Buying an off The Plan Apartment in a School Zone

voldemart on 13/04/2015 - 12:52

My wife and I are currently looking for an investment property. Initially we were just looking in the vicinity where we live (outer southeastern Melbourne) and only wanting to pay 400K tops for an unit. Then we thought, why couldn't we pay a little bit more, and buy an off-the-plan apartment in a good school zone much closer to the CBD (the public high school is very highly ranked)? After all we have two toddlers and in future would rather send them to good public schools than expensive private ones.

Before we formally drive ourselves down this path, I would like to seek you guys' opinions on this. A quick search this morning returned with articles either bluntly against buying off the plan or doing so with extreme caution (which we would). But the comments were all genetic so hopefully my fellow OzBargainers can share some of your personal experience, or the experience from some ones around you?

My wife is looking after the kids and not working at the moment, but she plans to go back to work in about two years. I as the sole breadwinner gets about 100K taxable incoming a year - and tax deduction is one of the key reasons why we want to buy a property off the plan (stamp duty concession, depreciation and negative gearing). the suburb we are looking at was recently ranked No.1 in Melbourne and the school is in top 50. The only downside is that (obviously) there is a lot of apartments being built in the area so rent-ability and rental in long run is a bit of a risk.

Would appreciate if someone would share their experience or ideas with us before we take the 500K plunge.. all is welcome and I promise I will do something with my procrastination and start sharing good deals when I see one :)

Financial

Comments

  • RockyRaccoon on 13/04/2015 - 13:00
    +1

    Not a wise idea as developers have been playing games with off the plan deals.

    Read this article

    http://www.news.com.au/finance/real-estate/why-you-should-al…

    So if you decide to go this route, at least you cant say later you didn't know, if it goes belly up.

    The best way to put it is that you are dealing with professionals, with a contract that covers them not you.

    As for experience I have no recent experience to advise you, but 20 years ago my brother was screwed the same way the article describes. If he wanted it at the original price he could just wait and wait and wait maybe up to 2 years was the developers estimate. He and others pulled out, and the project got completed. Surprise surprise only a month or two later than originally planned

    • voldemart on 13/04/2015 - 14:19
      +1

      Thanks mate. The article you referred was a good read, especially the things to consider part. I must say, in my research the bad stories far out numbered the good ones - if you believe in newspapers that is (who likes to read stories with a good ending?).

      And yes we would make sure all due diligence is made when reviewing the contract. I have a quite good solicitor lined up so hopefully he can pick up any pitfalls that we may miss.

      Ah, the joy of buying of a property.

      • jaybo on 14/04/2015 - 10:15
        +4

        take all articles you read in the news with a grain of salt, some "journalists" have ulterior motives for writing good/bad things about things. as you mentioned, you found more bad stories than good ones, but if you were only searching for good ones you could convince yourself of anything ;)

        we're waiting for our 3rd off-the-plan to be completed (bought our first about 3 years ago) and we've been pretty happy with the first 2.

        as for your particular example - as with all property investment, it depends on a lot of factors. some areas are a bad investment but good for lifestyle (ie for your example, that's a lifestyle choice rather than an investment one) - in melbourne specifically areas like south yarra are flooded with apartments right now and there's no signs of it slowing so it's not a great investment spot.

        my big question is - raising 2 kids in an apartment you're probably going to want at a minimum a 3 bedroom apartment - $500k in the inner areas of melbourne that i can think of with good schools probably isn't going to get you something that you'd want to live in with a growing family (i mean it can be done, horses for courses really!)

        if you're after more specific investment advice, have a look at some of the investment clubs out there (ie http://www.positiverealestate.com.au/ or http://www.propertyclub.com.au/) - they have plenty of free seminars you can go along to, ask questions, get some info etc. you're seriously under no obligation to buy anything from them (ps i do not work for them - and hated the idea of them to start with as i thought they were all crazy pyramid schemes) - ive had good experiences with both the clubs i mentioned and i know there are more out there.

    • firedragon on 13/04/2015 - 17:54

      Thanks so much for posting this!

  • Smulder on 13/04/2015 - 13:16

    Nevermind

  • dasher86 on 13/04/2015 - 13:22

    You may want to check with the schools policies on zoning.
    Even though you're investment property is zone in that suburb (and claim that as your residence) some schools may ask you if you have other properties may exclude you from the school even if you fall within the zone.

