Picture this: after years of disciplined saving, you're poised to dive into the property market. In your research, you encounter a phrase that piques your interest: 'buying off-the-plan property.' You find yourself pondering, 'What exactly does buying off-the-plan entail, and is it the right move for me?'
Don't sweat it any further. This article will guide you through buying off the plan property, outline the pros and cons, and help you decide if it's the right path for your property journey.
What Does It Mean To Buy Off-The-Plan Property?
Buying off the plan simply means purchasing a property yet to be built. You're buying based on the developer's plans and designs, not a physical building.
This approach to property buying has its unique advantages and disadvantages, which we'll delve into next.
The Pros Of Buying Off-The-Plan Property
Here are some of the advantages:
- 1. Depreciation Benefits
When you buy off the plan, one of the big advantages is what's known as 'depreciation benefits.' Here's how it works: as your property ages, certain elements wear out, such as the appliances inside the building. The good news is that you can claim the cost of this 'wear and tear' as a tax deduction.
This depreciation is generally considered a cost incurred in generating rental income, so property investors can claim it as a tax deduction. This can help improve your overall cash flow, making your investment more affordable in the long run.
- 2. More Choice
Buying off the plan also offers more options. You can choose the location, finishes, and even the floor plan of your property. This level of choice is rarely available when buying already established properties.
- 3. Time To Save
With off-the-plan properties, you typically pay a 10% deposit upfront, and the balance isn't due until the property is built.
Say you decide to buy an off-the-plan apartment that costs USD$500,000. Under the typical terms of an off-the-plan purchase, you must pay a 10% deposit upfront, which would be USD$50,000.
The remaining balance of USD$450,000 isn't due until the property is fully constructed. If the construction period is estimated to be two years, you have two years to save or arrange for the remaining amount. This extended period can be a significant advantage, especially if you're still building your savings or waiting for other investments to mature.
- 4. Attractive Pricing
Developers often offer attractive pricing early in the sales process to encourage early sales. This could mean securing your dream property at a lower price than if you waited until the developers completed the construction project.
These are some of the benefits that come with buying off-the-plan property. However, it has a few drawbacks too.
The Cons Of Buying Off-The-Plan Property
Here are some of the potential pitfalls:
- 1. Uncertainty
When you buy a property off the plan, you're essentially buying a promise. The developer is promising to build a property based on the plans and designs they've shown you. But since the property only exists on paper, there's a bit of a question mark.
Also, you're relying on the developer to fulfill their promise. This means their financial health and reputation matter. If they're in good shape financially and have a track record of delivering on their promises, that's a good sign. But if not, you may end up risking your investment.
- 2. Changes To The Property
Developers may make changes to the property during the construction period. They could switch out appliances and fittings or make small changes to the floor plan. While these changes are usually minor, they can be a source of frustration.
- 3. Valuation Risks
The bank will need to undertake a valuation before granting a loan. Valuation is the process of estimating the current value of an asset or company. If the valuation falls short of the purchase price, you'll need to cover the difference.
Imagine you're buying an off-the-plan property for USD$500,000. You apply for a loan, and the bank estimates the property's value at USD$480,000. In this case, the bank will only lend you based on the USD$480,000 value. This means you'll need to come up with the extra $20,000 yourself.
Is Buying Off-The-Plan Property Right for You?
Deciding whether to buy off-the-plan property is a personal decision that you should make based on your financial situation, risk tolerance, and long-term goals.
Consider options that align with your situation. If you're a first-time buyer with a stable income and time to save, buying off-the-plan could be an excellent opportunity to enter the property market.
However, if you prefer inspecting properties firsthand or dislike construction uncertainties, off-the-plan buying may not suit you. It's advisable to do thorough research and seek professional advice if needed.
