Off Plan Investment Property - Some pro's and con's for purchase
Off plan investment property - What's the pro's and con's?
When it comes to buying property, especially investment property, you basically have two options. Buy already Built (new or near new) or not yet built.
It is preferable for most ‘smart’ passive wealth builders that you don’t buy older properties simply because they do not offer any significant depreciable value in their fixtures and fittings.
And while we can discuss buying older properties, realize for the moment that there are quite distinct advantages and times when buying built can be better than not yet built.
Certainly an existing or just completed property enables you to capitalize on any latent buying value. You can of course then offer it to the rental market immediately which allows you to start claiming your tax deductions straight away.
(Remember however, that in order to be able to claim a deduction your property has to be intended and available for rent. Further it has to be rented in line with the market rate...
Examples of this are possibly, if you take your property off the market because you want to stay in it for a 3 month holiday, then you cannot claim the expenses generated during that time.
Similarly, if you let your property to say a next of kin or family member for 50% of the market rent and you try to claim the costs of the loan interest in lue, then expect some fancy foot work with the tax office when they call you. If this is your intention then a visit to your financial adviser is advised.)
It should be remembered too that tax deductions are only a supporting yet critical catalyst to making a good investment and should not be your placed as a purchasing element before the process of clarifying whether in fact that particular property will make a good investment.
Anyway..., back to 'Off plan investment property'
By buying a ready built property you will be paying full stamp duty which is approximately 5% to 8% of purchase price. (Stamp duty varies from State to State).
This may be considered a cost that you are happy to pay instead of buying an off plan investment property because of the opportunity latent value that it presents or perhaps its just the right timing whereby you'll recoup this cost quickly because of a rising or buoyant market.
Another reason that you may want to buy already built is that you can see what you are getting, however please remember that the older the property the less the available value in depreciating fixtures and fittings will can be deducted with the first 2 to 3 years being significantly better than the years that follow.
Off plan investment property however, also has many benefits with few downsides.
1) You get to buy in today’s market at today’s prices and do not pay for the property until construction is complete and settlement takes place.
2) Stamp duty is only paid on the value of the land as there is no building attracting any duty.
3) You may get the option to change the floor plan at small cost, depending on stage of development
4) You can use a deposit bond (in most cases) to secure your purchase instead of using a real deposit
5) You get a maximum tax claim because every thing is brand new
6) A brand new property provides an attraction to obtain premium rents
7) A brand new property offers minimal maintenance issues for many years
Foot note: An off plan investment property purchase differs from developing or building on your own block of land.
To develop on a block of land you will have interest payments on the land purchase cost and development or progressive construction costs including applicable interest to consider.
So what are the approximate figures and applicable stamp duty cost savings for a $300,000 property?
(It should be noted that stamp duty savings by off plan purchase are only made available by the State Government of Victoria.
Note: Your savings of stamp duty costs are obviously increased the higher your purchase cost.
Purchase price $300,000
10% Deposit$ 30,000 (If you want to avoid mortgage insurance of 1 to 2.5% you'll need a 20% deposit or utilize and equity lend)
Approximate costs are:
Stamp Duty $15,600
Loan Cost $ 1,500 includes stamp duty on loan costs. Please Note-Stamp duties vary from State to State.
Conveyancer $ 1,500
Mortgage Insurance $ 2,500
This 300,000 ready built example shows that you need approximately $51,100 to get started.
Because the stamp duty on the land component is approximately $5000, an off plan investment property costing $300,000 will save you approximately $10,000 in stamp duty
What way will you go?
At the end of the day it really depends on the 6 faithful serving servants of property investment.
And they are:
Ask and answer these questions and your answer to how you will buy your next property will be clear.
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