John Martinovic has invested in a wide variety of properties—from small units and off the plan apartments to National Rental Affordability Scheme (NRAS) assets—but, after learning his lessons through the years, he has decided to avoid purchasing off the plan properties in the future to be able to take advantage of more opportunities in the vast field of property investment.
According to the property investor, it was frustrating to invest in something that he can neither see nor touch, but he was fortunate that it turned out fine and valued up significantly after the development has been finished.
“We look back now and we go, ‘There's no way we would have what we have today if we started this, maybe, two years ago because we're seeing every day in the media, banks are tightening, LVR's [loan-to-value-ratios] are changing… every day, something’s changing with the whole investor segment,” he said. “It's making it harder, I always say to people, ‘Don't expect this, but you can certainly have this. It's doable but you've just got to get your foot in the door, too.' ”
He shares his experience with Smart Property Investment’s Phil Tarrant and reveals why he probably will never dabble with off the plan properties again throughout his property investment journey:
Describe “off the plan properties” briefly.
Phil Tarrant: Essentially, you commit to purchasing a property typically before it's even started building and you place a small deposit down. The idea is that you buy it at today's prices, and when the property is built, which might be one year, 18 months, two years, sometimes three years away, the market should have changed so that it's going to be worth more at that point in time.
What are the issues that property investors often face when buying off the plan assets?
Phil Tarrant: What they commit to purchase the property for and what the property’s actually worth are two very different things—often, it's negative. So they're committed to buying a property, which the bank will only lend them less money on, point number one. Point number two is that should they need to get out the marketplace... they're selling it for less than what they've paid for it.
Why does it remain as an attractive investment then?
Phil Tarrant: Typically, off the plan apartments, over time, become attractive. You know—five, ten years down the path. But a lot of investors get burned buying off the plan. A lot of it can be caused by oversupply in the market. When you see a 1000 or 2000 units coming online in a particular area, a lot of the times, their supply and demand cycle means that you're not going to price up. It can be dangerous.
Have you had a good experience buying off the plan?
John Martinovic: We're one of the lucky ones.
What would you tell investors planning to dabble with off the plan properties?
John Martinovic: One of the other things people got to think about, too, [when] buying off the plan is if you're buying these high rise buildings, all of a sudden it could be 100, 150, 200 new units available for rent. So, there's competition there to try to get someone in there… [There’s] all these things you've got to be mindful of.
Phil Tarrant: It's a double whammy, you know, in terms of valuation. Your property might not stack up and you find yourself in negative equity. The other side is that you can't get a tenant in there because everyone else is looking for tenants at the same time… If there's more people, if there's more properties than there is people, rents are going to come down, it's going to affect your yield and your property as well.
Would you buy off the plan again?
John Martinovic: Probably not, knowing what we do, knowing what we know now… It's a big handbrake in the whole strategy thing.
More than the risk, it’s the lost opportunity that concerns you most.
John Martinovic: Correct, because I'm always looking for more investment properties. If you find something good, you go, ‘Oh, I can't do any because I know in three months or six months or whatever, I've got to sit on this first.’ That's your first priority, so I think it just ties you up if you've got that long term commitment.
Tune in to John Martinovic’s episode on The Smart Property Investment Show to know why keeping on top of his finances now will not only safeguard the future of his children but enable him and his wife to be debt-free by the age of 45.