Ask Margaret: Should I buy off-the-plan or an existing property?

Hi Margaret,

I have been looking for a two-bedroom investment. Do you think Mascot is a good suburb to invest in?

And do you suggest off-the-plan or existing property?

Thanks,

Mag

Hi Mag,

I always find it interesting that investors write to me and ask if a specific suburb makes a good investment.  Thinking about this, usually someone will ask about a suburb because they live near it, or it’s within close proximity to their own home and they feel a comfort investing in property close by.

When someone decides to become a property investor, their first action is usually to buy a property.  They pick a suburb fairly randomly, and then try to get a bargain there. Later, when this investment does not perform as well as they would like, they blame the investment, or property investing in general, never seeing that they are most definitely responsible for things not working out!

Just like any occupation, becoming a good property investor commences with the process of gaining an education.  Asking me if Mascot is a ‘good suburb’ means that you have not acquired the very basic skills needed to become a successful property investor!

The process to choose an area requires you to consider the entire country first, and narrow down which areas within the country show the greatest number of growth drivers.  Growth drivers include things such as a population growing faster than the national average, an abundance of infrastructure development, a median household income growing faster than inflation, a diversified industry base, low unemployment and a strong and active local council.  Most notably, though, an area with these characteristics should also be one which has yet to ‘take off’.  Choosing long established areas may mean that you get some growth, and it may already be a proven performer, but your aim should be to buy in those areas that have everything about to happen, soon, so that you can buy there at an affordable price and before everyone else does.

Considering Mascot, it is well established with little room for the bigger growth drivers to exist to propel the prices along at higher than normal growth rates.  It should be a solid area, but it won’t have that ‘boom’ in prices which makes a great investment.  You need to look further afield to areas where growth drivers exists and where values are yet impacted by these drivers.  In and around Sydney this includes many of the outer Western suburbs and some of the larger regional cities such as Penrith and Bathurst.

With regard to the second part of your question, an off-the-plan purchase carries far greater risk than an established property, and little advantage over one.  It’s very difficult to establish whether the off-the –plan property is being offered at what will be a fair market value – even a registered valuer cannot forecast future values accurately enough to assure you  that what you pay is going to be what it is worth when completed.  When you tie up your borrowing capacity on a yet-to-be completed project, you may not be allowed by the bank to borrow for additional investments, as your true position cannot be determined until the property is complete and owned by you.  If you are getting a loan to buy the property, and the property subsequently has a value less than you have agreed to pay, you may not be able to borrow enough to complete the sale, as the bank will use the value at the time, not your purchase price, to determine how much they will lend.  If you cannot complete the purchase due to lack of funds, you will be sued to proceed and you may lose your deposit.

Confirming an accurate future rent return is also nearly impossible, as this is affected by demand and supply.  Where the development is large, there could well be a sudden oversupply as they all complete and come on line, and you could get far less rent than expected, causing further financial distress to you.

Finally, I’ve seen far too many off-the-plan properties with large commissions built in for middlemen marketing people, meaning what you pay may be well over its true underlying value.  That said, I’d prefer an established property which you can buy today, whose value you can easily confirm and whose rent return is more assured.

Margaret Lomas is a best-selling author and writes and hosts the popularProperty Success With Margaret Lomas and heads up the panel onYour Money, Your Call, both on Sky News. She is the founder of Destiny.

Have a property question? Ask Margaret!