A recent Channel Nine report claiming “you cannot go wrong” with long-term, off-the-plan apartments is high risk investment advice according to inSynergy Managing Director, Richard Sheppard.
The news report, which views more like an advertisement and pushes the sale of specific developments on the Gold Coast, proves that the media is not a safe way to obtain property investment advice, according to Sheppard.
While he does see the Gold Coast unit market as an “up-and-comer”, he says the report’s promises of success and its recommendation of a long-term off-the-plan strategy is off the mark.
“You can absolutely go wrong. You can go bankrupt using that strategy,” he said.
The danger comes from not being able to secure a formal loan approval from banks for longer than six months in advance, according to Sheppard.
“If the property is due for completion in longer than six months, you have no guarantee that you will still qualify for the loan.”
“If the banks change their lending policy [something that may well happen with the current Royal Commission], if your lending position changes or the property reduces in value, then your borrowing capacity is reduced,” he said.
He added that if you already have a home loan or investment property, then even a 10 per cent reduction in borrowing capacity can mean hundreds of thousands of dollars less in finance.
“Let’s say you already have $1 million in a home loan and investment property and you have a borrowing capacity of $500,000 for another property, then your total borrowing capacity is $1.5 million.”
“Then a 10 per cent reduction in total borrowing capacity will result in a shortfall of $150,000 on a property you committed to 18 months earlier.”
The cost of not settling
The costs of not being able to settle on a property can be significant.
“If you can’t settle, then not only do you lose your deposit, but if they sell it for 10 per cent less than you agreed because the market has softened then they can sue you for the difference, plus selling fees, penalty interest and legal fees.”
“It can end up costing you $100,000 or more, especially if you buy at the peak of the market. Units can drop by 20-30 per cent.”
Three Months the Safe Limit
Sheppard advises that buying a new investment property is still a smart choice due to the significant tax and security benefits, however says that the unit or townhouse should be scheduled for approval in three months, to provide a three-month finance buffer in case construction is delayed.
“Once you get in with your 10 per cent deposit and a small buffer, you have the loan, and you have it for 30 years. The only condition is that you meet the repayments. You are in control. It’s exceptionally safe,” he said.
“If you do buy in the wrong area – and you shouldn’t if you invest intelligently – and the property does decrease in value, then you just hold it until it grows. You don’t lose unless you sell, and eventually, it will grow.”
“Normally we recommend holding for six to eight 8 years or until you have at least 50 per cent growth.”
“Be very, very wary when you hear these broad sweeping statements of ‘you can’t go wrong’, especially if it’s associated with long-term off-the-plan.”
Instead, Sheppard urges investors to do their research and consult a specialist property investment advisor to ensure they are making safe and profitable choices.
Important Note and Warning: This information is general in nature and should not be considered personal tax advice. We highly recommend you discuss these concepts with your accountant, property investment adviser and investment finance mortgage broker jointly to ensure any considered concepts are suitable for your personal financial situation, as one effect of the concept may negatively impact another part of your plan.