Weigh up leveraged investments carefully: Tips for off-the-plan
In times past many savvy investors would buy apartments off-the-plan, leaving only a deposit of 10%, and sell them on before settlement to make a tidy profit.
It made many people rich. When the GFC hit these leveraged investments also made many people broke. Some speculators are tied up in court with developers chasing their money on units that have dropped in value to much less than the investor agreed to pay. This investment strategy is only for those who are willing to take big risks with a deep understanding of residential investment.
“You don’t see this sort of speculation now, and as a result it is a much more stable and realistic market,” says Rees.
Leveraging is simply using other people’s money, either as a mortgage from a lender or sometimes from the developer, to increase the potential gain from a property investment over a fixed period of time.
What separates leveraged investment from long-term investment is that it must have an end date that can be calculated. It is the opposite of taking a mortgage out to buy your house, paying it off over 25 years and owning the property.
For example, if you buy off-the-plan and put a $10,000 deposit on a $100,000 property, you would need to borrow $90,000.
If the $90,000 borrowed costs you 5% in interest, it would add $4,500 to the entire cost, therefore the $100,000 investment is in fact $104,500, if you sell within that one-year period. To make a profit, the property must be sold for more than $104,500. If the property sells for $110,000 you have made of profit of $5,500.
The profit is impressive when calculated as a percentage gain on the capital, however take note: if the property sells for $102,000 it will cost you money rather than making it.
For great tips on buying off the plan, download Property Observer’s free ebook – 14 tips for buying off the plan: The 2013 guide for investors and owner-occupiers.
