Pros and Cons of Buying Off the Plan Apartments
There’s lots of reasons to consider why you should buy an off the plan purchase because there’s nothing that can replace that sort of brand new feeling. You’re the first person to actually move into the property. There’s got shiny taps, it has got beautiful clean tiles, the carpet smells fresh and its got that really nice cozy feeling about it and I think that’s really a positive. Also if you buy in a block that has enough in the development, it means that there’s enough money for the developer to throw in a really nice pool, maybe have a gym area, perhaps a caretaker who looks after the building and if there’s enough, they can put a lift in which means you don’t have to thread all the way up those stairs with the shopping. So there are real advantages. The other advantage that you can get in off the plan apartments cause its brand new, you can get really great depreciation benefits that you can claim back in your tax and get a really good tax refund that will help you fund the property that you purchased.
But I guess on the flip side for me, particularly on the point with the depreciation whilst it’s a really great thing to consider, it shouldn’t be the driving reason why you decide to buy an investment property. Tax advantages is really the cream not the reason that you should do it. It’s not the main game. So I think that if you buy an established apartment for example, where you go through and do a really great renovation on it, you can actually create your own depreciation and really sort of neutralize the effect of buying brand new over something that’s a bit older or more established. The other thing to keep in mind too is there’s lots of apartments generally in these large off the plan developments. So the developer can make a good enough profit to be able to afford it.
The challenge of that is when a valuer comes along to value the property on your behalf, they actually know that there’s builder margins and developers’ margins in it. They also know about the marketing commissions and sales commissions that goes into the actual purchase price.
Quite often, they’ll provide a discount on the property valuation that reflects that. So maybe, you’re buying it for $500,000, they might come in at a valuation of $450,000 which means you need to use other equity in other properties to be able to settle on that property. I think that’s a bit of a disadvantage too.
I guess the other thing to keep in mind is if you’re one of 200, it lacks that intimate sort of cozy feeling. You would quite often feel as if you are in a very large community and can be quite isolated from the other people that you lived with and I think one of the advantages of that communal style of living is to feel like you know everyone and that you can get along and create some form of community. I think that’s often lost in these really large blocks.
So in summary for me if you’re looking to buy something established versus off the plan, the three filters that generally look at I’m when I’m buying investment properties is it needs to have owner occupier appeal, it needs to be investment grade and it also needs to have some form of scarcity. When we apply this to those to bigger blocks, the owner occupier appeal is often not there when you’re really large. It just really lacks that sort of feeling. In terms of investment grade for me, if you are one of two hundred for example, in three years time let’s say someone is financially hemorrhaging on apartment number twenty and they just got to sell it no matter what. They just gotta get it out of the market and they put in a fast sell price to get rid of it. What they actually does is, they drag down the valuations for everyone in the building based on the motivation and the general of one person. I don’t like to be in that position so for me, investment-grade mean small and boutique in number, usually 21 or less. Ideally, that’s established and it means that we’re not going to get the facilities, we’re not going to usually get a pool, caretaker or a lift but it also means that the body corporate levy is generally cheaper and it means that it has an owner occupier appeal to match that investment grade filter. The third one for me is scarcity. Buying a house, I like to have a scarcity of architecture, scarcity of land, I don’t like to buy on new sub-divisions. If its investing in an apartment, the scarcity for me is scarcity of number – maybe only 21. Let’s say I’m in a block of 12 and there’s a footprint of land. It’s not as if I can say that I own that particularly part of the land but I can roughly say about 1/12 of that is mine. Where else if you are in a really large development of 200 or more, as you look around the land on the ground, you start to realise that you’ve got to share this with a lot of people. So really, a large percentage of the purchase price actually is going towards the building and a very small percentage of the purchase price is going towards the land where the most value comes from.
For me, in my view, off the plan purchasing is something that you need to approach with a fair bit of caution and me personally, I prefer to buy something that is established versus brand new as an investment property.