Step 2: Buying Plan – Why, Where, How, What

At this point you would have a better understanding of finance and how it relates to your future Off the Plan property purchase. In this step we will cover the why people buy property, particularly Off the Plan property. We will also look at the various questions you may ask yourself during the process such as where can you buy? How much should you borrow? What type of property is right for me? This is very much a self-reflection step.

Step 2.1: Why Buy Property
Step 2.2: Advantages in buying off the plan property
Step 2.3: Where Could You Buy Property
Step 2.4: How Much Should You Spend
Step 2.5: What Type of Property
Step 2.6: Off the Plan Strategies

Step 2.1: Why Buy Property

Property had been an integral part of Australia’s history and has truly shaped modern Australia. Without property the majority of Australians would have no formal accumulated wealth base. It has been the driving force behind successful business. From an investment viewpoint, property in Australia signifies opportunity. A growing population, stable economic and employment conditions have been key to the growth of prices over the last decade. Many Australians state “why should I rent, when I can own my own place for almost the same price”. Due to the current interest rate environment, this statement is true as outlined in the case study below. As can be seen, the key difference between buying your own property and renting is the deposit (usually 10%) and upfront costs (stamp duty). If you take these out of the comparison the figures are almost the same. More importantly when used as an investment, the purchased property figures will become a dramatically better proposition.

Case Study: Comparing holding costs when buying to renting

Description Buying Expenses Renting Expenses
Weekly Payments
– Buying – based on and owner occupier with $540,000 loan @ 5% interest i.e. $600,000 property with 10% deposit.
– Renting – based on 4.5% gross yield of $600,000 property.
$519 $519
Deposits
– Buying – based on $600,000 price with deposit at 10% of $60,000.
– Renting – upfront bond of 2 months rent (which is refundable at the end) of $2,076.
$60,000 $2,076
Upfront
– Buying – based on $600,000 price with stamp duty at NSW rates of $22,819.
– Renting – /.
$22,819 $0
Extra Expenses
– Buying – council and water rates of $2,000 per annum and electricity of $2,000 per annum.
– Renting – tenant covers electricity usage of $2,000 per annum.
$4,000 $2,000
Summary Yearly Holding Costs
– Buying – *excluding deposits, upfront.
– Renting – *excluding deposits.
$30,988 $28,988

Step 2.2: Advantages in buying Off the Plan property

Off the Plan property offers multiple advantages to a buyer. Below is a growing list of benefits associated by buying before construction completes.

General

  1. Only 10% deposit which is a low initial upfront cost and is held in trust
  2. Price is locked in at todays price
  3. It can be more affordable, particularly if you get in at the start of the development
  4. Changes in NSW legislation in favour of purchasers have stopped the practice of rescissions from occurring
  5. You will know approximately how much your body corporate rates will be before construction
  6. You can work out the holding costs of the property in the initial phases

First Home Buyer

  1. First home buyer benefits such as stamp duty savings and first home buyer grants
  2. Longer time to prepare your finance
  3. Ability to enter a competitive market
  4. Can invest in an Off the Plan property before buying a place to occupy

Investment

Example depreciation schedule

  1. Depreciation benefits
  2. New properties achieve higher rents
  3. More in demand asset versus old property
  4. Less maintenance and upkeep
  5. High quality finishes
  6. Potential for capital growth during settlement
  7. Prime property in scarce location
  8. Stamp duty savings
  9. Greater time to prepare and advertise for a tenant if investing
  10. Time to find a mortgage which suits your requirements
  11. New properties tend to hold their value well
  12. Some developers offer rental guarantees which secures a tenant for a set period of time
  13. Buying in this way enables you to diversify into differing property markets around the country

Lifestyle

Example of dark colour schemeExample of light colour scheme

  1. Generally a choice of colour scheme to customise the interior
  2. Seven year builders guarantee
  3. You can watch your building built
  4. Buying in some developments is similar to buying a brand name and associated lifestyle
  5. Some developments offer luxury amenities such as pools, gyms and bbq areas
  6. Many Off the Plan developments are designed to feel like an inclusive community
  7. The property is new which means no one else would have lived in it before
  8. Lifts make buildings very accessible
  9. Usually built near ample public transport

