Don’t Buy Apartments
G’day everybody. I’ve had a question. Why don’t I recommend apartments?
There’s a very good reason why I don’t recommend apartments. Including myself, personally, being stung by it.
When you buy an apartment, you have to buy off the plan. So, the way that works is the property developer comes along and they find a block of land. And they might want to build a complex of, say three hundred apartments. To do that, what they have to do is they have to go and sell about a third, probably 50% now, of those apartments “off the plan”.
So, what they do is they go and get a graphic artist and an architect and they’ll put together some glossy brochures to explain how the property is going to look and then they’ll go and get some salespeople to sell the apartments off the plan.
You as a would-be investor come in and you look at the apartment, you look at all the glossy brochures, you think “wonderful!”. You put down the 10% deposit and you sign an unconditional contract to buy that property in 18-24 months’ time when the construction is complete.
Now, here’s the problem with that. The first problem is this. At the time, you make your decision to buy, the market is in a certain point. Usually the rental yields are high in that area and there’s good pricing in that area, hence why they’re building a development there in the first place, because they know that they can add two or three hundred apartments to the market and theoretically be able to sell them.
So, on paper, at the time, looks really good. But in two years’ time when it comes online, it’s actually far from that.
What actually happens is those apartments all come on the market at the same time. Whilst half of them might be owned by owner-occupiers, the other half are owned by investors.
And what do all those investors do? Straight away, want to rent their property out. So, when that apartment building is finished, all of those apartments, including yours, will come on the market at the same time for rent.
So, that high rent you thought you were going to get two years ago, could drop dramatically because the market gets flooded with available rental stock and they have to drop rents in order to encourage people to go in there.
So, once that happens, the next thing to follow is prices. And what happens is, the people who would be investing then they get the rent they think they can and they realise that they actually can’t hold the property, so they immediately try and sell. And when they try and sell, the market gets flooded with sales and the prices drop again.
So, this can then be amplified in some cases, like we’re seeing in Brisbane right now, where there is something like twenty residential towers being built in Brisbane. All these residential towers were marketed and sold over two years ago now, about one to two years ago.
And at that time, there was very good numbers in terms of valuations and rent returns. So, they were all sold on that promise. But what’s happening now is they’re coming online and the banks, people are going to get their finance to settle on the property, and the banks are valuing the property for less than what they signed the contract for.
And because they signed the contract, they have to buy it at that price. So, we’ve got a whole heap of people who can’t get the finance and they’re losing their 10% deposit.
Other people who have to go and top the finance up because they got approved to buy it… the banks valued it at the new price – might be fifty to a hundred grand less – so they have to go and borrow that money, but then find the rest of the money from somewhere else because they must buy the higher price if they sign the contract on it.
Apartments can be really dangerous. In boom times, people, if you know what you’re doing, and you’re a seasoned investor, you can make some money on apartments, but generally, you should stay the hell away from apartments because they’re bad news.
That’s it from me today.
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