3 Reasons Why You Should NOT Buy Properties Off the Plan

Dilleen Property Group 2021

If you want to build a property portfolio with the intention of creating a passive income, building wealth, creating equity, becoming a millionaire and putting yourself in a much better position in the future, read on to find out why I believe you should AVOID house and land packages.

Reason 1: Overpriced

99% of house and land packages are overpriced. When a developer buys a big block of land or puts a unit on a block of land, develops it and sells off the plan, most of time they're a much higher price as opposed to established properties.

For example, house and land packages in certain areas of Brisbane are selling for $500,000 or even terrace townhouses for $450,000 - $500,000. These properties might only be on 300 square meter blocks. Compare this to a neighbouring suburb, where you could purchase an established house for $300,000 on a 600 square metre block! The property may not ‘look’ as nice and new as the house and land package, but it’s on double the land size and probably rents for $350 to $400 a week compared to the $500,000 H&L package which would most likely rent for around $480 per week.

Let’s not forget this is an investment property. It does not matter if the property is brand new and fancy. What matters is the stats and figures. Is it a good deal? What’s the return? Etc. It doesn’t get any simpler than that. You pay a premium when you buy brand-new house and land packages. The developer that recommends these fancy properties gets paid on average $30,000 to $50,000 to sell this overpriced property that's going to sit there for a long period of time before it actually gets built.

Now, not all of the off the plan properties are like this, but a lot of them are. I personally know a lot of people in Sydney who have bought off the plan properties in western suburbs like Penrith for $600,000 just because they look nice! These properties would only rent for $400 per week. These are NOT good deals!

Reason 2: Rental yields

The second reason why I would avoid house and land packages and off the plan properties is because the rental yield is always going to be LESS. For example, a $500,000 off the plan unit or a house in Sydney, Melbourne or Brisbane is going to have about a 3% to 5% yield, which is rubbish if you're looking to build a sustainable portfolio.

Buying established properties in the right area and in the right market cycle are going to give you a much better rental yield. An established house for example in metro Brisbane could give you a 6% to 7% rental yield and a townhouse or unit with 7% to 9% yield.

Sacrificing on the yield is how a lot of people get stuck. If you buy a house for $400,000 which rents for $350 per week and you're looking to build a portfolio, you’re going to get stuck with finance. The numbers won’t add up with the expenses (e.g. council rates, water rates, management fees, insurance etc.) You want to buy properties that take care of themselves after all expenses.

If you are trying to become a property investor and want to build a sustainable portfolio, AVOID buying into properties because they ‘look nice’. Don’t sacrifice on the yield, and deter from investing with emotion. Most of the time people are getting stuck at two or three properties because they are falling victim to traps like this. After all, only 0.068% of Australian own 6 or more properties.

Reason 3: Comparable Sales

When I’m looking at buying an investment property for myself or a client, one of the most important things I like to look at is comparable sales. It’s so important to look at these figures to determine whether you are buying a property below what it’s worth. I only want to buy properties that offer instant equity on the way into the deal. With house and land packages and properties off the plan, it can be very difficult to judge comparable sales and what the property is worth if it’s the first property like this on the block. It’s almost impossible to purchase the property below market value. You are paying a premium and most of the time these properties are bought for more than what they are actually worth.

I buy properties that are established and in a metro area. Most of the properties I pick up are around the $350,000 mark and are $30,000 - $50,000 below comparable sales. That way I am making money going into the deal and not waiting for growth the happen.

Disclaimer: This is not intended as legal, financial, or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature, you should seek advice from a qualified and registered legal practitioner or financial or investment adviser. 

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