Buying property off the plan can produce amazing financial returns, but can also carry far more risk. What is off the plan property and how can outstanding returns and minimal risks be achieved? Richard Sheppard explains.
The general definition of off the plan property is:
Property that is not yet built and; has more than three months before construction is complete (but can be as much as five years from completion).
Buying property off the plan can produce a great return on investment because a relatively small deposit is required (which can take the form of a deposit bond) compared with the relatively high growth of the property purchased.
A deposit bond may be used instead of a cash deposit for off the plan property, which usually only costs around one per cent of the property’s purchase price. The benefit of this is that you are accumulating capital growth during the off the plan period while not having the borrowing costs associated with the mortgage. There are generally no other holding costs during this time. A few months prior to completion and settlement, finance approval must be sought and if the property has increased in value since it exchanged, often less or no other deposit funds are required to settle.
The main risk of buying property off the plan is that you cannot gain finance approval until close to the completion and settlement of the property. So, while you have committed to proceed with the purchase, there is no guarantee your finance will be approved. While you may have been in a strong position to get finance when you first exchanged, many factors could have changed by the time settlement is due (such as reduced borrowing capacity due to changes in your income or increased interest rates). For this reason, it is critical to develop a strong strategy and plan for these eventualities, otherwise, you could lose a substantial amount of money, including the deposit paid or offered as security through the deposit bond, or possibly more. So, if you are considering buying property off the plan it is definitely worth speaking to a property investment adviser or equivalent about how to understand and minimise the risks and maximise your returns.
Richard Sheppard is the managing director of inSynergy Property and Finance Solutions. Located in Brookvale, inSynergy provides professional property investment advice, property market research and specialised mortgage broking services to help every day Australians achieve better returns with lower risk from property. inSynergy is also an accredited investment property buyers’ agent. Visit inSynergy Property and Finance Solutions at insynergy.net.au or phone 1300 308 808