True Investors do not purchase OTP?

[Corsa]

Hi Fiona,
I have not lost money because as a full time investor, I feel I can make money in ANY market. I love this slow market as margins are much higher (more profits)......

I would suggest looking at newly built appartments that are targeted as off the plan investments and see who is buying them. Not true investors, I can assure you!

Hi Xenia

I noticed this post from the recent "Property Investment Article" thread and would like to make a comment on it. http://www.somersoft.com/forums/showthread.php?t=23883

I agree Xenia with your comments about having not lost any money and your thoughts that money can be made in any market.

But I am not sure if it can be said that "true" investors dont use strategies like OTP or buying inner city investments.

My understanding of an investor is anyone who utilises there available resources to produce income streams and/or capital growth on a periodic basis that attract a risk, but a risk that each investor is willingly to bear based on the individuals risk preference.

My personal strategy has included the use of Off the Plan purchases including apartments in inner city adelaide and I would consider myself a true investor

The first OTP deal was a tri-level townhouse purchased for $230,000. When completed 2 years later this property was worth $330,000. I used a deposit bond in lieu of a deposit which cost $700. I needed $240,242 at settlement including costs and based on the loan of $240,000 which the bank was willing to lend on valuation, I was required to put up a further $242 to settle. Based on the money I put in ($700 +$242) $942 and the capital growth generated of $100,000, this equates to a 10,616% return on cash. The property rents for $270 per week with a gross yield of 6.1%.

The second OTP deal was a sub-penthouse apartment with city views for $299,500. I used a deposit bond in liue of a deposit which cost $900. When completed 15 months later this property was worth $350,000. I was required to put in $27,000 at settlement to fund this property. Based on the money I put in ($900 + $27,000) $27,900 and the capital growth generated of $50,500 this equates to a 217% return on cash at period 0. The property rents for $330 per week with a gross yield of 5.7%.

Both of these properties are effectively neutral after tax but the cashflow required to support these investments month to month is supplemented by other cashflow positive investments that I have.

At all times going into this investment I was aware that I least needed 25% deposits including purchase costs of purchase price at settlement, that property prices could go down, and my cirumstances may change during the time from purchase to settlement. All of these risks I was willing to accept and bear. I acknowledge that OTP is not for everyone and can present higher risks than other investments and in this current market may not be viable.

Perhaps you could provide us with specific examples of where in your experience you have observed people going into OTP deals and/or apartments and losing money and elaborate on why you think people going into these deals are not "true" investors?

Just thought I would make this post to challenge some of the views that we have ie OTP and inner-city investments are widely presented by the media as being "bad" investments but do we ever question is this actually the case?

Looking forward to hearing from yourself or others who may have thoughts on the above.

Best Wishes

Corsa

 

[MichaelW]

Hia Corsa,

I read the title of this thread and came in here ready to post "rubbish, of course they do!" but it looks like you beat me to it.

You've done exceptionally well with your OTP purchases, and its a ploy I intend to use early in the next cycle too. It can work really well in a rising market, but of course is a mugs game if you come in too late or at the end of the cycle.

A mate of mine bought a unit in the infamous "toaster" in Sydney OTP. I can't remember the numbers but he locked in a price of around $700K with a deposit bond. He on-sold it just prior to completion for over $1.5M. Now that's what I call profit!!

Cheers,
Michael.

 

[JimmyJames]

Are you referring to OTP only in reference to large developments and apartments??? What about buying houses off the plan as an investment??? Then you get the tax breaks from depreciation and you can even claim interest paid during the construction of the property in the year it occurs...

 

[choppa]

Are you referring to OTP only in reference to large developments and apartments??? What about buying houses off the plan as an investment??? Then you get the tax breaks from depreciation and you can even claim interest paid during the construction of the property in the year it occurs...

From my knowlage you cannot buy house and land off the plan. You will have to settle for the loan up front and they will take out periodic installments eg: once the land settles then the foundation then the frame ect. However you can still claim for tax brakes and depreciation.

