WHAT ARE YOU REALLY GETTING WHEN YOU INVEST INTO OFF PLAN REAL ESTATE PROJECTS?

In Blog by InvestaCrowd

This is a hotly debated topic among real estate investors and developers alike, and there is a clear line in the sand being drawn between those for, and those against, investing into off plan real estate. It is predominantly a matter of where they stand in the totem pole (and what they are selling) as to what they believe.

We wanted to give a balanced view of the pro’s and con’s of this type of investment. The real problem for foreign real estate investors is that there are not many options available to you whether it be due to regulatory constraints, difficulties in obtaining a bank loan as a foreigner or simply the amount of cash available to you. It is not an investment I have personally made, as I prefer to invest into real estate development projects instead (where we feel the real money is to be made). But lets look at both sides of the argument.

For an investor, some of the pro’s of buying a project ‘off plan’ may include:

  • You are legally ONLY allowed to buy an off plan apartment and not a landed property (generally the rule for foreign investors in many countries).
  • Only 5-10% deposit required today, the remaining 90-95% due when the apartment is completed in 1-3 years time (construction period).
  • You are locking in the price today for the apartment you will obtain in the future, and if prices continue to rise, the property might prove to be a good investment even before you move in(although it’s likely the property has already been price-adjusted by the developer, so there is no guarantee here either way)
  • Many off plan products are entry-level pricing/size apartments, so it doesn’t get any lower to buy residential real estate
  • Ability to lock in low interest rates and there is also long term strategy to live/rent and therefore short term price fluctuations do not matter so much.
  • You do not have the funds, or ability (deep pockets) to fight it out at the weekend auction warzone with many others, and you do not know where the final price is going to end up. (many foreigner buyers will never ever go to visit their apartment)

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But the following should be considered, which could be potential downsides to ‘off plan’ investments:

  • Is this the best risk adjusted return you can get ? Your deposit will be locked up during the construction period (usually kept at a nominal interest rate or earning no interest which also might be taken by the developer) .
  • As you will not take full ownership of your apartment for a 1-3 year (construction period), there is the risk of falling real estate prices by the time you take ownership of your property. What rates/timelines are you able to lock in for your bank loan if you choose bank financing to pay for the large % of the acquisition cost, and certain lenders may withdraw either the whole mortgage or part of the mortgage if the project is not completed according to the timeline or to meet the LTV (loan to value ratio). Banks may also change their rules during this period and demand that the buyer put in more equity, dramatically changing the deal for an investor.
  • The risk that the developer goes bankrupt during construction, leaving you “holding the deposit to the keys” to an apartment that doesn’t exist.
  • Delays in settlement can have you tied up for years longer than first planned.
  • You are buying off plan, i.e., you won’t see the building until it is finished and the finished product may not be exactly what you pictured or were promised.
  • Defects to the finished product can dramatically hurt your investment, if you are not properly covered, you may be wearing all the repair costs needed
  • Contracting terms must be assessed word by word to ensure your investment is protected. There have been cases where the developer tried to rescind the contract to take back the apartment and resell at a much higher price in a bull market.
  • Ongoing management of the property, costs, repairs, time, hassles etc.
  • If the property actually declines in value, then you may just walk away and lose your deposit instead of buying an apartment that is “underwater”.
  • If you are buying through a real estate agent, you will pay as much as 5-10% in real estate commissions (built into the price of the property). This is a huge sum! The agent is walking away with potentially a few years worth of your capital gains with no money down.

By the way, in the real estate development world, this is how it usually works.

Did you know that to get bank financing for most residential developments, developers NEED to show the banks evidence of their off plan sales volume, and only when they hit certain targets, are they able to obtain the construction financing. So your deposit is used to acquire huge bank loans that are then used to build your apartment. Then, you will be charged “full price” for the unit when it is finished. It seems like a great deal for the developers and makes you wonder if you are really getting a good deal at all.  On that note, any apartment with a “guaranteed rental return” has simply taken more money out of you through the sales price, and it is an artificially inflated price allowing the developer to offer you this return back, which usually only exists for 1-3 years anyway. It is your money taken today, to be given back tomorrow. Do not buy into the “guaranteed return” sales pitch, it is a farce.

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Hmmmm so shouldn’t there be a better way to invest? What do we already know.

  • Real estate investment with proper research, good location and timing in the market, has consistently proven to be a great investment. Personally, I have made money on every real estate transaction I have ever been involved in, some took longer than planned, but I have always come out on top in the end(the same cannot be said about my stock portfolio)
  • You could also invest into real estate funds where there are typically high (and sometimes hidden) fees and you have no control over which particular assets your funds are going into.
  • You could emigrate to the country where you would like to invest, as you can buy your way into most countries (Australia has a significant investor visa whereby $5mil AUD gets you into the country but there are strict rules around what you must do – HERE), but this seems a little extreme, expensive and out of reach for most investors.
  • You could invest in any number of different financial products, but if it is real estate you want, you could be constrained to a REIT, or publicly traded real estate companies, but this is a stock market investment and there is no direct ownership of the real estate asset.
  • You could even work out a complicated deal with a local partner/investor, but that is difficult, risky, expensive and time consuming

But there must be a better way?

  • Yes, there should be, but previously there really wasn’t, until technology and regulation changes have changed the game completely.
  • You need to find access and the ability to invest in the development of the real estate, i.e whilst the buildings are being built. This is where the best money is made.
  • And you can now do this through real estate crowdfunding. Selecting the right crowdfunding platforms, you can now invest with much smaller amounts than previously possible, into debt or equity positions, along side premium developers, obtaining a direct ownership in the company owning the land or buildings being developed.

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There are a long list of benefits and advantages of real estate crowdfunding, and to find out more about what investors should consider to begin real estate crowdfunding read – HERE

Best yet, all of this can be done from your laptop or mobile phone, to find our more about this new evolution in real estate investing, please login and create an investor account at InvestaCrowd

Here is a great checklist if you are planning on buying off plan: The Trick to Buying Off Plan . And here is another story that shows the potential pitfalls of off plan investing: When buying off plan turns out to have an unplanned downside But wait! It is not all doom and gloom and this article offers many tips to the best approach to off plan investing: Many dangers in off the plan rush

InvestaCrowd is a global real estate crowdfunding platform headquartered in Singapore, deals on InvestaCrowd are exclusively available to our members only. Their are limited investment positions in each deal, and investments are offered on a first come first serve basis. To see the latest offerings and begin investing today, login and create an investor account at www.investacrowd.com

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