Newly built property is not a great way to build financial independence for 99% of aspiring and growing property investors.
Safrea Chronicle reader, Brian, asks: When building a property portfolio, is it a good idea to buy off-plan, on new developments or purchase an existing property?
Carlo Mariani, founder at ThePropertyCoach, explains that ‘off-plan’ and ‘new developments’ are used interchangeably by most people in South Africa to refer to newly built residential property, either freehold or sectional title.
The PropertyCoach is a property educational and investment platform that enables investors to achieve their goals through personalised investment strategies, coaching and mentoring.
“In response to the reader’s question, we will refer to newly built property, as opposed to existing property,” explains Mariani.
According to Mariani, buying a newly built property is a lot more expensive. He shares four traps novice investors fall for when lured by marketers of new developments:
1. Free transfer costs
While property developers can negotiate bulk discounts with a firm of conveyancers, there’s no such thing as free conveyancing. The relative cost has simply been built into the purchase price; so you will pay the conveyancing cost over 20 years at the applicable bond interest rate – and that is hardly bargain.
2. No levies
Sometimes property developers will say ‘very low levies for an initial period’, but it is just a different version of point 1.
3. Rental guarantees
Mariani says that in his view, if an investor needs to rely on the perceived peace of mind of rental guarantees for them to invest in a newly built property, then they may suffer from one of these serious problems: lack of knowledge of the fundamentals of the local rental market, or not enough cash reserves as buffers. “It is important to read the small print of the terms and conditions of these rental guarantees very carefully before making any purchase decision.”
4. Expensive features
Property developers like to entice investors with, for example, fancy gyms, swimming pools and clubhouses. Mariani says that assuming these facilities will be used, they are guaranteed to increase levies substantially over time, as they require ongoing maintenance.
However, Mariani says property investors should consider three critical factors before making an investment on a newly built property.
1. Premium price
The price per square metre on newly built property is expensive compared to an existing property. Premiums from 50% to 100% are ‘normal’ in this current market, he points out. Mariani asks the question: “How much of a higher rent will you get, not just in the first year but over the next three to five years to compensate for this?”
Another factor to consider is how an investor will handle a situation where, upon completion of their development phase, many units sold to investors will flood the market in that specific complex? This creates longer-term vacancies and downward pressure on rentals, he says.
3. Understand the fine print
Before making any decision, the investor should be competent enough to read and fully understand the offer to purchase. The developers’ lawyers draft complex clauses contained in the standard offer to purchase and it is important to understand these, so you can protect yourself against investment risks.
“For more than 17 years of local investing experience, I have built solid sources of cash flow and equity without buying newly built properties,” says Mariani.
He urges would-be investors and those growing their investment portfolios to be open-minded. “Be up-to-date with property fundamentals of supply and demand, including the costs of replacement, building costs, changes in zoning regulations and approvals,” adds Mariani.
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Edited by Gudrun Kaiser