    • MITM on 13/04/2015 - 13:58
      +1

      Why would a school be interested in your property portfolio ?

      • mrmarkau67 on 13/04/2015 - 14:13
        +4

        Because your eligibility for attending a particular school is supposed to depend on where you actually live, not where you may hold an investment property.

        If a family has a small unit near a high ranking school, and a larger house in some other area, that would ring alarm bells about where they actually live.

        I know that sounds crazy, but parents will go to extraordinary lengths and great expense to get their children into a good school.

        • voldemart on 13/04/2015 - 14:28
          +1

          Thanks for the heads up Dasher86 and mrmarkau67 for your reply. We actually plan to stay in the apartment (too small for a family of four I know, but hey) prior to the enrolling them in the school and rent our current house out. Depends on how it works out we may move back or even stay there so the kids can go to school a bit more easily. My older kid is only 2.5 years so who knows. We figure in the meanwhile we can at lease rent it out and get some tax back.

        • Smulder on 13/04/2015 - 15:09
          +2

          You will be subject to CGT on the unit if you rent it out prior to eventually moving into it yourself.

          If you do plan to move in at some point within the next 6 years, it would be beneficial if you could move into the new unit (even just briefly) prior to renting it out, as it is then exempt from CGT under the main residence exemption.

          However, this isn't really an option if you own your current house, which it seems like you do.

        • MITM on 13/04/2015 - 15:39
          +3

          @Smulder:
          Selling after leasing it you'll be subject to 50% CGT (That 25% from you, and 25% from your partner - basically bugger all tax)

          GCT is only payable AFTER you sell it which may be 5, 10, 15 years away.
          And you'll only pay 25% CGT each on the first 12 months growth if you get a valuation done when you move in.

          Don't get hung up with CGT - it means you made a profit.
          Presumably you'd get a Depreciation Schedule done from day one.

        • mrmarkau67 on 13/04/2015 - 16:57

          @Cheap Charlie:

          To what extend could/does the school go to when determining your child's eligibility?

          Where do you stand in the event your child has attended a school for a year or two and you move to an adjacent suburb yet your desire is still such that your child attends the same school?

          The answer is - depends on the school and the state. Right now, in our area the schools are filling up, so they are looking more closely at these kinds of shenanigans.

          Lying on a statutory declaration for what could be perceived as $20,000/year worth of value is pretty serious.

          On the other hand if you are moving into an area with declining school age population, and your children aren't delinquents, they'll be delighted to get your enrolment.

  • MITM on 13/04/2015 - 14:07
    +3

    We had a pretty good experience with off the plan.
    We used a deposit bond which cost a few hundred dollars (per year)
    Meantime the construction was delayed for over a year, but values had risen.
    Finally on settlement, we stumped up the deposit/balance - but the property had increased in value more than the deposit (10%)
    So for a few hundred dollars, we made about 40k on paper, and the bank supplied all the funds to complete the purchase based on the revaluation.

    We had no trouble letting it out as it was near CBD. A recently divorced doctor rented it as it was close to the hospital and had a second bedroom when his kids visited.
    We later sold it and it was the easiest sale ever.

      • MITM on 13/04/2015 - 15:07
        +3

        The deposit bond company will want to see evidence that you do indeed have the deposit - but this could be in the form of equity in another property. You wont get a deposit bond unless you have the funds available - they're guaranteeing your deposit to the builder. (Just don't spend it before settlement)

        The Deposit Bond company will want a sunset clause in the contract to allow you "out" if it drags on too long.
        We passed the sunset clause date, elected to extend the contract and so bought another Deposit Bond.

        We checked on the builder and they had built several projects in the area. They built 1 project at a time until completion before moving on to the next, and they had been building for quite a few decades. All looked good - but how would you ever know they are solvent and this wasn't going to be the project that broke the camels back.

        Our motivation to use a deposit bond was for peace of mind that if something went wrong, we'd only be out of pocket a few hundred dollars. Yes there were delays, but we just held out.

        The basics are the builders bank needs a percentage of (pre)sales for them to advance the loan. The pre sales help the builder get the project underway and are usually keenly priced.
        And any deposit is supposed to go into a trust account - not directly to the builder until settlement.
        We just elected not to pay a deposit into the builders sales company's trust account and so they accepted our deposit bond.

