What to weigh up before you invest in property off-the-plan

Conventional wisdom has it that you should never buy an investment property off the plan as you’re likely paying a premium for everything being new, and there’s always the risk of defects.

Yet on the plus side, it does mean you’re paying a deposit of, say 10 per cent now, with the possibility that its value will have increased by the time you come to settle.

“It is a case of buyer beware, and you should approach any off-the-plan purchase with caution,” says mortgage broker Leanne Pon of Savvy Home Loans. “But it can also be a great idea.

“You put the deposit down and maybe within that 18-month settlement period, there can be a very good uplift in equity by the time you settle. You do have to be careful though and put in place some steps that will protect you from risk.”

These include, says Pon, inserting into the contract certain clauses that make settlement subject to finance and a final valuation, to make sure the buyer isn’t stuck with a shortfall if they’re paying more than the banks consider the property, on completion, is worth.

Another clear and present danger, says financial advisor Helen Baker, founder of On Your Own Two Feet, is the risk of a builder or developer going bust, and leaving the property-buyer high and dry. “In that circumstance, you could lose everything,” she says.

“Another concern is the quality of the work on a new building. Will there be defects that the developer is reluctant to rectify? And does the contract involve fixed pricing, or will it change according to the rise in prices of some of the materials, like timber?”

Of course, with an investment property, the mortgage repayments and interest are deductible against tax but if there are issues with the property, says Baker, then it might be impossible to tenant while those are being sorted out.

“There are some benefits with off-the-plan investments, with the value increasing before settlement, but you have to be careful where, and what, you buy,” she says. “If there are too many new homes being built in the same area, then they can devalue each other. You need to weigh up all the pros and cons and understand your own personal circumstances and goals.”

Reece Coleman, co-founder of The Buyers Agent Network, is adamant, however, that with the right research and advice, and in a rising market, the rewards can be considerable. He’s purchased around 15 off-the-plan investments over the past two years, mostly for doctors, lawyers and accountants.

“You put down 10 per cent but receive the capital growth on 100 per cent of the value on settlement,” he says. “They’re great for investors as they generally carry large depreciation benefits, too.

“I bought one unit in Brisbane in April 2021 for $741,000 and on settlement, it was worth $1.49 million. Today, the building cost is about $18,400 a square metre, but you’ve been buying at $9000 a square metre. But we do a lot of research and will only buy in high growth areas from developers we trust with their own in-house build teams.”