If you can find any houses to purchase off the plan with a long term settlement please let me know.

Cheers.

 

[Corsa]

JimmyJames - OTP applies to houses, apartments/units, house/land packages etc.

MichaelW - yep, OTP's are great. I have heard some similar stories about people doing really well.

Thats why I wanted to make this post to hear what other people's point of view's are - whether they have had good or bad experiences with OTP investing.

I recognise it can be a riskier investment due to certain supply and demand equations etc but certaintly OTP can provide lot benefits particularly in a rising market.

Does anyone have any experiences they want to share?

Best Wishes

Corsa

 

[MichaelW]

Corsa,

Don't want to hog your thread, but I sort of equate buying property OTP like buying share options. You may need to pay a premium, but you only have to exercise that option at some point in the future. If the market goes up then you've got a hell of a lot of leverage working for you for very little down.

Now, who says you can't make big bucks out of options in a rising market? But that's the trick, it needs to be a rising market. When the worm turns you can get stuck holding an over-priced asset and needing to exercise that option. That's why I suggested using it as a strategy "early" in the property market boom. If you come in too late you can get burnt.

That's enough from me, I'll leave it to the others for a while, sorry...

Cheers,
Michael.

 

[The Y-man]

I'm going to go the "been burnt" by OTP side of this....

It's not to say it "never works" - just that there are traps for the unwary.


1. Pricing.

As an investor, one looks for the greatest gains with minimal outlay.

The first issue we had with the OTP purchase, was that because it is sold by a developer, there is a significant margin built into the price (i.e. developer's profits, marketing fees, etc as well as agent's fees, commissions). This margin can be as high as 30% of the resale value of a "preloved" property in the same area.

So even in a bull market, it takes time - possibly years - to make up for the "developer's margin".

In a flat or falling market, this can be a disaster for purchasers who may need to sell out for whatever reason (i.e. health, divorce etc).

In contrast, buying a property "second hand" means you are generally negotiating the price with a "mum and dad" vendor (unless they have a very good agent representing them) - not a professional, seasoned marketing agent.

2. Unable to "value add"

You are generally unable to improve and value odd on brand new or OTP propoerties - where a coat of paint can do wonders to an old run down apartment, a glossy newly built thing can have little done to it.

On the other hand, some "vital" chattels have to be added at extra costs - eg curtains, blinds, door stops, light fittings, phones, TV aerial, air con, landscaping, trench digging (for telephone), gas meters, whatever the developer/builder decided were "exclusions"

3. Uncertainty of Costs

Marketing agents avoid and/or underquote this tremendously. Body corporate costs for large 100+ unit apartments can easily hit $3000 per year for a $350,000 apartment - and that's without a tennis court!! This can really tear into an investor's yield.
The "big buck" items are:
a. pools - including heating costs, cleaning, change areas, showers etc
b. Gym - why do common area equipment break after 10 uses?
c. Tennis courts
d. Lifts - these are "killers" - the cable need a 5 year safety check, and replacement costs if deemed unsafe can go into hundreds of thousands of dollars. This is especially bad for "refurbished" office buildings, where the cables can be decades old


4. Ageing

OTP apartments age very quickly if a new one is being built every day in the surrounding area eg Melbourne Docklands. Tenants will always go for the newer flashier - and consequently pay less for the older. Obviously the exception to this rule is where an OTP development is happening in an small isolated spot in an existing residential area (where it can't be "outdeveloped").

5. Repairs

You may be surprised to know that OTP and brand new property generally requires more repairs than an old one - mainly as nobody has "road tested" everything inside.... we have had issues with:
a. sections of apartment not wired up for power
b. faulty hot water unit
c. gas stove top with incorrect spec (euro gas pressure)
d. blown halogen bulbs
e. cracked laminate in kitchen
f. cracked tiles in bathroom
g. faulty elevator
h. incorrect heater unit in swimming pool
i. faulty garage door
j. leaking plumbing (builder's nail thru pipe)
k. incorrectly installed oven

In older properties, problems like this have either been fixed (by the previous owners), or are more obvious at purchase (and therefore used as a negotiating tool).

