Property has proven to be an effective ways for everyday Australians to achieve financial freedom, and buying off-the-plan is one strategy many investors use to generate extra income in a short amount of time. On-selling the property prior to settlement for a tidy profit sounds like a dream come true – but does this strategy really work?
Buying property off-the-plan in a high growth area, and then selling prior to final settlement, is one strategy that many investors have used to pocket tens of thousands of dollars within a short space of time.Whilst this can be a very successful profit-driver for savvy investors, Ian Dore from Dore Property Corporation says success depends largely on the property’s location.
“Demand for rental property far outstrips supply generally throughout all capital and regional cities across Australia at present,” Dore explains, “so investors should focus primarily on cities where population growth is booming, and the fundamental drivers are in place for capital growth and significant rental demand.”
Spotting a winner
Identifying the right property in the right location is crucial in this strategy. To ensure you are on a winner you need to consider the area very carefully.
• Follow the money trail
Find locations where major development and investment has been announced and/or commenced, particularly where those projects are supported by public companies and the government and promise to create massive employment opportunities
• Invest in a strong market
Look for locations where government and corporate spending is substantial and committed well into the next decade, as this will promise a strong and resilient market
On-selling prior to settlement
When it comes to on-selling, Dore says there are strategies investors can use to make the process more cost-effective and streamlined.
“Through discussion with the developer, it may be possible to receive their approval for a ‘Put and Call’ contract, which effectively allows you to on-sell prior to settlement,” Dore says.
“In doing this, you make a direct saving as the original contract will now be settled by a third-party buyer. The difference in contract price is your profit.”
Dore cautions that these types of contracts typically form part of a sale agreement for the sale of an asset to a third party, and as such you should seek independent legal advice before proceeding to be certain that it suits your purposes.
Another financing option available to off-the-plan purchasers is deposit bonds.
“They’re an inexpensive financial guarantee, generally costing less than half a per cent of the contract price for up to 12 months,” Dore says.
“It’s in the form of a bond that gives you the convenience of paying the upfront 10% deposit on the purchase of a property, without actually having to pay the full amount upfront. The benefit of this is, you don’t need to be out of pocket for the months before settlement – so your own money can continue working for you during the construction period.”
What if the property fails to quickly appreciate?
In many cases a building or property appreciates in value before settlement; however this is occasionally not the case. In this event, Dore recommends that the smartest move is to “hold onto it for as long as you can afford to”.
As an investor, you should plan for this to happen as your worst-case scenario; if you work out that you can not afford to keep the property as a rental property if all else fails, you should seriously reconsider whether to purchase the property in the first place, as you will risk making an overall loss on the transaction.
“Generally, the highest growth you will achieve from the purchase of an off-the-plan property will take place during the first two to three years from settlement,” Dore says.
“During this period, not only will you generally achieve the highest rate of growth, but you’ll also maximise your taxation in that period, because you’re able to claim the maximum depreciation and capital building allowance deductions, if the property is in a complex.”
Once the property settles, Dore says it is normal to “see a surge in the values” of a new building when it goes into full operation.
“When residents and tenants move in, a development becomes appreciated – and that is when capital growth kicks in.”
This article has been republished with permission from Your Investment Property magazine. Try our Loan Repayment Calculator and find the best repayment strategy for you.