        • voldemart on 13/04/2015 - 15:54

          Sounds interesting MITM. We have our first appointment with an agent tomorrow - any other tips you can share e.g. what questions we should ask and what key information we should after?

        • MITM on 13/04/2015 - 22:12
          +1

          @voldemart: have a good solicitor ready. One who loves property as an investment vehicle. Perhaps has investment properties.
          Do your homework on the builder. Past projects. How many projects currently underway. Go and see them. Check quality. Talk to subcontractors. Do they get paid on time. Talk to residents. Any building faults.
          Proposed future projects, whats coming up in case we postpone. Are they in the same area. What did they do during gfc. Did they firesale.
          Don't be afraid to walk away.
          Remember the agent works for the builder, but will be your best friend.
          Add your own clause to the bottom, "subject to my solicitors final approval" will give you a little extra time.

  • Kousuke Nakamoto on 13/04/2015 - 15:00

    I think it's very risky buying an apartment especially when there are other development within the current school zone. If the school is unable to cope with the increased demand, it will simply redraw the school zone by downsizing it. If your investment properly fall outside the redrawn school zone, you could be in for a potentially large financial loss.

    • voldemart on 13/04/2015 - 15:53

      Yeah I agree and in fact that's the first thing we check when looking at an apartment on sale - how far away is it from the school. A couple of friends of ours bought there apartment off the plan JUST on the boundary on the assumption that the school once attempted to downsize its zone and get rejected by the government so they reckon it won't happen again ("sound" logic, I know). For us we will make sure the apartment is very close to the school to avoid this from happening.

      To give our friends' credit, although risky, I am not so sure downsizing a school zone for such a good school is something the government can do politically. The 'burb is in a marginal electorate so pissing off the residents does seem political suicidal to me.

      • lplau on 13/04/2015 - 21:59
        +1

        Lol seems like liberals and the labor governments love political suicide… I wouldn't put it past them…. they will do it again.

  • t_c on 13/04/2015 - 17:06

    not sure if any self respecting ozbargainer would buy of the plan.

    Jenman has a article on it, and suggests buyers request a clause in the contract that states only the buyer can invoke the sunset clause.

  • aggregate on 13/04/2015 - 19:54

    I don't like buying off the plan but I cannot deny more people are buying OTP apartments these days.

    You need to understand there are certain risk associated with buying off the plan. The project may be delayed, not built to the original plan and the strata costs may rise significantly after a honey-moon period. If you factor these into account and still are okay with the price you are paying, then go for it.

  • saine on 13/04/2015 - 21:28

    Will it still be a good school when your children are older? These things can change. I would vote for best possible investment, then assessing school In the 10 years.

    • voldemart on 14/04/2015 - 14:34
      +3

      I have a theory on this on this very question, saine. I believe the difference in results between a good school and bad school is primarily driven by the students rather than the schools themselves. With due respect to those who attended private school (and I am sure you got a lot out of the experience), I think the success, at lease the academic success in those schools were largely achieved by having parents who were keen and able to drive you to be successful. After all, other than ultra rich ones who don't care about spending 30K or more a year a kid on private schools, most parents cough up the money and they expect you to be better educated.

      What I am getting at is the parents who are willing to pay extra to buy/rent a place in a school zone logically pay a lot more attention to their kids' education and statistically as a result the kids will do better at school and the school then gets a better ranking as a result - not the reverse. Of course one can't deny the school's teachers' and management helps a lot as well - but there is no way you can cook a good steak with dodgy beef.

  • tebbybabes on 13/04/2015 - 21:57
    +2

    May I just ask, what does "off Plan" mean?

    • xuqi on 13/04/2015 - 22:24

      It means signing a contract to buy, before the property has actually been built.

      They have building plans, but nothing physical for you to see.

    • lemontree on 13/04/2015 - 22:28

      It means the property has not actually been built yet.

    • Supporter on 13/04/2015 - 22:30

      you view the apartment as a drawing only…. only the floor plan. construction of building has not even started.

