How to make great money from Off-Plan Apartments
- Thread starter Marten
- Start date
Hi
I agree with Geoff but also add that when values just tread water, neither rising or falling, you lose.
If they fail to rise sufficiently to cover ALL your costs to get into the deal, you lose. You must pay for your stamp duty, deposit interest costs, legal advice, any other professional advice etc., and your time just to break even. Then you need to make a profit on top.
The IP market today is not showing the positive signs you need. My suggestion, leave it alone.
Regards
Ross
I agree with Geoff but also add that when values just tread water, neither rising or falling, you lose.
If they fail to rise sufficiently to cover ALL your costs to get into the deal, you lose. You must pay for your stamp duty, deposit interest costs, legal advice, any other professional advice etc., and your time just to break even. Then you need to make a profit on top.
The IP market today is not showing the positive signs you need. My suggestion, leave it alone.
Regards
Ross
OTP is not for everyone. Here is my list of criteria to match for a successful OTP purchase:
1. You are not new to unit investment
2. The area is just released to unit dvelopers
3. The developer is large and well established
4. You are buying in the first release of the development when the vendor needs to sell certain % to secure the finance
5. The completion is at least 1.5 years away
6. You are confident in securing finance for the settlement even if the prices drop slightly affecting the bank valuation
7. You are in the highest tax bracket to get maximum benefit from depreciation on a new property
Another option might be buying house+land packages - similar to OTP but with less volatility.
I know a number of cases where people bought OTP in Sydney in the last 3 years making (on paper) 10-15% at settlement on a $300,000 purchase. My last OTP settled in January is valued at 11% markup to the purchase price a year ago.
Regards,
Lotana
1. You are not new to unit investment
2. The area is just released to unit dvelopers
3. The developer is large and well established
4. You are buying in the first release of the development when the vendor needs to sell certain % to secure the finance
5. The completion is at least 1.5 years away
6. You are confident in securing finance for the settlement even if the prices drop slightly affecting the bank valuation
7. You are in the highest tax bracket to get maximum benefit from depreciation on a new property
Another option might be buying house+land packages - similar to OTP but with less volatility.
I know a number of cases where people bought OTP in Sydney in the last 3 years making (on paper) 10-15% at settlement on a $300,000 purchase. My last OTP settled in January is valued at 11% markup to the purchase price a year ago.
Regards,
Lotana
Lotana:
Are you saying some of these purchasers making 10-15% (on paper) held these properties for 3 years (ie. very long development horizon).
Given capital growth over the last 3 years you would have thought they'd have made a "killing".
Are you saying some of these purchasers making 10-15% (on paper) held these properties for 3 years (ie. very long development horizon).
Given capital growth over the last 3 years you would have thought they'd have made a "killing".
Kev,
I've seen that too. I know people who bought in literally the best position in Geelong (looks straight out onto the bay, 1 block from the city shops). The bought for $400k three years ago. It's now valued at $550k.
The location is about as good as it gets for the area and the apartment is fantastic, but by comparison the average house in suburban Melbourne has had that sort of growth over the last year, instead of over three years.
Given the risks involved, I can't understand why people would bother with OTP as an investment strategy - to me it appears that suburban housing is cheaper and performs better.
I've seen that too. I know people who bought in literally the best position in Geelong (looks straight out onto the bay, 1 block from the city shops). The bought for $400k three years ago. It's now valued at $550k.
The location is about as good as it gets for the area and the apartment is fantastic, but by comparison the average house in suburban Melbourne has had that sort of growth over the last year, instead of over three years.
Given the risks involved, I can't understand why people would bother with OTP as an investment strategy - to me it appears that suburban housing is cheaper and performs better.
Kev,
Purchase price: $300,000
Paid at exchange:
Deposit bond for 10% or $30,000 for 18 months $1500
Paid at settlement/sale:
Solicitor cost $1,200
Stamp duty $9,000
Total outlay: $11,700
Sale price: $345,000
Profit: ($345,000 - $300,000 - $11,700) = $33,300
Which is 284% profit on the outlay or 11% of the purchase price.
If you had $117,000 you would be able to convert it to $449,000 in less then 2 years by buying 10 OTP units like the one above.
