Risk vs reward: buying new property

Risk vs reward: buying new property

Building reached record levels across Australia during the building boom as developers took advantage of sky-high levels of demand and rising prices in many capitals.

In Sydney, 30,000 new homes were built in the last financial year alone. This has been the highest level of building activity in 16 years, according to Metropolitan Housing Monitor data released in October. 

Other capital cities also hit record levels of approvals, with highrises redefining metropolitan skylines across the country.

With more opportunities than ever to buy off the plan, or a house & land package, many investors are now considering whether they can make money by purchasing new.

With this surge in building, however, comes a surge in housing stock that threatens to push all capital cities, but Sydney, into oversupply by 2017, forecasts from research house BIS Shrapnel show. Brisbane and Melbourne are expected to be the worst offenders for having too many homes on the market.

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For those wanting to make their fortune in new property, this could mean danger if not carefully planned out, as Propertybuyer’s managing director Rich Harvey has stated. 

He successfully bought and flipped new properties off the plan in the late-1990s and early-2000. He has built his success on the knowledge that it’s all about picking the perfect timing in the market.

Investors need to put down their deposit on the property in a market that is set to take off, but not so hot that developers are pricing in expected value increases into what they’re charging. 

In Sydney, this would have been about four years ago. This is no small feat for any property investor.

More recently, Rich Harvey managed to use this strategy in markets like Newcastle, where clients have made 30 per cent capital growth by purchasing yet-to-be-built homes and selling them either before settlement or just after they’ve been completed.

He has stated that it’s "often too difficult to make money. It's not a strategy I recommend”.

He also said that it is “definitely not for first-time investors.“ 

For those who do decide to buy new, he warned them to ignore the beautiful brochures and look instead at:

  • The location of the home within the block
  • The outlook and aspect of the apartment
  • Whether the balcony is large enough to be a living space (especially in Brisbane)
  • The overall design
  • Cross ventilation

Getting it right is all about weighing up the pros and cons, and the risks with the rewards, Jeremy Iannuzzelli, an accountant for VJR & Associates and Keshab Chartered Accountants said. 

One of the big pros is the small amount of upfront capital to lock in your piece of real estate. Most developers only require 5 or 10% deposit, with some developments taking about two years until the apartment tower is finally built. This means investors can get in with little capital and spend the months ahead saving a larger deposit.

Iannuzzelli has pointed out that in doing this, “you're taking a bit of a risk. During the time it takes to build, the developer could go out of business” he said, as a worst-case scenario. 

Lending policies could also change, or your own circumstances could be different by the time the property is built. This could affect your ability to get a loan when it’s time to settle.

 “In situations where you can't settle you either lose your deposit or try and sell ahead of time. If you have to rush to sell, or in a declining market, there's the concern you won't be able to get what you bought it for,” he said.

 

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