property off the plan," warns Hyde. "It needs to be a good investment. But investors still fail to capitalise on the deprecation benefits they're entitled to. It can make a significant difference come tax time." Once the property is completed and rented, the same tax rules apply as with any investment property.

To find out how much depreciation you can claim on a potential property investment, try our new state-of-the-art Depreciation at washingtonbrown.com.au

The Risks

The main disadvantage of buying property off the plan is the risk of market fluctuations. It may be difficult to predict whether the selling price will reflect the actual market value at the time of settlement. These market fluctuations can include interest rate rises buy off the plan Sydney.

For this reason it is essential to do your homework rather than rely solely on promotional material from the developer. Become empowered They key to a successful off the plan investment is research. Find out as much as you can about the area you are buying into. Is there an oversupply of new product in that particular suburb? What are the current rental returns? How much are similar properties selling for?

Look for growth areas with proximity to desirable lifestyle features such as cafes and restaurants, transport and public schools. With a dwindling supply of land along the coast, properties with water views tend to yield higher returns. Current social factors are also a good indication of possible trends to follow. For instance, the upward pressure on petrol prices could create a demand for housing closer to transport hubs in the future.