While builder's insurance and warranties covers most of these, the unit can not be let to tenants until they are fixed - and/or tenants will often need to be reinbursed for inconveniences.

Of course, when FAI disappered - so did many of the builders' 5 year building warranties....

6. Surroundings

Our OTP experience suffered from: 3 significant developments nearby blocking the views of the best apartments; a drug rehab centre down the road (which the marketers forgot to mention of course....). Our foyer suffered from rehab patients "cooling off" in the small hours of the night. After a bashing of a resident, repeated theft and damage to common propoerty, a security guard was employed 24 hours - another body corp cost at $80 ph.

Those wonderful computer generated "finished" visions can not convey ther other senses - namely temperature, smell and noise.

Going out onto the balcony of a finished apartment may turn into a unbelievably windy and/or noisy experience..... oh and did someone mention a factory chimney stack next to your high rise?

And what about the next door neighbour's conversations and the sound of someone urinating (obviously a guy!) in the middle of the night that you can hear through the walls as you lie in bed at night? Don't laugh - had friends who lived in a "prestige" apartment like that!

***********

Anyway, I hope this gives you some ideas as to why we will probably never go into an OTP or "Just Completed" deal again - even for our PPOR - it's simply too much hassle.



Cheers,

The Y-man

 

[goddessk]

5. Repairs

You may be surprised to know that OTP and brand new property generally requires more repairs than an old one - mainly as nobody has "road tested" everything inside.... we have had issues with:
a. sections of apartment not wired up for power
b. faulty hot water unit
c. gas stove top with incorrect spec (euro gas pressure)
d. blown halogen bulbs
e. cracked laminate in kitchen
f. cracked tiles in bathroom
g. faulty elevator
h. incorrect heater unit in swimming pool
i. faulty garage door
j. leaking plumbing (builder's nail thru pipe)
k. incorrectly installed oven

In older properties, problems like this have either been fixed (by the previous owners), or are more obvious at purchase (and therefore used as a negotiating tool).

While builder's insurance and warranties covers most of these, the unit can not be let to tenants until they are fixed - and/or tenants will often need to be reinbursed for inconveniences.

I haven't purchased OTP for investment purposes however I did buy my PPOR off the plan. Whilst it has doubled in the last 6 years (not bad for a one bedroom apartment), I can relate to what Y-man is saying about repairs.

We have lodged one $240K repair claim through the home owners warranty insurance for major defective work on the asphalt driveway, the tiling to the balconies and every single balcony edge. At present we are trying to work out how to pay for the sinking floor in one of the townhouses and deal with the dry rot under the building. I am on the owners corporation and see the flood of "repair work" requests that come through.

Whilst I will not disparage the success that others have had in OTP purchases, and nor can I say every builder has the same shonky work ethic, I must admit that I am discouraged from purchasing off the plan, or any newish building, in the future. Depreciation or not. I just don't think they build them like they used to!

At least when I rent out my PPOR eventually I am safe in knowing the history of the building and that hopefully the worst has come and gone.

 

[choppa]

Hi guys,

I agree with what you guys have put forward but i feel that if you deal with reputable builders most of those headaches would not occure. The fact is with good management they are able handle these situations.

As the poputation increases eventually most of the population will be living in high rise buildings "ever seen the jetsons".

 

[The Y-man]

Hi guys,

I agree with what you guys have put forward but i feel that if you deal with reputable builders most of those headaches would not occure. The fact is with good management they are able handle these situations.

True, and the trick is finding out who are the "reputable" ones... I thought ours were pretty reputable.... but then, the Wembley Stadium thing hadn't happened yet......(ooops, am I allowed to say that?)

