Considering investing in an off-the-plan property? Reduce any associated risks by implementing these seven strategies into your approach.
Blogger: Harry Kalligeros, owner, Properties Invest
Sourcing and selecting the best deals
Independent property strategists can provide access to a wide range of property types and prices. Product types include apartments, villas, house and land or commercial. When you follow these tips it will help reduce any risk associated with investing in property off-the-plan.
Tip 1 – Database registration
Get online and register your interest for investment properties in the price range and type of property you seek. When giving out your contact details, choose companies that have a broad range of stock in different regions. Where possible choose companies that are not the builders or developers as they have a vested interest in selling their project only. Compare what property is out in the market between different investment property providers and different regions/cities.
This provides the following benefits to you:
- Knowing what property is available.
- Using national property providers allows you to have an open mind of the best region/city to buy in and make the most profit.
- Knowledge of the market allows you to identify a good property deal when you first see it and it can help overcome indecision.
A good property strategist will have a research process in place that starts nationally and chooses the best states, regions and cities according to economic, demographic and real estate data. Then has a selection process of choosing properties that best identifies with the client’s investment strategy.
Tip 2 – Relationships
Have a relationship with an investment property provider; each provider has are a number of exclusive properties available and only their client relationships would be aware of them as they do not necessarily list properties on realestate.com.au or even their website.
- Choose a firm that has a process of due diligence for each project they accept and not just selling from a list or their own builds.
- The best off-the-plan deals are when the product first goes to a pre-release function not available to the open market.
- Selection of best locations in the developments occurs when the development first becomes available (first in, best dressed).
- Know what you want in an investment property so that you are ready when you find that elusive deal.
Tip 3 – Supply and demand
In some states in Australia we are experiencing a shortage of rentals and new dwellings being built. At the same time we are experiencing population growth through interstate and international migration. These economic and demographic pressures create an upward pressure on property prices and rents. Now imagine the property shortage when all the baby boomers start to retire and Australia has to increase its migration to replace that workforce.
How many times have you heard 'buy when the market is low', 'buy when interest rates are low and when rents are high and increasing'? Sound familiar?
Data in some states suggests timing for this strategy is ripe now:
- Ensure the property provider has a research process that identifies regions of population growth and undersupply of properties.
- Be able to identify the best investment deals and get in early to secure that property with confidence (research rejects overpriced property).
- Act decisively and have 10 per cent of the deposit ready – or have finance ready first if wanting to borrow to buy property.
- Have SMSF structures ready, including bare trust if you wish to purchase with your super money.
Ideal dwelling size for apartments is no more than 50 to 80.
Tip 4 – Delayed settlement
Build time can vary up to two years, which can be used as a strategy knowing you only need to pay the deposit until completion of the development. Thus you can place a 10 per cent deposit on an investment with the balance due in two years' time on a fixed-price contract.
Increased capital growth prior to settlement – if the property is in an upward market, the value of the property can increase prior to settlement where the investor inherits that growth on a fixed-price property.
Flipping prior to settlement is not advised due to market uncertainty.
Tip 5 – What risks should be aware of when selecting a project?
Research the track record and history of the project developer.
- Always get property/project credibility – request independent valuations on all constructions.
- Know who the builder is and if there is a different developer, research the track record of both.
- Go through the specification list in detail – read the specs or you won’t know what you are buying.
- Level of pre-sales and time on market since project release.
- Look at room dimensions not just relying on marketing clichés like ‘our apartments are bigger’.
- Some designers get the build cost down by better utilising design. Look at usable space, remembering that it does not affect rental yield.
- Be careful of verbal offerings – make sure it is in writing.
- Investor versus owner-occupier ratios in each land development and/or apartment project.
- Investors are looking at yield, medium to long-term capital growth and a quality build/construction.
- Selling lifestyle for owner-occupiers or tenants in the form of city living with access to café strips.
- As an investor, you need to think of who your target market is.
- Owner-occupiers usually take the top floors.
- Bottom floors will generally give you higher yields.
It's important to know the ratio of owner-occupiers versus investors in development so that value is not diminished by a large occupancy of investors.
Tip 6 – Things to look out for in the finished property
- Ceiling height – many developers will keep them lower to capitalise on higher sales when height restrictions apply.
- Room dimensions – look for well thought-out designs to maximise space and overcome any dead space.
- Study nook near living – integrated living provides multi-functional areas without the extra room.
- Large storage areas and storage as close to car bay – easy to move things back and forth from the storage area to the car.
- Car bays near lift – get into the development early to choose the best-positioned bays and apartments.
- Two-car bays are a thing of the past – as an investor, think of who the target market is.
- Overhead cupboards are a minimum must-have.
- Just because the pictures show glass splashbacks, it doesn't mean they are included – check the specs.
- Air-conditioning in the living and master rooms should be included in the price.
- Natural light and views – north facing for house and land.
- Power points, lighting points, etc; quality of fixtures and finishes.
Tip 7 – How to make money buying off-the-plan
- Look for a long settlement period in economic growth environment.
- Buy within the lower price ranges as it will push up yield.
- Buy before price increases – once pre-sales are reached, the developer can increase prices if the market price is increasing.
- Buy when construction prices and land prices are low or have been stagnant and are poised for the next growth cycle.
- Take a long range approach – medium to long-term investments only – minimum of five-year outlook.
- Appoint a property manager two months before completion of the project.
- Compare and double-check estimated rental returns – based on today’s values is best.
- Check that there is no more than 50/50 investor versus owner-occupier split.
- On selling/flipping – it is too risky.
With over 21 years’ experience in the financial services industry coupled with 10 years in strategic property research, Harry has worked as a financial planner in large international Australian banks and boutique firms alike. He draws on his financial planning knowledge, passion and experience to help his clients grow their own wealth as they reduce their risk through personalized strategic property investing.
Harry is the founder and director of Properties Invest Australia Wide.