Cameron McEvoy is a NSW-based property investor and maintains a blog, Property Correspondent.

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Cameron McEvoy

12 December 2012

Why you should buy existing property rather than purchase off the plan

Why you should buy existing property rather than purchase off the plan

There is a hotly contested argument in the Australian property investing landscape: Buying off the plan versus buying established properties.  Most investors starting out are likely to enter the unit market instead of buying freestanding houses. This is particularly evident in capital city markets, where detached dwelling price entry points are usually not within reach of first-time investors. So investors look to the unit market for easier accessibility and (arguably) easier ongoing management while holding. As such, they come across this choice fairly early on in their investing career, with some favouring off-the-plan apartments and others preferring established stock only.

But which type is the best?

I favour established stock, and here’s why:

First of all, let’s start with the biggest factor: price. Property is all dependant on location, we know this; but if compare the price of an off-the-plan unit with an established unit (same bedrooms, floor space, parking etc) in the same suburb – and even street –  the cost will be much cheaper. Sure, the older unit may not be as pretty, or have as modern styling or features, but it will be significantly cheaper than the off-the-plan stock, making it more readily accessible for entry-level investors.

Additionally, there is scope for renovation to increase value and rental return, throughout your ‘holding’ life for the property. This is a handy tactic in times where capital growth may be flat, or when increasing interest rates can dip an investor too far into the ‘negative’ in terms of holding cost. Off-the-plan residences have a built-in maximum ceiling rate for rent with little scope to add value via renovation for a good five to 10 years from completed construction.

This flows into my next point. Established stock that has stood the test of time is typically better built than new stock. Not always, but developers look to cut corners with building materials, design, and functionality. Sometimes developers are looking only at what will drive their biggest profit margins, instead of the dynamics of the area they are constructing the block in are demanding. I find this interesting because often developers market most heavily not to would-be home owners, but to would-be investors.

You should always pay utmost attention to your due diligence when buying off the plan for this reason. It is never a happy discovery when an investor realises that while she signed off on Smeg kitchen appliances two years back, her finished kitchen is furnished with cheap inferior fittings that look OK for about a year but have no wear and tear sustainability. This translates into expensive holding costs in years two, three, and four when inferior fittings break down.

Somebody has to pay for all those marketing costs. Yep, somebody has to pay for all those fancy high-gloss 60-page booklet they print, every billboard ad, every online banner ad they have to buy ad space for. No prizes for who picks up the bill for it: yep, you, the investor. And working for over six years in the media advertising industry myself, let me tell you that mass-scale marketing ain’t cheap. As investors, paying for someone else’s marketing campaign is something that should be avoided, and buying established stock helps reduce your risk of exposure to this.

 

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