Why you should avoid off-the-plan
My property journey started with an off-the-plan (OTP) purchase back in 2009 at Granville in Sydney (but it’s actually closer to Merrylands). I was young, naïve and didn’t know much back then about the research I needed to do to validate the purchase.
My dad found this for me and he thinks that it would be a good fit because of the five years rental guarantee so I don’t have to worry about it too much. Plus, the glossy brochures looked really nice! And the sales agent had a whole tonne of research materials about the area, what the future developments were (the Stocklands mall at Merrylands was being constructed at that time) and the expected population/jobs growth at Parramatta being the second CBD.
The purchase price was $360K for a brand new two bed, two bath, one garage OTP apartment in a complex of 45 and rental guarantee for five years is at $450 per week. I was told, “It’s over 5 per cent rental yield and easy to hold”, and I did my “due diligence” based on the materials he provided and it seemed feasible. Plus, there were probably some parental pressure on this too (yes, Asian parents are like that, don’t want me to have too much money to spend), so I signed on the dotted line. I was 25 that year.
Fast forward to 2018, this property has:
- Grown to about $500K in value, thanks to the latest Sydney boom, and allowed me to pull some equity out;
- Rent to-date is at $450/week; and
- Strata has increased from $400/qtr to $800/qtr, plus there has been some serious issues with the building quality, but more on that later.
So what did I learn out of this purchase?
Steer away from OTP as you’ll almost guaranteed to overpay for anything brand new and shiny
I paid $360,000 back in 2009, whereas the average price for a two-bed apartment there was less than $300,000 at Granville. So, I bought way above market median and now I understand the extra money was to cover everyone else’s profit margin (except my own!)
Rental guarantee can be a double-edged sword and most of the time it’s to make the OTP more attractive
I considered myself relatively lucky because the rental guarantee on this deal is at $450/week and for five years so I’ve recouped some cost back.
In all honesty, the agency company would’ve made a loss because they were never able to achieve $450/week during the first five years, but that was once off and I’ve never seen anyone else bold enough to do a rental guarantee this long — most of them are only for one or two years max and there are conditions on top.
They do this mostly to make the OTP property more attractive to investors because they know you’ll have trouble renting it out AND at the estimated rent (due to influx of units released at the same time), so it’s a bait to get your foot in and then after rental guarantee safe net … you’re on your own.
Quality of OTP can be shabby and cost you more to hold long term
This investment property was built by a relatively renowned builder who does lots of projects out at Western Sydney so I was quite shocked in terms of their building quality on my unit.
As I mentioned above, my apartment is on level one and during heavy rainfall the water got from wall into both bedrooms; I ended up having to re-plaster some parts of the wall and replace the whole carpet in both bedrooms. It wasn’t just me, other units on my level is also experiencing similar issues so clearly this is a building defect. This is another huge piss off for me as the OTP appearance can be brand new and shiny but you never know what was actually underneath the building structure.
What also annoyed the hell out of all owners is that it’s been three years and we are still not getting anywhere as the lawyers from the defending side keep stalling, so the owners have been forking out quite a lot of funds in the last couple of years for this law case. Hopefully we’ll get a resolution towards end of this year.
Even if you overpaid on day one, if you hold a property long enough it will correct your mistake
Yes, I’ve overpaid from day one on a crappy product but the silver lining is I’ve left it chugging along by itself (as rental guarantee was covering most of the outgoing expenses anyway) and thanks to the latest Sydney boom the value has gone up and I can even pull out some equity for our next purchases.
I’m sure everyone makes a mistake somewhere along the line in overpaying but by holding it long term the property price will eventually catch up and correct your mistake.