Design

Example of exterior design

  1. Unique building characteristics and innovative finishes
  2. Security car parking in apartment buildings
  3. Oasis landscaped design for residents
  4. Latest design and architecture trends
  5. Efficient use of space
  6. Maximum use of light
  7. Storage cages for any overflow
  8. Balcony and courtyards are usually well designed to make the most of natural light
  9. Many new developments need to have an allocation of adaptable units

Step: 2.3: Where Could You Buy

Every capital city around Australia varies on where you can buy Off the Plan property. In Sydney new apartments are more common within 30km, new townhouses within 25km-50km and new house and land packages 40km-80km to the CBD.
In Melbourne new apartments can be purchased within 10km, new townhouses within 20km and house and land packages within 30km to the CBD.
Brisbane is similar to Melbourne with new apartments within 15km, new townhouses 30km and house and land packages 25km-50km to the CBD.
Other things to consider when deciding on where to buy are understanding any new infrastructure projects such as road, rail and trams. Educational facilities such as schools or universities. New shopping amenities such as shopping centres or local malls. Convenient new employment options such as new office buildings or retail space. New development approvals can totally alter an area from virtual farmland to prosperous suburb. Traditionally Off the Plan projects have a tremendous amount of feasibility work undertaken by the developer prior to a project being started. The key is understanding the local demand for the type of property being offered.

Step 2.4: How Much Should You Spend

There are many opinions on whether you should stretch yourself to your full borrowing capacity or not. The one side says “this is the best way as it maximises your asset base”. The other side believes “it’s better to leave some room in your capacity”. The true answer to this question depends on the property. What this means is the specific Off the Plan property will determine the price of the property for the local market. The theory of supply and demand will determine prices. In high demand locations with waterfront views you would expect properties to be higher priced than non-waterfront properties. Similarly with properties close to the city and properties which are further out. Some key impacts on prices are land size, property size, bedrooms, bathrooms, quality, car spaces, courtyard / balcony space, location, views, aspect, market confidence, economy, demographics and new infrastructure projects.
*As a rule of thumb, Australian’s spend around 27% of their pre-tax incomes on mortgages.

Step 2.5: What Type of Property

The type of property you should buy primarily depends on your personal goals. Your goals will be very different if you want to occupy the property once it completes in comparison to renting the property out once it finishes.

Personal Goals
Are you buying to occupy or invest? If to occupy how many bedrooms and how much space will you need? If to invest what is the normal type of property in the local market i.e. Apartments, Houses or Townhouses? Do you like the standard of finishes? Does the completion timeframe work with your goals?

Your Off the Plan Strategy will guide you through the remaining steps. Whether you are looking to hold, on-sell or rent. A clear direction from the start will make the entire process much smoother. In this step we have outlined the advantages and the differing strategies associated with Off the Plan.

Step 2.6: Off The Plan Strategies

An Off the Plan purchase offers many strategies due to the timeframe of the purchase. In particular it gives 3 options on how you decide to treat the property.

Step: 2.61: Buy to on-sell

The shortest term outlook and most speculative is the buy-to-on-sell purchaser. The pure intention is for short-term investment growth. The period of potential growth is between exchange and settlement.

Example of buy to on-sell Investment

A purchaser named Tom decides he foresees strong growth over the next year in a suburb just outside of the CBD. He decides to buy an apartment Off the Plan. Between the exchange and settlement period is projected to be 2 years or 24 months. His goal is to on-sell the apartment in 12 months time or halfway through the construction period. He believes he will make sufficient profit to warrant his investment. Just remember there are costs involved in on-selling such as agents fees, potential capital gains and stamp duty.

Step 2.62: Buy to hold

Buyers looking to hold onto the property for a medium or long-term period are classified as buy-to-hold purchasers. They are typically looking to occupy the property as their principal place of residence. Many families, couples and retirees choose this method by buying apartments, houses or townhouses based on their personal requirements. These type of buyers are usually the most emotionally connected to the property as they will be physically living in it.

Step 2.63: Buy to rent

Property investors wanting a strong return on their investment choose Off the Plan properties in locations with strong underlying fundamentals. These fundamentals are driven by supply and demand, population demographics, infrastructure resources and the local economy. The goal is to purchase property which performs well into the future in terms of capital growth and rental returns. Typically these are medium to long-term investments.

Next up you’ll learn about which type of buyer you are in the next step.