Investors aim for capital growth by buying units from developers who are pre-selling the project before the building commences and hold it for capital gain purposes (sometimes at completion).
Keys to make it work:
- Sufficient funding and effective finance vehicles
- Quality research on market conditions
- Timing for entering the market
- Knowing the bottom of the price bargain
- Timing when to sell
Financial Requirements:
Deposit bonds could be used for this type of buy. In this scenario, insurance companies would take a certain percentage of the deposit as a fee and issue the deposit bond to the investor for a certain period of time to secure the deal. In that case, the investor doesn't have to tie up a large amount of money into a project for a period of time.
Time frame and exit strategies:
Investors are often able to see the value of their off-the-plan investments appreciate before project completion.
Some investors might choose to sell the investment before the project completion and invest in something else. Others might hold onto the investment for a longer term, leasing out for cash flow and realizing the gains by refinancing from time to time.
The return perspective:
If investing in off-the-plan properties in a rising market, investors usually secure good capital gains by locking the price months or years ahead of project completion.
The advantages:
Getting stocks from developers at the off-the-plan stage often means the investors have the chances to secure the stocks with discounted prices, therefore increasing the potential capital gains.
The potential risks/difficulties:
Most off-the-plan stocks are selling on the base of negative gearing benefits. While the market is not in favor of capital growth, investors might find themselves in the cash flow tie situation as the investment incurs the regular cash repayment. The amount of the tax benefits incurred might not be worth the effort.
The project might experience delays for various reasons making investors holding on to the deal longer than expected. While it is not always easy to extend the deposit bond, investors will either need to come up with the deposit to keep the property or lose the deal after a long wait.
When the market goes against you, there isn't much investors can do except to carry the loss (especially when the investment is negatively geared).