I believe most townhouse/lowrise developments are done by "once off" buidling companies that disappear once the project finishes (only to rise in another form somewhere else....)

Cheers,

The Y-man

 

[choppa]

In talking with people that have purchased OTP they have in fact made considerable gains and have not put out alot of money as the insurance and bodycorp has coverd the expenses.

If it works for you more power to you!!

 

[JimmyJames]

From my knowlage you cannot buy house and land off the plan. You will have to settle for the loan up front and they will take out periodic installments eg: once the land settles then the foundation then the frame ect. However you can still claim for tax brakes and depreciation.

If you can find any houses to purchase off the plan with a long term settlement please let me know.

Cheers.

The product I work with does function like you said choppa; land settlement then normal progress payments etc for a free standing house and land package on a fixed price contract. Whilst there is a margin built into the price, we get very cheap building contracts and buy the land in bulk at a discount so your still buying at or below the market.


Corsa: What we're experiencing here in Perth is absolutely astonishing. OTP houses that are selling on fixed price contracts are being handed over 8-12 months later with $60-80k (on a $300k property) in equity already. You've got to use a system to pick the areas though.

 

[choppa]

Excellent, can you give me a web site link to check out more info?

 

[joannep]

Having put deposit bonds down on two of the future Burswood apartments I'm only hoping I come out with a bit of a profit (unlike some of the people in this thread!). Fingers crossed, & i'll keep you all posted!!

 

[geoffw]

In talking with people that have purchased OTP they have in fact made considerable gains and have not put out alot of money as the insurance and bodycorp has coverd the expenses.

There have been a lot of people who have been extremely badly burnt by buying OTP recently.

One HK was aggressively promoting OTP with deposit bonds not too many years ago.

OTP can work well in a rising market, or when buying something which gives some sort of uniqueness.

But the peoplke have been burnt when the market has stopped rising- or has declined; especially when the property they have bought is basically the same as many around.

 

[JimmyJames]

We have just assessed an apartments value in perth being $2k less than when the person bought it OTP 20 years ago. Burnt or is that burnt???

 

[willair]

In talking with people that have purchased OTP they have in fact made considerable gains and have not put out alot of money as the insurance and bodycorp has coverd the expenses.

If it works for you more power to you!!

Choppa,
well done,can i just ask the area that the people you talk to
have made these gains on OTP Developments,and is this in
the last six months or just recently.
good luck
willair..

 

[Kingbrown]

We have just assessed an apartments value in perth being $2k less than when the person bought it OTP 20 years ago. Burnt or is that burnt???

Well, a 2k loss isn't much, but wow, negative capital gain in Perth for twenty years?

Burnt!

 

[joannep]

uniqueness in OTP PI's

totally agree with Geoffw. I believe there has to be a certain uniqueness to an OTP property. I wouldn't consider buying within Perth CBD (OTP) at the moment....just a bit wary after seeing what happened in Melbourne. I find the snippet about an apartment being worth only $2k more now than it was 20 years ago absolutely amazing.....& terrifying to think that's what could happen if we're not careful & considered! Don't suppose you'd consider letting us know where in Wa this was????
I also wouldn't buy off the plan if i wasn't prepared to make it my PPOR. In my opinion, there is cash to be made from OTP but careful consideration is needed (isn't this always the case!!) .

 

[Glenn]

We have just assessed an apartments value in perth being $2k less than when the person bought it OTP 20 years ago. Burnt or is that burnt???

Nice headline JimmyJames! You wouldn't be a journalist would you?

Would you be willing to share some of your thoughts or experiences on how you arrived at the current valuation?

Also, to quote that someone has been burnt financially by holding this asset for 20 years we must assume that you are aware that there was no income or tax advantages that improved the $2,000 loss in the capital value of the asset...no rent increases for 20 years! Do you think that this is "the norm" JimmyJames??

Glenn