Below we identify five key tips in investing in off the plan apartments:
Tip 1 Due Diligence
When buying off the plan, many make an emotional decision based on a focus on “stamp duty” savings, however there are a number of factors to consider prior to proceeding with an investment.
After all, super is your retirement nest egg.
Firstly, there are different measurement guidelines for apartments. A developer may advertise an apartment of 50 sqm internal and a independent valuer may measure at 45 sqm. These 5 meters can have a disastrous effect come settlement and obtaining finance. This is common error due to different measurement standards used by developers and valuers. You should inquire on the measurement standard used to ensure it is in accordance with the Property Council of Australia – Residential Property Guidelines.
Further, the marketing plan for your dream apartment may be a draft and may be subject to change in that the developer may not have a plan of subdivision. It is important to obtain a contract and engage a legal advisor to review the contract prior to signing. Remember, off the plan contracts will generally be unconditional and not subject to finance so you will immediately pay a 10% deposit.
If your apartment has a car park and storage cage, you will need ensure they are on the same title as the apartment being purchased in order to satisfy Superannuation Law.
Tip 2 Recipe for success
The recipe for success involves an understanding of the factors that impact a property price. We need to state clearly that an investment in a SMSF is an investment not a home to live in. Under the sole purpose test, you or a related party cannot reside in an SMSF apartment. It’s not a emotional decision, it’s a investment decision.
Boutique v Tower
Boutique apartments are “Cute” – generally less than 50 apartments in a development, provide a great possibility to differentiate your apartment from other apartments. For example – most investors choose corner apartments, in a small building this may be at the
front of the building facing the main road, or at the back of the building with less noise and more privacy. Further, there will be generally less than 5 levels with a car park. Boutique apartments are generally built in suburbs, which provide more lifestyle with access to schools, public transport and nightlife.
In relation to Towers, these are generally large apartment buildings, which have been favoured by foreign investors. Recent years have provided warning signs for Towers which are generally built in the CBD of capital cities such as Melbourne, Sydney and Brisbane. With apartments being sold off the plan to foreign investors, large margins have been added for marketing agents and have not been valuing up at settlement providing a nasty surprise for the buyers. Even worse, many are left vacant upon the promised ‘rental guarantee’ expires due to high vacancy rates. Towers have been built in areas where independent valuers are providing risks of “over-supply” of apartments, so its important to do your due diligence and steer clear of towers for investments for the long term.
Verdict: Boutique Wins!
It also pays to look at the apartment building as a whole not just the single apartment. The right area is surely one of the most important elements when buying your apartment. Its integral to capital growth and also affects the rental vacancy rate. The more desirable the location, the less chance of an empty investment property in the future.
After all, a SMSF Investment Property is a long term investment.
To be a desirable location the following amenities need to be close by:
- Public transport (train/bus/tram)
- Schools
- Public facilities (post office/libraries/parks/medical centres etc)
- Shops and markets
- Lifestyle activities (restaurants/cafe strips/beach etc)
Properties close to the inner city are usually more popular with renters and buyers, tending to consistently outperform the general market in long term capital growth. The infrastructure of inner city suburbs is also quite well developed and provides a desirability factor.
Tip 3 Focus on Capital Growth & Rental Yield
Its important to achieve BOTH capital growth and rental yield. There should not be a focus on one or the other but both together. If you are borrowing to invest, your rental income will need to exceed your interest repayments to ensure you are not relying on contributions.
For example, a $350,000 apartment may require the following analysis on an annual basis:
Rental Income $17,500 (based on yield of 5%)
Loan interest $15,820 (based on a loan of 80% of purchase price @ 5.65%)
Property Mgt $875 (based on property management of 5% of rent)
Body Corporate $1250 (body corporate varies on each development)
Insurance / other $250
Net return $695
Depreciation # $3700 (Based on diminishing value method)
(#) Depreciation is a tax deduction
Tip 4 Obtain a finance pre-approval
Looking for an SMSF investment property can be an exciting and challenging experience.
However, it is important to understand your borrowing power before taking the big step in completing the purchase by exchanging contracts for your dream SMSF property.
An SMSF loan pre-approval is generally free and provides trustees with an indicative offer from a lender. This will assist to understand your purchase price and loan amount.
Further, trustees will be able to assess if they have sufficient cash in their SMSF to cover the deposit and settlement of the property.
Tip 5 Your Bare Trust needs to be set up
When buying in an SMSF, many sign a contract and then set up an SMSF.
This is a NO. It is important to engage a SMSF Specialist Advisor set up an SMSF prior to signing the contract.
Further, in most states it is required to execute a bare trust prior to signing a contract.
Your legal advisor will assist you with the name of the contract of sale, this needs to be correct to ensure there is no double stamp duty in the future.
Tip 6 Depreciation
Most property investors have heard of depreciation, however have not unlocked the hidden benefits of depreciation.
Depreciation can put thousands of dollars in tax deductions in your pocket each year. Its simply compensation for “wear and tear” of the apartment over the period of your investment.
Depreciation on items in the building such as dishwashers, ovens, carpets and blinds etc are claimable. Your SMSF Advisor will assist you to obtain a depreciation report upon completion of the apartment.
Buying an investment apartment is about increasing your wealth.
It takes thought and consideration to ensure the right property is chosen. Keep all the above information in mind when looking at real estate and you will be on the road to building a successful investment portfolio.
This content contains information that is of a general nature only and has not taken into account your specific objectives, needs and financial situation. It is not intended to provide financial, investment, accounting, tax or legal advice, therefore you should seek advice from the respective qualified or licensed professional before making any decisions. Redwood Advisory disclaims responsibility for reliance on information contained in this article.
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