Off-the-Plan Investment vs. Buying an Existing Property: Which Offers the Better Return?

At our recent Hot Property; Live & Uncut event, we were asked a number of questions that we didn’t get time to answer. One of them was, “Should I buy an investment property off-the-plan or purchase an existing property to renovate?” Both strategies have their merits, but if you’re looking for a better return on investment with less risk and effort, buying off-the-plan often comes out on top. Here’s why.

Off-the-Plan: A Path to Immediate Equity

One of the most significant advantages of purchasing a property off-the-plan is the potential for immediate equity. By locking in a purchase price during the ‘pre-sales and construction phases, you often pay less than the completed market value. This difference creates equity before you’ve even received the keys due to the massive demand for completed properties and the ongoing reluctance for people to purchase off-the-plan due to fear or their timeline.

Additionally, during the construction period, the market may experience price growth, further boosting the value of your property before it’s even completed. In the current property market, where supply is struggling to keep up with demand, the opportunity to buy off-the-plan at a price below what the completed product will command can provide an immediate edge with considerable capital growth.

Renovating: Hidden Costs and Risks

Buying an existing property to renovate might seem like an appealing way to generate equity, but the reality can be quite different. While some individual investors successfully add value through renovations, most find that the actual returns are far lower than expected due to the hidden costs involved.

Renovating is not just about the cost of materials and labour; it’s also about the time, effort, and opportunity cost. Many investors overlook the fact that their time is valuable, and the hours spent managing a renovation project could be used elsewhere. Additionally, renovation projects often exceed their budgets and timelines, eroding potential profits.

Furthermore, even if you manage to increase the property’s value through renovations, much of that value would have likely been achieved simply through market appreciation had you held the property for the same period. In most cases, the real value is generated in the purchase price, not the renovation.

If the focus is long term growth, it is always about purchasing the right type of home, not just ‘value adding’ – most people renovate to sell. This strategy is speculative and the more speculative the strategy the more risk that is involved.

It is also much harder to leverage the tax man to help you build your portfolio, and thereby equity.

Stamp Duty 

Another factor that tilts the scales in favour of off-the-plan purchases is stamp duty savings. Stamp duty is calculated on the contract price. If the value is much higher on completion, that isn’t considered when stamp and transfer duties are calculated. Better yet, when purchasing house and land off the plan, you only pay stamp duty on the land component, this is in contrast to purchasing an existing property, where stamp duty is calculated on the full market value of the property at the time of purchase. The savings in stamp duty alone can significantly impact your purchase costs, and ability to service a loan.

Depreciation

In building a portfolio, we want to maximise our cashflow. The ability to leverage tax benefits such as depreciation (where we can claim back some of the costs of fixtures and fittings each year) can add significant income through tax withholding or rebates. Depreciation is maximised on new properties and highest on apartments and townhouses. More cash each month makes it easier to hold and grow your portfolio. Depreciation, depending on the age of the existing property, might not be an option.

The Numbers: Off-the-Plan Wins on Net Increase

For most investors, the net increase in value from an off-the-plan purchase outweighs the potential gains from an existing property. The combination of immediate equity, market uplift during construction, lower stamp duty and tax benefits are just some of the reasons that off-the-plan purchases are a more attractive option for generating wealth.

The smart money is on buying off-the-plan, where the value is built into the purchase price, and the market does the heavy lifting for you.

Here at Investor Property we also do the heavy lifting for you when it comes to finding the right properties that offer the product types most in demand, brought to the market by reputable developers and builders and priced to deliver great returns.

Speak with a property coach today to understand what opportunities exist to serve your investment strategy and goals.