I bought 2 OTP units so far. One, in Sydney, as i said earlier, showed $25K paper profit (after stamp duty) on $1000 outlay, the other one in Melbourne will be ready at the end of this year but is already showing a very good growth so far ($40K on $2000 outlay, virtually no stamp duty in VIC).
Cheers,
Lotana
I actually meant that I personally know people who made 10-15% profit on paper between exchange and settlement on OTP units. Typically the period would be 1.5 years, sometimes more. The percentage is in relation to the purchase price, not the outlay. It is a high risk-high reward venture. The typical arithmetics looks like this:
Purchase price: $300,000
Paid at exchange:
Deposit bond for 10% or $30,000 for 18 months $1500
Paid at settlement/sale:
Solicitor cost $1,200
Stamp duty $9,000
Total outlay: $11,700
Sale price: $345,000
Profit: ($345,000 - $300,000 - $11,700) = $33,300
Which is 284% profit on the outlay or 11% of the purchase price.
If you had $117,000 you would be able to convert it to $449,000 in less then 2 years by buying 10 OTP units like the one above.
I bought 2 OTP units so far. One, in Sydney, as i said earlier, showed $25K paper profit (after stamp duty) on $1000 outlay, the other one in Melbourne will be ready at the end of this year but is already showing a very good growth so far ($40K on $2000 outlay, virtually no stamp duty in VIC).
Cheers,
Lotana
Hmmm. Ask the two fellows who appeared on ACA tonight (Sydney 6.30pm) about their OTP properties and I think you might receive some negative comments 
One was a HK graduate who bought overvalued units in Melbourne about 18mths-2 yrs ago and is now struggling to get $100K less than what he paid for them. Another bought 2 units in Sydney CBD a similar period ago and recently had them revalued for $6K more than what he paid for them. Wow! If that's the risk you take with buying OTP, then count me out.
Then again, I'm conservative by nature and tend to stick to buying something that is already built. I'm sure there are many success stories out there as well. Just do your homework and ask for a "Deed on minimum performance", as advocated by Paul Clitheroe on the show (well, it sounded impressive!).
One was a HK graduate who bought overvalued units in Melbourne about 18mths-2 yrs ago and is now struggling to get $100K less than what he paid for them. Another bought 2 units in Sydney CBD a similar period ago and recently had them revalued for $6K more than what he paid for them. Wow! If that's the risk you take with buying OTP, then count me out.
Then again, I'm conservative by nature and tend to stick to buying something that is already built. I'm sure there are many success stories out there as well. Just do your homework and ask for a "Deed on minimum performance", as advocated by Paul Clitheroe on the show (well, it sounded impressive!).
Completely agree with Jakk. The best position is to be a developer and look at the gamblers / punters to line up. Some will make money (especially right place and right timing in the cycle) but lots of them will loose some even will go bankrupt.
To me it is too much risk and headache for very little returns.
To be able to make money on new property (without gambling on cap gains) you ned to buy wholesale. At the same time keep in mind that the developer is there to make a profit, not for charity. So, if anything (place, timing, economic climate, new fly zone path, new aotmic reactor planned nearby, builder goes bust, etc, etc) goes wrong over the development period, in spite of your best intentions and research, you will LOOSE money big time. Then you can decide either to cut your losses or hang on and hope and pray for better times. When I need this excitement I go to the casino with $50, otherwise I rather invest on a bit more stable principles, like ROI, Yield, 10yr cap growth, econimic and other stats, etc, etc in an already build property. But its only me.
Tibor
To me it is too much risk and headache for very little returns.
To be able to make money on new property (without gambling on cap gains) you ned to buy wholesale. At the same time keep in mind that the developer is there to make a profit, not for charity. So, if anything (place, timing, economic climate, new fly zone path, new aotmic reactor planned nearby, builder goes bust, etc, etc) goes wrong over the development period, in spite of your best intentions and research, you will LOOSE money big time. Then you can decide either to cut your losses or hang on and hope and pray for better times. When I need this excitement I go to the casino with $50, otherwise I rather invest on a bit more stable principles, like ROI, Yield, 10yr cap growth, econimic and other stats, etc, etc in an already build property. But its only me.
Tibor
I've read of a few stories of people buying OTP and losing out within the first 2-3 years.
