Property Twins | Property Twins™
[rev_slider ]
In: Home Buyers, Property Investors0

OUR FIRST CAR

Our little Kia Rio that we purchased out of university just over eight years ago has been on its last legs. It was a shiny new purchase we made in year 2008 when we had no idea about saving or delayed gratification. It was red, shiny, new and hence low on maintenance. But it came with a hefty price tag to go with car finance and it lost much of it value the moment we zoomed out of the dealership. It almost cost us the dream of buying our first properties. From that moment on, we vowed to never buy a brand new car again, UNTIL, we had bought enough property to ensure the car worth was really only a fraction of our net worth.

Buying brand new cars is an emotional lifestyle decision. However, in comparison to a property, it’s a significantly smaller financial commitment than buying a brand new unit or house. We keep echoing about how much brand new / OTP property is fraught with danger. Just like our little new Kia Rio back in 2008, we think buying brand new and OTP property is an emotional decision. It’s often made with blinkers on the eyes that go with the glossy brochures and often cost people their entire investing careers.

It’s easy to get turned off property when you’ve just paid 10, 20 or 30 percent more than the established property up the road and you realise that there have been little equity gains in the years following (we are not fortune tellers, however calling this out now, in case you are about to sign the dotted line with one of these). There are many reasons why people buy brand new property and often the reasons need to be dug deeper to really see what leads individuals to make the call – often it’s due to the steep learning curve required to learn anything new. Property Investment is HARD WORK!

REASONS PEOPLE PROVIDE WHEN BUYING BRAND NEW / OTP

We have heard the following reasons on more than one occasion, for buying a brand new property:

  1. As the property will be brand new, I won’t need to worry about the maintenance, especially if the property is interstate;
  2. If it is brand new I don’t need to go around ensuring the property is in a good enough condition or have the need for building & pest inspections;
  3. There are Government incentives associated with buying brand new property in a particular state;
  4. My “financial advisor” found me this property;
  5. My accountant told me to buy a new property to “save tax”;
  6. There is a rental guarantee that comes with the property so I won’t need to worry about its rent return for the time being;
  7. The property looks modern and somewhere nice to “live” in and it actually comes with a pool & a tennis court!
  8. The sales guy / girl told me that they can find me the property for “FREE” and it won’t cost me any advice fee to purchase

Simply put, in our view, the above reasons are just a smoke screen and not really reasons why one should be buying property.

MUST ASK YOURSELF: What am I trying to really achieve with this investment?

Whilst buying property is hard work, and even more of it when buying interstate, you need to weigh the pros and cons of each approach.

RISKS WITH BUYING BRAND NEW / OTP PROPERTY

Buying brand new property has its time and place, and may work well in rising markets. However, the risks with brand new / OTP property are alive and kicking most of the time during the property cycle. These are:

  1. PREMIUM PURCHASE: You pay a PREMIUM price – much more than the one down the road that is a couple of years older. FYI, you are also paying the GST for the property inclusions (the developer passes those on to you!).
  2. EQUITY-LESS PROPERTY, FOR A LONG TIME TO COME: Since you’ve over paid anyway, you would be sitting on an “equity-less” property for QUITE some time to come. There will likely be an impact on your ability to add further properties to your portfolio. Consider where this will place you 5 years down the track, should your property attains below average growth? To put this into perspective, an OTP property we considered in Sydney in year 2009, grew 37% to date, versus established properties which have grown between 70% and 90% in the same timeframe.
  3. PAY MORE FOR LESS: With greater urbanisation, newer properties have smaller blocks than established ones for a greater price for houses and units tend to be in high density complexes (which due to a fire sale risk make the lending for the property difficult anyway). You are paying more for the “building” than the land. Buildings depreciate in value.
  4. OVER SUPPLY: If you’re buying a property with many newer properties coming within the vicinity, you may find there to be too many cookie cutter properties around yours, that look just like yours! In six months, the tenants will choose the newer property down the road; And when selling down the track, why will a buyer choose YOUR property over the new one the developer just built in the new estate not far from your property?
  5. SUNSET CLAUSES: Brand new / OTP properties may have what is called a sunset clause. This means the developer controls whether delaying the build and therefore the settlement date will allow them to rescind the contract. This is high risk in a rising market in particular and may mean missed opportunity!
  6. FINANCE IS DIFFICULT: Due to potential high lender exposure, change in lending policies, oversupply, valuations not stacking up you may find finance not being as rosy as first thought. Lenders value these properties close to completion which is often much later than when you sign contracts and bid adios to your 10% deposit, which could work harder elsewhere
  7. FREE LUNCH: “Free of charge” service – There is no free lunch, friends. Brand new / OTP sales mean hefty commissions for the sales person. So make sure you do your own research in terms of the quality of the purchase you are making and build your team that supports you in making those decisions.

Buy brand new / OTP, if it’s your own home and it’s a lifestyle decision. However, be wary it will likely impact your future investment aspirations and may set you back many years. As mentioned earlier, there may be a time and place for OTP, however more often than not these properties carry high risk and are not game for anyone seriously looking to build a portfolio.

Make sure you…

> Set a strategy

> Do your due diligence

> Do your cash flows

> Line up your ducks for lending and then go shopping!

Message us to chat about property!

All the best with property shopping,

The Property Twins


To Get Started: Schedule A Chat with the Property Twins Team
Join Our Exclusive Facebook Community of 6,000+ Property Investors: Property Addicts Australia
Join our Exclusive Search & Select The Right Property in 90 Days 5-Day challenge

Note: Please ensure you always seek specific specific credit, tax, financial, legal or investment advice. Property Twins' Blogs are not a substitute for personal and specific, taxation, financial, legal or investment advice

Leave a Reply

Your email address will not be published. Required fields are marked *