What Timeline Should You Be Looking At To See ROI From Off-Plan Property Investment?
Property investors are usually in love with numbers. The mathematics of property investing has a romance all of its own. For many investors, it doesn’t get much more satisfying than snapping up an off-plan investment and then sitting back while the property growth machine clicks into full gear. That makes calculating the ROI from off-plan property investment pretty simple!
Naturally, calculating your ROI from off-plan property investment is easier when you are an investor than if you are an owner-occupier. In evaluating whether an off-plan development is right for your investment portfolio, all you have to check is location, the development blueprints, a few artist’s impressions, and your assessment of the deal on offer.
Property Investing First Principals
The literature on property investing is nearly unanimous. Investing in property is at its most attractive when it is done on a medium to long-term basis. In many cases, over-eager property investors over-focus on their initial ROI at the expense of understanding the strategic role of the property in their investment position.
Fixating on an ROI from off-plan property investment can come at the expense of long-term yields and capital appreciation.
Location, Location, Location Meets Deal, Deal, Deal
In assessing the likely timeline behind when you should be looking to see an ROI from your off-plan property investment, all you can usually consider is whether or not the numbers stack up, how likely the developer is to deliver on their promises, whether the location realizes its potential, and whether the contract conditions are beneficial for your financial situation.
All property investors are familiar with the old adage that real estate investments are all about location, location, location. However, when venturing into off-plan property investments, this rule of thumb often collides with the realities of the off-plan deal, deal, deal.
As developers move from front-end loaded purchase structures to more back-end and post-completion oriented deal offers, the dynamics of an off-plan property ROI are changing.
A smaller up-front deposit component and the willingness of developers to discount the early phases of a development in order to fast-track their pre-sell levels are unlocking value for investors.
Developers are often jostling with a host of competitors when trying to sell their off-plan property. The developers need early investors to help them cover their up-front financial commitments and to help ensure the project is a success from a sales perspective.
For these reasons, deciding to opt in at the early stages of a development can prove to be quite beneficial. However, buying in early also comes with higher risks.
Some of the positive advantages of being an early investor in an off-plan property development can include:
The first off-plan properties released are usually sold at the cheapest price in the development’s sales cycle, as the developers prefer quick initial sales results. Once they meet their financial thresholds for pre-sales, developers often increase the purchase price on their remaining properties to compensate for their lost profitability on those early sales.
Today’s Price For Tomorrow’s Equity:
An off-plan property purchase allows buyers to lock in their ownership of a property, without having to settle for an extended period of time. It may be one or two years before settlement falls due. In the interim, capital growth can often increase the value of your initial deposit before its even completed.
The risk here, of course, is the development may encounter construction or financing problems prompting its value to decrease during this time. Hence, it is important to be sure about the attractions, services, and infrastructure of the broader area, not just your particular property development. If you intend to hold the property long-term, value fluctuations in the short-term may not be a cause of concern for you.
Time Is On Your Side:
Extended settlement periods means you have breathing room to fund your phased payments for your investment. You can also use the intervening time to save money, reducing the amount of finance you may need to borrow to complete the settlement process.
Cream Of The crop:
Getting in early on the off-plan property development allows you to choose your purchase from a wide range of properties within the development. You can procure the one with the best views, or that’s furthest away from a busy street. As the development sells down, your choice of available properties shrinks and you have fewer options within your development.
ROI From Off-Plan Property Investment Timelines
The ROI from off-plan property investment will vary based on a range of factors, including market fluctuations, property maintenance costs such as taxes, maintenance, and insurance, the amount of rent you receive, the prevailing interest rate on your loan, and the type of property you invested in.
There are no guarantees your property will appreciate over time, but presuming you did your research and the property is in a desirable location, you can reasonably assume the value will hold, if not increase, by at least one percent per year.
Many economists suggest three to five percent ROI growth is a reasonable rate to expect. However, conservative forecasting models are always better to head off unpleasant financial surprises further down the investment road.
Real estate investment trusts (REITs) and professional commercial property investment companies typically target properties with a five-year outlook potential.
Individual investors have the luxury of determining what is more important to their investment needs. If in five years, your off-plan property is worth 10 percent more than it is today and you subsequently decide to hold, even if the following five years deliver no increase in your property’s value, your property would still be actively generating cash flow to pay down your mortgage and contribute a stable, predictable income.
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Assessing an ROI from off-plan property investment should always be done in the context of what your goal is for your investment property. Most property investments deliver the optimal results when held over the medium to long-term. It’s important to remember that real estate is not a liquid asset. Always remember to factor in the worst-case scenario financially for you if you are not able to sell your property in the time frame you are targeting.