      • tebbybabes on 13/04/2015 - 22:37
        +1

        Xuqi, Lemontree, Supporter - Thanks for the heads up. Makes perfect sense, in hindsight. :)

  • gccmelb on 14/04/2015 - 07:04

    negative gearing might be withdrawn in the future. Land tax might be introduced. What happens if there was a recession?

  • chumlee on 14/04/2015 - 07:27
    +3

    Don't buy because of negative gearing. You spend a dollar to get less than 40 cents back. You have to hope the property boom continues so you get a capital gain otherwise you are screwed

  • woodwa on 14/04/2015 - 08:21

    If you do go this way you need to be I would want to be sure that.
    1. Council has Approved a Development application and
    2. Council has issued a construction certificate(allowing them to build)
    3. Body corporate structure is finalised
    4. Look for other developments by this developer elsewhere… Just ask.. if they are reputable they should have done a few projects of the same scale.. also look at the directors for corporations that have bankrupted. there are websites that have all the ASIC information out there.
    5. You have insurance that covers your investment
    6. Make some alterations to the contract of sale that would protect me from the developer changing the floor plan, Adding units(decrease of value), and thay thing else that they may change

  • srhardy on 14/04/2015 - 08:57

    Buy this months MONEY MAG as it has atricles on just this subject and read it cover to cover and take notes.

    Sounds like you want to move in down the track, do it in under 6 years and you have all sorts of lurks and perks

    Get the BEST conveyancer before you buy and consult with them at every step, its solid gold experience thats working for you and checking BEFORE you sign the contract!!!

    You will thank me… The biggest mistakes are you sign a contract and then get a conveneyncer to try to unscrew yourself from a bad contract!!!!!

    Best hint ever! The LONG hint list in the post before this is the sort of thing they will help you do correctly…

    • jaybo on 14/04/2015 - 10:18

      i'd personally substitute the conveyancer for a good property lawyer & a financial adviser ;) but the advice is sound - get an expert to help!

  • congo on 14/04/2015 - 11:29

    I have never brought off the plan, because I believed that buying new, you would always be paying a premium.
    Also I have concerns that the strata would be higher than normal for new apartments.
    So for me, it's a bit too much risks.

    However saying that, there are benefits for "off the plan", especially if the market is going up and if you don't have the finance for a deposit straight away.

    Do your research and weight up if the risk is worth the benefits.

    In terms of where to buy, its all about supply and demand.

    Buy somewhere that has high rental demand.
    Good rent would help your cash flow.

    • voldemart on 14/04/2015 - 14:15

      Thanks Congngo. Yes I am fully aware that supply and demand is the key in an rental property and that buying new would mean you pay a premium. But again, there is literally zero built apartments on sale in the area after a quick search on realestate.com.au! I think this owes to two reasons a) there are not a lot apartments in the area (as yet) 2) the demand is really high and whenever one comes out it will be sold straight away.

      So I think from a rental perspective, the biggest risk for us is the number of apartments to be built. In other words demand is not an issue but supply may be.

  • cuongizzle on 14/04/2015 - 14:33

    Just mitigate your risks.
    1. Check with the school in regards to zoning. Schools like Mckinnon have clauses in which they may change the zone. Some schools restrict apartments all together even within the zone.
    2. Off the plan is risky due to their issues with project delays. Their sunset clauses (usually 5 yrs) means you cannot get out of the contract if there are no works even starting. What you can do is request a lower sunset clause when you are negotiating which allows you to get out of the contract earlier if the project is delayed.
    Research the developer. Make sure they have completed similar projects before. It could be their first apartment development and it's a different ballgame to small multi dwelling developments they are used to.
    Research the builder. Same as above. Also the more projects they have on…. The more at risk of bankruptcy they get.
    The risks could be all mitigated by making the right choices in where/who and what you buy.
    Off the plan is not as good as it was before with all the First home owner bonus and stamp duty savings it came with. Stamp duty savings has now been further reduced so you can afford a older unit/apartment if you wanted

  • baker bob on 14/04/2015 - 14:47

    No to off the plan and no to investing mainly for tax purposes. Plenty of info out there about those 2.

    Investing in Syd / Melb today means you are barely treading water with the poor rental yield with hope of capital gains in the future, it's speculative investing. Not saying that's bad and I have invested in these times but you need to understand the risks and accept them before pulling the trigger.

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