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The "off the plan" advantage

From better choices to the very real possibility your property may increase in value before you’ve even paid for it, buying off the plan is a strategy many investors use to build wealth.

For owner-occupiers and investors alike, the advantages of securing a property today and settling twelve to eighteen months down the track are significant and should be considered as part of your property purchasing strategy. In this edition of Property Insight we explore the benefits of purchasing off the plan and look at how to minimise associated risks.

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The "off the plan" advantage

When you buy “off the plan”, you are entering into a contract to purchase a property before or during construction. There is no finished product for you to inspect so you are quite literally buying off the developer’s plans.

While this can make for long and detailed contracts ensuring the developer builds the property you expect, it also offers significant benefits, as outlined below.

1. A better price

When it comes to buying off the plan, the old adage “the early bird gets the worm” is often the case. When developers first offer their new products to the market they tend to start with lower prices to get the ball rolling.

Once construction commences, prices usually rise and can continue to do so throughout the building phase. In a rising market, it’s not unusual for developers to raise their prices in line with improving market conditions. Therefore, if you commit to the project early on, you may find you make a significant saving.

2. Maximised tax benefits

When you buy a new investment property, you gain access to various tax benefits, including depreciation. The newer the property, the greater the depreciation value, making an off the plan purchase more attractive.

When compared to an older build, a brand-new property can completely change the cash flow of your asset due to depreciation benefits, potentially saving you tens of thousands of dollars over the life of the property ownership.

Depreciation is a specialised area of tax. To claim your depreciation, you need a schedule determined by a qualified Quantity Surveyor. There are essentially two depreciation types; building depreciation and fixture and fitting depreciation.

Building depreciation is the cost of a building, determined by a Quantity Surveyor and calculated over a period of 40 years. This is also known as your capital allowances, and is depreciated at 2.5% per annum. Fixture and fitting deductions are depreciated over the life of the fixture or fitting (usually 7-10 years). This includes items such as hot water systems, curtains, carpets, ovens and air-conditioners. Depreciation is highest in the first 5-10 years after a property is complete.

Your depreciation report will tell you how much you may claim as a tax offset. The below case study is for a Brisbane property with two bedrooms and two bathrooms.

Case Study

2 bedrooms, 2 bathrooms, unfurnished
Purchase price $660,000



3. Secure property at today’s price

If you buy before or in the early stages of the construction phase, it’s often eighteen months or, in some cases, longer, before you are required to pay the balance on your property. You will pay a 10% deposit upon signing the contract and the rest once the build is complete. In the meantime, your asset is appreciating based on the full purchase price.

In a rising market, buying off the plan is a great strategy not only for investors but also owner-occupiers. Many clients purchase their principal place of residence off the plan, securing property at today’s price and selling their current residence just prior to settlement.

In this case, you are capitalising on growth with the new property while it’s being built and selling your principal residence in a market that has experienced gains, putting you in a better financial position in the long run.

4. Time to prepare

If you’re an owner-occupier purchasing off the plan, you get the added advantage of having time to “put your house in order” before moving in. The gap between paying the deposit and settling gives you a chance to save money, arrange your finances and sell your current residence without the need for costly bridging finance.

5. Greater choice

One of the greatest benefits of buying off the plan is that you get your pick of properties within the development. If you are quick off the mark the selection is even greater.

A wider array of choices means more opportunity to choose an apartment with a superior position, aspect and floor layout — it’s common for penthouses, corner units, those with the best views, and ground-floor apartments with private gardens to be sold first. These superior properties offer better potential for strong capital growth and rental yields.

6. Quality control

Newly built properties in Australia are eligible for a seven-year warranty on the building structure, which helps ensure the quality of the property you purchase off the plan.

Before settlement of an off the plan property, you should be given the opportunity to conduct an inspection and subsequently lodge any defects with the developer. If you are unable to conduct an inspection personally, you should nominate a representative on your behalf to conduct this inspection. Depending on the contract, there is usually a further three to six months after settlement where the developer is responsible for defects.

This can include minor items such as appliances that don’t work as expected, and so on. The builder/developer is obligated under the contract to rectify all of these problems and most will resolve any issues quickly so they can move onto new projects.

Outside of this six-month period, builders are accountable for a further six years and six months for any major defects. This means any structural or interior building faults must be repaired by the builder during this period. This provides a great deal of security for purchasers when compared to buying a resale, which may be hiding problems that aren’t identified until it’s too late.

Minimising risk

While buying a property off the plan in a rising market may sound ideal, it’s important to remember that—as with all investments— there are risks to be considered. In a softening market, depending on the location, it is possible the apartment you bought off the plan could be worth less than what you’re obliged to pay for it on completion. Remember that property is a long-term investment and, provided you are buying with the intention of holding on to the property, you will most likely find that buying off the plan is a successful strategy.

In the short-term, only secure a property off the plan if you have sufficient purchasing ability now and believe your financial circumstances will be the same or improved upon settlement. We recommend seeking a finance pre-qualification before engaging in an off the plan purchase. This will provide you with the knowledge and peace of mind that when settlement approaches you are in a suitable financial position.

Some other ways to minimise the risk when buying off the plan are to thoroughly check the developer’s credentials and their previous projects. History is a great representation as to the developer’s build quality and of course reputation in the industry. It is also imperative to engage with a property lawyer who deals frequently with off the plan contracts, as these contracts are more complex than your average re-sale contract. This will ensure the contract you are signing matches the vision you have of your future property. Following the steps above will minimise your risk associated with such a purchase and protect your valuable asset acquisition.

Weigh up your options

For both owner-occupiers and investors alike, buying property off the plan can yield greater tax benefits, a lower purchasing price and the potential to choose a highly desirable property. In the right market it can also quickly turn into a high-performing investment. For these reasons and more, buying off the plan should definitely be considered as an option for your property acquisition strategy.

DISCLAIMER: Whilst the publisher and author believe that the information contained in the publication is based on reliable and researched information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. Anyone who intends to use the information as the basis for making financial or business decisions should first obtain advice from a qualified professional person. This article is published on the understanding that neither the publisher nor the author - is responsible for the results of any action taken on the basis of the information published; and is not engaged in rendering legal, accounting, professional or other advice or services. The publisher and author expressly disclaim all liability and responsibility to any reader of this publication as a consequence of anything done, or not done, by a reader relying upon any part of this publication. (C) This article may not be reproduced in full or in part without the specific written consent of Which Property and the Author.

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