What I'd like to know though is, what investment strategy they were using, and why don't they hold the property for the long term as most experienced investors recommend? So looks like they were doing it to make a quick $ (get rich quick thinking that backfired?)
One thing I've learnt about investments is to always have an exit strategy. I learnt this from investing $17k in shares in 2000 when the market was hot thinking "these will do well if I just hold them", when they are now worth < $5k. I didn't do my due dilligence, and didn't cut my losses early (which is more a common practise in shares than in property) Shares are a lot more volatile though than property, so whilst they may be in the red now on paper as long as they factored in a manageable cashflow they'll get their $ back within 5-10 years if they hold on to them (I guess that'd put them off their get rich in 2 year idea though wouldn't it?)
Myself am itching to get my first IP once I learn what I need to learn and do my research... then I'll be itching for 2,3,4+
That's my newbie 2c worth..
What I'd like to know though is, what investment strategy they were using, and why don't they hold the property for the long term as most experienced investors recommend? So looks like they were doing it to make a quick $ (get rich quick thinking that backfired?)
One thing I've learnt about investments is to always have an exit strategy. I learnt this from investing $17k in shares in 2000 when the market was hot thinking "these will do well if I just hold them", when they are now worth < $5k. I didn't do my due dilligence, and didn't cut my losses early (which is more a common practise in shares than in property) Shares are a lot more volatile though than property, so whilst they may be in the red now on paper as long as they factored in a manageable cashflow they'll get their $ back within 5-10 years if they hold on to them (I guess that'd put them off their get rich in 2 year idea though wouldn't it?)
Myself am itching to get my first IP once I learn what I need to learn and do my research... then I'll be itching for 2,3,4+
That's my newbie 2c worth..
Hi K2L,
Myself never been in that situ, but if you think the reasons not holding onto it could be;
1. No money available to settle, especially when value has not increased (might even have fallen), so one has to fork out 10, 20 or even higher percentage of an already expensive property.
2. Property is heavily negatively geared and if no sufficient income
available to sustain these losses over a period of time (could be several years) it could casuse financial hardships.
3. Loss of job, changes in economic / family situation which prevents holding onto a loss making venture.
4. Had enough of loosing money and 'just want to get the hell out of it' as 'real estate does not work'. This is rather sad, but predictable and happens.
5. Adding up everything it might makes sense to 'cut losses' as a bad decision can limit the investor's future opportunities.
To me whatever is the reason, this is rather the wrong end of "applying a bandage". Doing work up front and investing based
on sound principles and research can avoid to get into this situation. I still would like to mention that there are people who made quite a bit of gain from OTP, but I am pretty convinced that the majority knew exactle when, where, for how much and when to get out of it. This is called the smart money. The herd followed 'hoping and praying' that they also can have their share of the 'easy money'. Some have other lost. Just like in other things in life.
Tibor
Myself never been in that situ, but if you think the reasons not holding onto it could be;
1. No money available to settle, especially when value has not increased (might even have fallen), so one has to fork out 10, 20 or even higher percentage of an already expensive property.
2. Property is heavily negatively geared and if no sufficient income
available to sustain these losses over a period of time (could be several years) it could casuse financial hardships.
3. Loss of job, changes in economic / family situation which prevents holding onto a loss making venture.
4. Had enough of loosing money and 'just want to get the hell out of it' as 'real estate does not work'. This is rather sad, but predictable and happens.
5. Adding up everything it might makes sense to 'cut losses' as a bad decision can limit the investor's future opportunities.
To me whatever is the reason, this is rather the wrong end of "applying a bandage". Doing work up front and investing based
on sound principles and research can avoid to get into this situation. I still would like to mention that there are people who made quite a bit of gain from OTP, but I am pretty convinced that the majority knew exactle when, where, for how much and when to get out of it. This is called the smart money. The herd followed 'hoping and praying' that they also can have their share of the 'easy money'. Some have other lost. Just like in other things in life.
Tibor
I've bought 3 OTPs but in a rising market. 1st one in Jan 99 for $224k and settled 2 yrs later worth 285k and rent return about 6-6.5%. Now worth around 320K, lovely development.
Bought no 2 in June 01 for $302k very beginning of 2nd stage of develop. Will settle early 04. Current value around $345k (settled back a little from a peak of $355k) but plenty of growth to play with.
