Why property investors should avoid buying off-the-plan
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Why property investors should avoid buying off-the-plan

By Bianca Dabu
investors

The first purchase is often a "make or break" move for many property investors, but while it's easy to make efforts to actively avoid making mistakes, knowing you made a wrong turn in your property investment journey can actually be a tricky thing.

Colin Finch, being keen on building a strong portfolio over time, started his journey by purchasing a two-bedroom, two-bathroom, two-level townhouse off-the-plan in Maidstone, Victoria in July 2015.

He told Smart Property Investment: "We chose Maidstone based on strong growth over the past four years and bought [the townhouse] new because we were moving from PerthPerth, TAS Perth, WA to Melbourne and needed the time to relocate. Being a first time [buyer], we also got the $10,000 First Home Buyers, and reduction in stamp duty, which was even better since we purchased before the slab went down."

"In hindsight, we would have loved an established property with renovation potential as we see them continue to rise. Just trying to figure out if our new townhouse purchase was the wrong first property [was difficult]," the property investor added.

According to Smart Property Investment's Phil Tarrant, determining a wrong first purchase is always going to be based on the goals of the property investor.

"When someone buys a property and they're just hamstrung for 10 years because they've thrown everything into it—it's ruined their capacity to service a loan, the cash flow and stuff," Phil explained. 

"And that could be [the] wrong property for someone. For another person, wrong property might be, 'Yes, it's a great yielding property, but it's not going up in value.' So, [it's about your answer to] 'Why invest in property?'"

"In Colin's situation, I don't know why it would be the wrong property for him, but I'm assuming if that's the only investment property he's bought, he probably considers it's a wrong property because his goal is to build a large portfolio over time."

Meanwhile, propertybuyer's Rich Harvey identifies "buying off-the-plan" as the risk that Colin took for his first purchase. According to him, most of the time, off-the-plan may not be the right approach to buying property because it may only lead to low growth over time.

"Buying off-the-plan—it is a riskier way to buy properties and I've got say, probably in about 97 per cent of cases, buying off-the-plan is not the right approach to buying property because you're paying retail price. You're paying the developer's margin and you're generally funding their pockets, not your own pockets," Rich said.

"Over time, it will perform, but you are sort of going to see pretty low growth generally in off-the-plan purchases.

"However, the 3 per cent... of purchases that do work, you've got to buy in areas and get into pre-sales very early in the process. Sometimes, the developer's quite keen to sell it at a cheaper price. So we've had some clients [with whom] we're very strict in the due diligence that we do on these properties and we have got clients [who have] done very, very well."

He advised first-time property investors to look out for investments that they can add value to.

"Off-the-plan is riskier... Buying something that he can add some value to, that's where you make that equity. If you can create the value then that's going to leverage you into your next property. That's really key," Rich concluded.

Tune in to The Smart Property Investment Show's special Q&A episode to know more about creating equity and the financial backing you need to get started and identifying the best real estate agents to sell your property.

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Why property investors should avoid buying off-the-plan
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