Modern apartment buildings in new neighborhood .

Should You Invest In An Off-The-Plan Apartment?

 

Apartments and off the plan apartments are often attractive options for novice investors – the marketing, the brochures and the sales people provide a level of information not readily available with other property types. This, combined with the glossy brochures and slick sales and marketing can be really enticing for investors.  However, with one exception, we do not recommend investing in Perth apartments and we especially caution against investing in anything off the plan.

Generally speaking, there are only a few circumstances where we would recommend considering an apartment as an investment; for example if affordability is an issue or the investor is using a varied investment strategy. In the event an apartment is purchased, selecting the ‘right’ apartment is crucial.

What is the problem with off the plan?

The problem with purchasing off the plan is there is normally no ‘subject to finance’ clause in the contract. Typically, the investor pays their 10% deposit, which could be anywhere up to $60,000 or more, and does not need to apply for finance for quite some time, often not for a year.  A lot can change in a year. Your circumstances could change, and perhaps finance that would have been approved a year ago will not be approved at the time you need it to be to go forward with your purchase of the apartment. Or, the bank’s lending criteria could have changed as has occurred recently with the APRA restrictions on investment lending. Or any number of other things could have changed that mean you are just not in a position, for whatever reason, to go through with the purchase. So guess what happens to your deposit? You lose it. It can be money absolutely down the drain.

 

More broadly though, we just don’t think Perth apartments are a great investment right now, and there are better investment options out there, for the following reasons:

  • Perth has an oversupply of apartments. Don’t believe me? Just look on www.realestate.com.au or take a drive around the inner city suburbs and have a look at all the new construction going on. Apartments are springing up everywhere and that makes for hefty competition when it comes time to rent or sell. Basic supply an demand tells us the more of something that’s available the lower the price, and this could not be truer for re-sale of apartments and apartment rental yields. Neither of these things are what you’re looking for in an investment.
  • Apartments have additional fees. Strata levies, maintenance levies, special levies – why pay these if you can invest somewhere else that doesn’t have them? Additional fees and costs where you can avoid them do not make sensible investing.
  • When property goes up on value, it’s usually the land portion that has the highest increase. Land is the scarce resource when investing, so appreciates much faster than a dwelling.
  • Apartments tend to have more transient tenants and are generally a ‘stepping stone’ residence until something better comes along. To make matters worse, when your tenants do move out, you’re likely to have a higher vacancy rate in an apartment due to the competition in the marketplace.

As we noted above, there are a limited set of circumstances where investing in an apartment may be an appropriate strategy for you. However, we are firm believers that the most valuable long-term investment is in house and land and, where possible, this should be where your place your investment dollars. Above all, remember that property investment is not a short-term wealth creation tool, you need to be in it for the long haul. Choose your investments wisely, use an effective debt-reduction strategy, manage your properties well, and you will be on-track to achieve a secure financial future.

*This article is for information purposes only. Our blog posts are not intended as financial or investment advice and should not be relied upon for any purpose. Before making financial decisions, you should seek advice from a qualified and registered financial or investment adviser.

 

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