New Build Vs Off Plan Property - Which is Better?

By: Brett Wood

Firstly let's look at how I define each of these terms.

New build is classified as a development that is within 3 months of completion or has completed but has not yet been tenanted. Off plan is a development that is longer than 3 months out from completion or where the property has not moved earth yet.

Now some people may say that off plan is simply property "off the plan" or property which has not begun being built and technically they are correct, but let me explain why I consider it very different.

It's all about structure.

My definition is not really based on time it is based more on the fact that in most cases with newly built property you can exchange and complete at the same or within a short time. This simply means that if you have structured correctly your money will go into the property and come out very quickly, effectively realising your gain at purchase and exponentially growing your return of investment.

In an off plan scenario you would normally be expected to place a 5 or 10% deposit on exchange and then wait for completion which could be up to a couple of years later. Only at this time could you realise a gain from the property, prior to this it is simply a paper gain.

Hopefully now that you have a grasp of the two concepts we can move on to working out which one presents a better return. After all, that's all that should matter in property investing.

The answer is quite simple - It depends on the market. You need to look what the market is doing. This in property is what we call your strategy meeting the market. Choosing the appropriate strategy for the market

Let's consider two very different property markets and two different types of property and the relative results they achieve. The stagnant market

If you purchase an off plan property that is due to be completed in 18 months time and place a 10% deposit down at exchange, you would expect that because the market is stagnant the property will not increase in value over that period.

So therefore you have paid 10% and made effectively no return over this period but you have also taken a risk that the values, rentals, or market may change making it hard to get a mortgage. No looking so good for our off plan scenario.

On the other hand if you had purchased a new build property you would have paid your 10% deposit and within a short time received your 10% allowance upon successful completion back. Your actual cash tied up will be significantly less than the off plan scenario. This extra cash can then be used to purchase another property.

Therefore if you purchase off plan in a stagnant market you are likely to buy one property as opposed to new build where, for the same cash input you could buy perhaps three times as much property. Clearly in a stagnant market new build is a better proposition than off plan property. The galloping market

The same two properties purchased in a galloping market would mean that the new build is still a decent proposition except that you now have to consider that you have a mortgage to service. It will certainly go up in value more than in a stagnant market and because interest rates are low your cash flow is eased.

Now consider the off plan. You still secure with a 10% deposit but over the course of the build program your property may have increase in value by say 10%. You don't have a mortgage or cash flows to worry about.

Now here's the power of off plan in a galloping market. Say the property is worth ?200,000. You place a ?20,000 deposit on it. Now if it goes up 10%, it goes up on the entire value (?200,000) not just your deposit so you have just doubled your money before you have even completed. (?200,000 x 10% = ?20,000)

So consider the above before you go and get sold a heap of rubbish about how great off plan is.

There is no doubt that in the right market and the right circumstances it is a fantastic proposition but don't caught up in the hype of the sales pitch and thinking that doubling your money before completion is easy. This is where working with a professional portfolio manager will make you job so much easier, they will explain the pros and cons of each decision.

Real Estate
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 

» More on Real Estate