BUYING PROPERTY OFF THE PLAN: THE BENEFITS AND RISKS INVOLVED
An off-plan property can be more cost-effective compared to existing properties, allowing the buyer to customize it during the actual build process.
As many readers will be aware, the New Zealand government recently introduced new legislation on 22 October 2018 – the “Overseas Investment Amendment Act” which restricts the ability of non-residents to buy existing New Zealand residential property (houses and apartments). The new legislation does not restrict non-residents from buying residential developments such as investing in houses or apartments to be built and on sold or held as an investment property.
The new legislation also does not affect non-residents from buying commercial or industrial property.
Non-resident buyers still have many options for investing in property in New Zealand. Purchasing ‘off the plan’ apartments is one option that may smart non-resident buyers are pursuing.
Here are some insights how investors from all over the world are making a fortune by buying properties particularly at the initial construction stage.
WHY BUY “OFF THE PLAN”?
The concept has advantages both for the purchaser and the developer. From a purchaser’s point of view, property which may not be completed for some time can be purchased at today’s prices. This can be a real benefit in times of rising prices – when the development is completed the property may be worth much more than what you bought it for before construction started.
Also, a developer will also usually be prepared to sell more cheaply (at a substantial discount to an existing property) where the “final product” can’t be shown to the purchaser. In other words, an un-built property may be cheaper to buy than exactly the same property that has been completed.
An off-the-plan buyer can enjoy capital gains before having to service any interest costs at the end of the day. Usually you only need to pay a small deposit on an off the plan property, so you get the exposure to price increasing during construction without having outlaid much money.
From the developer’s point of view, sales “off the plan” mean that purchasers are committed at an agreed price. This will go a long way towards reducing the developer’s commercial risk and will be of great comfort to the developer’s financiers (developers must secure a certain number of pre-sales before banks will let the development go ahead and mortgage lending can be approved). Which is why ‘off the plan’ sales are launched ahead of construction.
WHAT ARE MAJOR BENEFITS “OFF THE PLAN”?
- Alternative deposits – which means you can use a lower cash deposit, a bank guarantee or a deposit bond (project dependent).
- Maximise tax advantages.
- Customised design possibilities.
- Longer settlement period, allowing for potential capital growth.
- Interest on deposit is often received by purchasers when cash deposits are made.
- Time to save more cash during settlement period.
- Opportunity to move into a brand-new apartment.
- Deposit is held in trust.
WHAT ARE THE MAIN RISKS?
- The project may take longer than planned to complete or may not proceed.
- The finished product may differ to what you anticipated.
- Expected capital growth doesn’t eventuate or value may be less than purchase price.
- Developer may go into liquidation which stalls the project and delays getting your deposit back
To ensure that you don’t buy at the wrong time and/or in the wrong market there are a few points checklist for buying off-the-plan investment properties.
- Make sure that you maximise your tax depreciation benefits by purchasing new real estate.
- The development should be situated in a strong growth location.
- Ideally the location offers 4 pillars of economic support such as employment opportunities, wage growth, demand and of course rental growth.
- The developer is well proven and has a reputation of building quality properties in growth locations.
- The development should be built near infrastructure such as schools, public transport and entertainment districts, medical facilities, etc.
- The finished development needs to have high quality finishes as it needs to appeal to an owner-occupier in the event you want to sell.
- Look for a minimum yield of 5%, buying in a location with limited accommodations.
Buy a property at today’s value by getting a valuation.
- Obtain legal advice on the contract.
To learn more tips and strategies to a successful off-the-plan purchase contact us:
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You’ll learn more about strategies and off-the-plan projects designed to help you maximise your capital growth and income and arrange your portfolio to achieve the best return possible no matter what the market is doing.