Why Buying an “Off-the-Plan” Box in the Sky is a Dumb Idea

Last year I wrote an article on PropertyInvesting.com called, “Why Buying an Investment Property Off-the-Plan is Dumb.”

In Australia, to buy “off-the-plan” is to buy a home that has been planned, but not yet built. It’s essentially just a contractual promise from a developer. It often involves two contracts – one for the land and one for the dwelling.

The Indian Investor and His Box in the Sky

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I spoke to an investor today who is originally from India. Having moved here to Australia a few years ago, he doesn’t know a lot about the property market, nor how to find good deals. So he followed the crowd, people who also didn't know what they were doing, and signed a contract on a small, 1 bedroom, off-the-plan apartment in Melbourne.

He set an appointment with me, looking for some help on what to do. He’s committed to buying this apartment but now he’s changed his mind. The problem is he paid a non-refundable 10 percent deposit of $36,500 to secure this overpriced, cash-flow-draining box in the sky.

There have been heaps of these things built all over the city, especially near the city centre. Thanks to overdevelopment to meet demand from Chinese investors, demand which is now drying up, we’ll likely be facing an oversupply of apartments sometime next year.

Unfortunately, unless our Indian friend can somehow convince the developer to let him out of his contract, which will happen about the time hell freezes over, he’ll need to either go through with the purchase or forfeit his $36,500.

I did tell him to try to sell it to another unassuming simpleton investor following the crowd, but there are some stamp duty consequences that may make the whole exercise pointless. And that’s if he can even find a buyer.

The Guy Who Cares More About Tax Savings Than Profits

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One of the big selling points for agents trying to flog new properties is the depreciation tax benefits. Because the dwelling is newer, there’s an ongoing loss to right off on depreciation, which shows up as a cost on the profit and loss statement, lowering the investor’s taxable income.

This is especially true after Australia’s recent budget announcement where the Government is removing most depreciation benefits from existing property purchases.

So yesterday, a guy left me a comment on my “Why Buying an Investment Property Off-the-Plan is Dumb” article. He wanted to know if my opinion had changed after the government's recent tinkering with the tax laws.

Here’s his comment and my reply:

So Why Is Buying Off-the-Plan So Dumb?

To summarise there are two big reasons buying off-the-plan is risky:

1. There’s only one way to make money – the whole market has to go up.

2. You’re paying too much for a building and getting too little land.

When we’re talking about apartments, it’s an even worse investment. There’s literally no land and with the big fat supply glut around the corner, there’s a good chance that many of these investors, not to mention the developers, will be in big trouble.

Are you seeing any unwise or irrational investor behaviour where you live?

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Thanks for reading :)
@jasonstaggers