Investing in house and land packages or buying off-the-plan in Australia can seem like a smart move, especially with the enticing sales pitches and incentives.
However, there are significant risks associated with these types of properties that can impact your financial future when not carefully reviewed.
In this blog, we will delve into the performance risks and potential downsides you need to be aware of before making such an investment.
Limited Capital Growth Prospects
Understanding the Land to Asset Ratio
- Low land value relative to purchase price:
- Notional land value may only account for 25% of the purchase price.
- The remaining 75% can be attributed to:
- Developer profits and costs.
- Incentives by developers and project marketers which require sales staff commissions.
- Costs of skilled labor for builders, contractors, and tradesmen.
- The actual cost of the materials which may only make up 50% of the construction cost
Depreciation Concerns
- High depreciation rates: When depreciation is at its peak, as soon as the property is finished, the overall dwelling value declines at its fastest.
- Low land to asset ratio: A low land value percentage relative to the dwelling value reduces capital growth prospects.
- First owner disadvantage: Aiming not to be the first person to own the property because of this phenomenon often makes sense. After 5 to 10 years, depreciation settles, and the land to asset ratio is likely to become more favorable.
Homogeneity and Its Impact on Value
Lack of Uniqueness
- Identical properties: Homogenous dwellings, such as identical apartments in a building or houses in a development, reduce the scarcity factor.
- Competition: Your property may face stiff competition from similar properties, affecting its desirability.
Benchmarking Risks
- Impact of low sale prices: One low sale price in your block can set a benchmark for your property’s value, especially if it’s due to a forced sale.
- Valuation impact: Comparable low sales can negatively affect the perceived value of all similar apartments or houses.
Yield and Oversupply Concerns
Rental Yield Risks
- Abundance of similar properties: An oversupply of similar apartments can adversely affect rental yields.
- Competitive rental market: Prospective tenants have many options, leading to potential rent reductions as landlords compete to attract tenants.
Listen to the Property Trio podcast
For more in-depth insights on Risks of House and Land Packages and Off-the-Plan Purchases and how to select a quality asset, tune into the Property Trio Podcast, where numerous episodes are dedicated to these essential topics.
Ep #16: Unpacking land to asset ratio
Ep #58: Off the plan purchases – Everything you need to know. Part 1: purchase through to settlement
Ep #59: Off the plan purchases – Everything you need to know. Part 2: The financial drivers
Ep #60: Why established properties outperform
Ep #89: Capital growth – what increases property value?
Reach Out to Us for Expert Advice
Investing in house and land packages or buying off-the-plan can come with significant performance risks, including limited capital growth, high depreciation, lack of property uniqueness, and rental yield challenges.
It’s crucial to carefully consider these factors before making an investment.
For expert advice on making informed property investment decisions and navigating the risks associated with house and land packages or off-the-plan purchases, contact us today.
Regardless if you are looking in Victoria, Queensland, New South Wales or any other state let Property Planning Australia help you secure a more stable and profitable investment future.