Normally, in current climate would not have bought 3rd but "unique" element bought $420k in Sept 02 now selling for $455k and a year to settlement. These properties were all held with deposit bonds of around 2-3K each and all had a minimum of 18 mths to 2 yrs to completion. I am not looking to sell them and make a quick buck but to hold for about 5 yrs from completion to strip out depreciation. Most deposit bonds work on 20% of equity. So if you have 1 mill of property and LVR of 80% you could secure a bond of $40k with the remaining 200k equity which will buy you a $400 k property OTP. However, the deposit bond people are getting much narkier now and you need to show that you have every ability to achieve sufficient equity growth and income requirements to settle the loan. Need to be very careful with your development selection as to get the time span you are looking at larger developments. Also wouldn't be buying now. will probably be trawling again late next year for something settling 06-07.
Bought no 2 in June 01 for $302k very beginning of 2nd stage of develop. Will settle early 04. Current value around $345k (settled back a little from a peak of $355k) but plenty of growth to play with.
Normally, in current climate would not have bought 3rd but "unique" element bought $420k in Sept 02 now selling for $455k and a year to settlement. These properties were all held with deposit bonds of around 2-3K each and all had a minimum of 18 mths to 2 yrs to completion. I am not looking to sell them and make a quick buck but to hold for about 5 yrs from completion to strip out depreciation. Most deposit bonds work on 20% of equity. So if you have 1 mill of property and LVR of 80% you could secure a bond of $40k with the remaining 200k equity which will buy you a $400 k property OTP. However, the deposit bond people are getting much narkier now and you need to show that you have every ability to achieve sufficient equity growth and income requirements to settle the loan. Need to be very careful with your development selection as to get the time span you are looking at larger developments. Also wouldn't be buying now. will probably be trawling again late next year for something settling 06-07.
I have a friend who bought an OTP townhouse in Lane Cove about two years ago. At the time he paid 500k, knew nothing about property and didnt even have finance approved when he put down his deposit. I was thinking he was way out of his depth as he was only doing it on a whim, yet 1 year later at settlement he was offered 650k for it!! It put my most recent investment to shame and I thought I was the one who was well researched!
Ideally they would be independent valuer but as they are not built yet you would have to rely to some extent on real estate agent or original vendor. However, I have dealt with these developers before and have not had any trouble with their valuations to date. 1st IP is managing RE estimate but it is in keeping with sales in the complex. 2nd IP (1st stage completed) unit styles vary but $345k down from $355k is understandable and a long way from what is being paid five blocks down the road for similar units in Alexandria and Green Square, many going for $420-450k. 3rd IP is original vendor and there have been no resales. These are current sales of identical units OTP. In the end, I am not too fussed as I am happy to settle them at contract price and 5-7 years is very forgiving. But I haven't been burned yet and know the areas I am buying into quite well.
By the way, I am happy to announce a valuer who valued my house last year has just revalued it 14 mths later at $220k above the last valuation. Guess whose reaching for the supermarket trolley!!!
By the way, I am happy to announce a valuer who valued my house last year has just revalued it 14 mths later at $220k above the last valuation. Guess whose reaching for the supermarket trolley!!!
I agree with the Slum God here. Your a legend Jakk (nice sence of humor also)
OTP is risky unless you know exactly what is going on with the property your buying and what other develpoments are going on around this property also. I see Guy's on TV (when i get the time to waste) preaching to the world how they did this and that Blah, Blah, Blah and then you hear they are getting kick backs from the developers or they are the developer.
River front land close to where I live has been bought and sold several times OTP and people are making a lot of money on it, but it is unique and rare.
If you like to gamble bet on Horses. IMHO I think it would be safer and in some case more ethical.
Regards
Brojac
OTP is risky unless you know exactly what is going on with the property your buying and what other develpoments are going on around this property also. I see Guy's on TV (when i get the time to waste) preaching to the world how they did this and that Blah, Blah, Blah and then you hear they are getting kick backs from the developers or they are the developer.
River front land close to where I live has been bought and sold several times OTP and people are making a lot of money on it, but it is unique and rare.
If you like to gamble bet on Horses. IMHO I think it would be safer and in some case more ethical.
Regards
Brojac