Buying Off-the-Plan or Building a New Home in Today’s Market
With the announcement of the HomeBuilder package from the Federal Government and a host of other incentives being offered by various State Governments, building a new home or buying off the plan has just become a lot more popular.
However, when looking to buy off the plan or building a new dwelling, there are a number of considerations that you need to take into account to make sure you’re creating or purchasing an asset that is going to stand the test of time.
As we’ve seen in recent years, when the hoards start looking to buy property, many people are more interested in simply being involved, rather than making calculated and smart investment decisions. That might be fine at times when the market is hot, but if you’re looking for a long term investment that will set you up for years to come, you need to take a far more measured approach.
I like to purchase properties that are off the plan or newly built, but they must first pass a number of stringent tests. Many of these tests aren’t exclusive to these types of properties, rather they are based on simple property investment fundamentals.
The most obvious is supply and demand
If you’re looking to buy an off the plan property in a building with hundreds of other apartments in a CBD in Sydney or Melbourne or any large city, is it likely there will be a shortage of supply that could assist with price rises in the future? Not likely.
For that reason, you need to make sure the building you’re buying into is in an area where there is a scarcity of that type of product. I prefer smaller boutique-style buildings with larger floor plates that incorporate the flexibility to WFH.
It’s also important to ensure you have a strong demand for the type of product you’re looking to purchase. An example might be an established suburb with a number of downsizers who are keen to stay in the area but want something smaller, newer and with far fewer maintenance requirements than their family home of 30 years. This group of buyers is not worried about price, rather they want a great product in a great area. Buying into a building in an area like this will ensure strong demand in the future which contributes to rising prices in a sustainable manner
It’s also worth noting that not all buildings are created equal. There are the good, the bad and the ugly in every building and it is equally important to purchase a property that ultimately has strong owner-occupier appeal and one that fits the needs of that market. You want to be buying into the best building with the best floor plans and the good news is that is something you can control.
Another key consideration is price. Just because something is discounted doesn’t mean it’s a good buy. In fact, it can be quite the opposite. If there is strong demand for a certain product in a certain area, it’s highly unlikely that you’re going to receive a large discount. Again, that’s not a bad thing as it is showing us that there is strong demand and tight supply. The very thing that will lead to future price growth.
This can be an even more powerful thing when added to the fact that you might only need a 10 per cent deposit to secure the property off the plan. If there is strong demand at the time and low supply, by the time the building is completed – perhaps 12 months later – you can be confident that you will likely receive a good valuation and ideally even some price growth.
When buying new or off the plan, there are also a number of advantages to an individual who is trying to construct their overall portfolio. Buying new, means you have greater flexibility to create a portfolio that is diversified across state borders – protecting you from land tax thresholds. As well as selecting the types of buildings that match your financial situation and borrowing capacity. Ultimately, you can manufacture a situation that works best for you on a process-driven basis where you have a good idea of what the financial impact is going to look like.
Buying well in the current market is not about making a quick decision, just to try and make the most of a Government grant. Buying new and off the plan is a strategy that we like and one that has proven highly effective. But it still comes down to making smart decisions based on the fundamentals that drive property prices.
It’s fair to say that if you’re buying into a new building with 300 other apartments or into the latest land release 50 km from the CBD, supply and demand won’t be on your side. And no amount of government stimulus will be able to change those fundamental factors.
As always, plan well and spend the time to look at the research to help guide you in making robust and well-informed decisions.