Sunday, 24 February 2008

7 Steps to Becoming a Property Millionaire, Prt 4 (Buy Off The Plan With Deposit Bonds)

Source: Keith Mason

Step 3: Buy off the plan property

The strategy is to buy new off-the-plan property to benefit from leverage. By this I mean buying property prior to, or during its construction phase.

The time that lapses between signing the purchase contract and the property settling can be months or even years. During this time, if the property is positioned in a sought-after area where high capital growth exists, the value could appreciate by tens of thousands of dollars.

It is probably better to buy low rise developments which do not have lifts or gymnasiums as these additions increase the body corporate costs, and affect our return on investment. There are arguments for and against any type of property, but new property is always in demand by tenants, has great tax deductions, and you should not have to spend money on maintenance for quite a while.

Step 4: Start up money using leverage and Deposit Bonds

Lets assume that we find a great deal for $300K. Because it is off the plan, due for settlement in 12 months, we only need to put down a 10% deposit, which does not have to be cash. Deposit bonds are used by many investors to put up the deposit, costing approximately 5 to 10% of the deposit only. So for a $300K deposit for 12 months it would cost only around $1,500 using deposit bonds.

Other costs to pay are stamp duty and legal costs, which combined are usually 5% or less (approximately $15,000) depending on which state you buy in. So the total cash outlay is around $16,500 max. (Another alternative to deposit bonds is a bank guarantee)

In some states like Victoria (Australia) a major benefit of buying off the plan property is that stamp duty is only payable on the value at the time of contract, which is basically land value, so for a property purchased at $300K you only pay about $2K on stamp duty instead of about $14.5K.

This might just tempt us to choose Victoria for our first property. Our start up money could be only about $3,500 which is a big incentive for some of us. New Zealand is also very attractive as there is no stamp duty to pay at all, which makes getting started even easier.

See a mortgage broker for qualification requirement on deposit bonds.

Next step: Settlment, Renting Out The Property.

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