Off-the-plan apartments - To buy or not to buy?
Off-the-plan apartments can be very tempting to invest in - especially when everything is brand new and modern. But more often than not they make terrible investments and come with significant risks.
Here's why:
1. Overpaying: "paying tomorrow's prices today."
Let's face it: when you buy an off-the-plan apartment, you're paying a premium. Sure, the property is brand new and in good condition, but that comes at a cost. More often than not, you end up overpaying for what you're getting. In some cases, I've seen people pay up to $150,000 more for a brand-new apartment in the same suburb, compared to an established one with the same number of bedrooms. That’s a huge price difference!
Let’s say you buy an apartment, off the plan. You will need the median price of established properties to grow before the value of your brand-new apartment can grow in value.
Your brand-new apartment might be worth $150k more than an established one in the same suburb, but how many home buyers are willing to pay that much more for the same amount of bedrooms and bathrooms in the same suburb?
Unfortunately, it could take years for the value of established apartments to reach the level you paid for your brand-new one. And during that time, the value of your property may remain flat (or even go backwards). It's a risky proposition because you’re “paying tomorrow’s prices today” without any certainty it will be worth that amount in the future.
2. Settlement Risks: The Price You Pay vs. Property Value
Buying off the plan comes with the uncertainty of settlement. Imagine this scenario: you buy a brand new apartment for $600k off the plan - and you're excited for the build to be completed in 12 - 18 months. And when it's all completed and the time comes for settlement, the bank doesn’t think it’s worth $600k anymore (because you overpaid) and they value it at only $520,000.
Now, they're not willing to lend you the full amount you need for the purchase (i.e. $480k if you're contributing a 20% deposit). If this happens - you will need to find an additional $64,000 for your deposit to complete the purchase. And if you can't come up with the extra funds to settle the property, you might have to forfeit the property and lose your initial deposit (usually 10%).
These situations cause a lot of uncertainty because it's harder to predict the future value of an apartment that doesn't exist yet.
It's also important to remind ourselves that A LOT can happen in 12 - 18 months when you are waiting for your apartment block to be built. For example, Interest rates can go up 12 times in 14 months (like in 2022 - 20223), and builders and developers can go out of business - these turn of events can have a significant impact on the value of an apartment you bought the year before.
3. Oversupply: Stiff Competition leads to lower prices.
One major red flag I've noticed with off-the-plan apartments is the level of supply. The apartment you buy could be one of 100 - 500 others in the same block. And your block could be one of dozens in the same suburb. This oversupply leads to fierce competition for tenants and buyers.
e.g. If you're trying to find a tenant for your apartment, chances are another landlord in your block or suburb is too!
And if there are not enough tenants to fill all the apartment vacancies - You'll need to lower the price of your rent to be competitive (and this situation is exactly the same if you’re trying to sell your property!)
4. Developer Commissions and Kickbacks: A Major Concern
This is perhaps the BIGGEST red flag I want to raise.
Be very careful when dealing with companies who advise you to buy off-the-plan apartments or house and land packages, and get paid a commission from the developer. The advisors from these companies (aka salespeople) can be very convincing in the way they present brand new properties as compelling investment opportunities - and they'll focus on benefits like tax depreciation and rental guarantees. Take everything with a grain of salt.
Some of these companies make huge commissions of up to $40k for every property they sell - and these commissions are ultimately paid by the buyers who pay an inflated price for the property. The last thing you want is to overpay and be left with an underperforming asset that you’ll struggle to sell.
KEY TAKEAWAY:
If a company gets paid a commission from a developer for a property you purchase - they are working for the developer. NOT you.
And if they are also representing you as a Buyers Agent - this is a conflict of interest.
5. Opportunity Cost: Is this really the best investment opportunity?
One of the most logical arguments against off-the-plan apartments is the opportunity cost. Instead of putting your money into these properties, it could be invested elsewhere for potentially better returns. Historical data consistently shows that houses outperform apartments when it comes to price growth. This is because land appreciates over time, while buildings depreciate. Investing in houses in good suburbs, where vacant land is scarce, can be a more rewarding long-term strategy.
If I was ready to make a purchase, I would prefer to buy and own a house today and start seeing the return on investment ASAP, rather than wait for a brand new apartment to be finished in 18 months (with all the risks).
Don't get me wrong. I'm not against investing in apartments altogether. I think established apartments in small blocks within desirable suburbs can make good investments. But where possible, I prefer to invest in houses.
Conclusion:
As you can see, I'm very passionate about warning investors about the risks associated with off-the-plan apartments because I've come close to falling into that trap myself.
It hurts me whenever I hear stories of people who invested their hard-earned money in properties that are now worth less than what they paid.
I think brand-new apartments are great to live in - but not so great to invest in. This is because the risks of overpaying, oversupply, developer commissions, and missed opportunity costs are all significant factors that simply, cannot be ignored.
If you're contemplating purchasing an off-the-plan apartment and want to learn more, feel free to reach out to me. I'm always here to help.