COMMENT: Off-the-plan investing in 2020

As the decade draws to a close, existing property investors are conducting portfolio reviews and wondering where they can create efficiencies, boost income and reduce costs. Many others will be strategising to get into the property investment market, and questioning whether off-the-plan investing is the right approach. No matter your current position, here are some tried-and-true rules of thumb from an experienced investor and specialist advisor:

1. Off-the-plan has a number of distinct advantages over existing property.

With brand-new property you have a much lower risk of maintenance and repair costs and a better quality of tenant, which also means a higher rental rate and return to you as an investor. Older properties can cost a great deal of money for upkeep, which eats into income and profit. New properties also tend to rent quicker, reducing the risk of loss from vacancy periods, and the combination of good tenants and sound properties greatly reduces the likelihood of any disputes. As a landlord you have no problem with law changes regarding insulation and other requirements because, assuming full due diligence has been completed, that will be part and parcel of any new build.

2. You can enjoy capital growth even before completion.

When buying off the plans you are required to put down a 10% holding deposit, which sits in the solicitor’s trust account and can’t be touched until settlement. However, it is interest-bearing and therefore earing a little whilst its sitting there. Additionally, the price you agree at the time of purchase is the price you pay at settlement – which means you can buy off the plan at a 2020 price but realise a potential capital gain when the property is completed six or 12 or 24 months later, and the value has gone up in the interim.

For those who don’t have the cash on hand, a bank can advance the 10% against equity in your own home, and a bit more to take care of the interest payments while the property is being built. Through this period there are no outgoings but there is a potential capital gain. I strongly recommend you use a mortgage advisor to organise this for you. Remember, you don’t pay for their service.

For example, I bought an apartment off the plan in a central Auckland building, and 14 months after purchase it was worth $150,000 more than I had paid – so that 10% holding deposit made me $150,000. This creates options: You might decide when the property is completed that you will sell and pocket the profit, or go ahead and realise the passive income from tenancy.

3. With the right strategy you can make steady additions to your portfolio.

If you are committed to building up a portfolio, consider doing what I do. Part of my strategy is to always have property waiting to come into my portfolio in the future when it is completed. Why pay for a property in two years’ time, at 2022 prices, when you can secure one today, at today’s price, and reap the capital growth while it’s being built, which means more rental income later?

A recent example I'd like to share is a three-bedroom town house in Hamilton which a client purchased off the plan for $450,000, 18 months later the property was valued at $530,000. What is that property going to be worth in five years? If you waited another half-decade to buy it, what will it be worth then and what capital gain have you missed out on? Part of the portfolio strategy is considering the profile of various properties – is the location desirable or up-and-coming, and is the infrastructure there to support the tenants you want?

4. Investment property can be leveraged to pay off your home mortgage and establish a passive income.

Investment properties should be treated as workhorses to achieve defined goals. You can use the equity in your investment property built through capital gain to either pay off existing debt or to pay off your own home, which is the biggest debt most people have. For most New Zealanders that’s the only way they will get to pay off their mortgage before they retire. More than 50% will not be so lucky, and will still have a home mortgage when they retire.

Achieving a passive income is a realistic goal with the right strategy. Let’s say over the life of your investing you hold four properties at once. If you sell two within the next 10 years and use those funds to pay off the remaining two, you can be left with a potential annual income of $100,000, depending on the location and profile of the property – and that’s on property that you can purchase for $550,000 today.

5. Source good advice throughout the process. 

You don’t know what you don’t know, and an experienced advisor can protect you and help you get the best out of your investment. An advisor may identify whether you are set up in the wrong way with your own home mortgage or whether you can ringfence your home from your other investments. They can ensure you have structured each of the investments so you don’t have a house of cards and your home is at risk; that you’re not paying too much for a property; that the rent you’ve been quoted is correct; that there is likely to be growth in that area and infrastructure that will attract tenants, along with future demand so you can sell the property. It is like a chess game.

Good investing requires a substantial amount of due diligence and forward planning. At Propellor we put together conservative cash flows on our recommended properties for all clients. These cash flows include income, outgoings, interest rates, vacancy rates and other metrics. If a client has an existing portfolio, we assess its strengths and weaknesses and identify which properties are costing them money and not giving the right return so should be sold and replaced with properties that are going to perform better. People have emotional attachments to properties, or they have a portfolio full of ageing properties, but it is a business decision – if a property is not performing, get rid of it.

The right advisors are also tuned in to what properties are available off the plan around the country, because a vast number do not even reach the open market. You may miss out on some great buys!

Remember that due diligence must also be completed on the developer: you need to know what they have built before, whether the funds are there to complete the build, the quality of fixtures and fittings. You also need proof of their financial position and history in the industry, which is difficult to ascertain as a private investor working alone. Even though the trust account protects your 10% deposit if things go south, you could have lost a year of potential capital growth from a failed build.

*Nikki Connors is the founder of Propellor Property Investments (a 10-year-old residential property investment company); Metropolis Design (which designs, sources and assembles high-quality but affordable furniture packs and items for residences); and Proportional Property Ownership (a new shared ownership investment programme for New Zealanders who want to get on the property ladder or expand their portfolio).