Buying on trend and buying off the plan

By Andrew Trim, Managing Director of Johnson Real Estate and author of ‘Real Estate Dangers and How to Avoid Them’

Never buy an investment property based on an economic trend. For example, the mining boom of the 1990s and early 2000s led many property investors into country towns and regions. While returns and growth were – and there is no other word for it – spectacular, the end of the mining boom saw a significant downturn for residential investments in these areas. The supply of tenants diminished, leading to reduced rental returns; buyers deserted the market, and therefore prices fell significantly.

EXAMPLE

On the back of the mining boom and the subsequent slowdown, Karratha in Western Australia had a peak median price of $815,000 in October 2010. By November 2016 the median price had fallen by 55 per cent to $362,980. An investor, believing they were making a smart decision in 2010, would have incurred a loss in excess of $450,000 over six years, not including associated costs such as stamp duty and agent’s fees. There were similar losses in South Australia and Queensland. 

Never believe anyone who tells you that property prices don’t fall!

Off-the-plan purchases – more so unit dwellings than house and land packages – are the most common investments to offer a rental guarantee. Ask a local agent to estimate the likely rent without the guarantee so there will be no surprises.

If you are purchasing off the plan for investment, the deal must stack up on genuine figures, not those provided by the marketer. Along with getting a genuine rental estimate, ask a local agent to give you an estimated sale price if they – the local agent, not the agent marketing the project – were selling it locally. If the deal relies on false assumptions for the numbers to work or requires capital growth before completion, the purchase becomes a speculation rather than an investment. That’s fine, as long as you are prepared to wear the inherent risk of such speculation.