[WHAT I LEARNT OUT OF BUYING 7 PROPERTIES SERIES] LESSON 1 – WHY YOU SHOULD AVOID OFF THE PLAN (OTP) LIKE A PLAGUE

It’s always been my goal to be able to give back and help other investors grow, minimize mistakes via sharing my own experiences and journey to-date. This is the whole reason why I started my personal blog David’s Property Journey last year.

Looking back however I felt the blog was quite loosely structured, so I thought it may be better to create a series to consolidate, focus more on what I learnt rather than just telling the story/journey.

I’ve made quite a number of mistakes along the way in purchasing 7 properties and I don’t mind sharing them. I still make mistakes all the time, but the important thing I learnt is not to be afraid to make them, but to understand what went wrong and how to do it better next time. Just like learning to walk, we all fall at some point and some of us fall harder than others. But what’s most important is to get up again and think about how not to fall (or not to fall as hard as last time) via continuous improvement.

And the idea here is to provide the lessons learnt I can think of in my current journey so people can benefit and not “fall as hard”.

So….buckle up and off we go!

1. First lesson – why you should avoid OTP 

My property journey started with an OTP purchase back in 2009 at Granville in Sydney (but it’s actually closer to Merrylands). I was young, naïve and didn’t know much back then about what I really need to do to do the research required to validate the purchase. My dad found this for me and he thinks that it would be a good fit because of the 5 years rental guarantee so I don’t have to worry about it too much. Plus the glossy brochures looked really nice! And the sales agent has a whole tonnes of research materials about the area, what the future developments are (the Stocklands mall at Merrylands was being constructed at that time) and the expected population/jobs growth at Parramatta being the second CBD.

The purchase price was $360K for a brand new 2 bed 2 bath 1 garage OTP apartment in a complex of 45 and rental guarantee for 5 years is at $450 per week. I’ve been told “it’s over 5% rental yield and easy to hold”, and I’ve done my “due diligence” based on the materials he provided and they seem feasible. Plus there are probably some parental pressure on this too (yes, Asian parents are like that, don’t want me to have too much money to spend), so I signed on the dotted line. I was 25 that year.

Fast forward to 2018, this property has:

  • Grown to about $500K in value, thanks to the latest Sydney boom, and allowed me to pull some equity out
  • Rent to-date is at $450/week
  • Strata has increased from $400/qtr to $800/qtr, plus there has been some serious issues with the building quality. My apartment is on level 1 (out of a total 3 levels) and couple years ago during a heavy rainfall the water had leak into my unit and damaging the carpet. To-date there is still an ongoing lawsuit which has been going on with the developer/builder for the last 3 years. And as you guessed, it’s costed all the landlord a gazillion on special sinking funds

So what did I learn out of this purchase?

  • Steer away from OTP as you’ll almost guaranteed to overpay for anything brand new and shiny

I’ve paid $360K back in 2009, whereas the average price for a 2 bed apartment there was less than $300K at Granville. So I’ve bought way above market median and now I understand the extra money was to cover everyone else’s profit margin (except my own!!)

  • Rental guarantee can be a double edged sword and most of the time it’s to make the OTP more attractive

I considered myself relatively lucky because the rental guarantee on this deal is at $450/week and for 5 years so I’ve recouped some cost back. In all honesty the agency company would’ve made a loss because they were never able to achieve $450/week during the first 5 years. But that was once off and I’ve never seen anyone else bold enough to do a rental guarantee this long – most of them only for 1 or 2 years max and there are conditions on top. They do this mostly to make the OTP property more attractive to investors because they know you’ll have trouble renting it out AND at the estimated rent (due to influx of units released at the same time), so it’s a bait to get your foot in and then after rental guarantee safe net…you’re on your own.

  • Quality of OTP can be shabby and costing you more to hold long term

This IP was built by a relatively renowned builder who does lots of projects out at western part of Sydney so I was quite shocked in terms of their building quality on my unit. As I mentioned above, my apartment is in level 1 and during heavy rainfall the water got from wall into both bedrooms and I ended up having to re-plaster some parts of the wall and replace the whole carpet in both bedrooms. And it wasn’t just me, other units on my level is also experiencing similar issues so clearly this is a building defect. This is another huge piss off for me as the OTP appearance can be brand new and shiny but you never know what was actually underneath the building structure.

What also annoyed the hell out of all owners is that it’s been 3 years and we are still not getting anywhere as the lawyers from defending side keeps playing the stalling strategy. So the owners have been forking out quite a lot of funds in the last couple of years for this law case, and hopefully we’ll get a resolution towards end of this year.

  • Even if you overpaid on day 1, if you hold a property long enough it will correct your mistake

Yes I’ve overpaid from day 1 on a crappy product but the silver lining is I’ve left it chugging along by itself (as rental guarantee was covering most of the outgoing expenses anyway) and thanks to the latest Sydney boom the value has gone up and I can even pull out some equity for our next purchases. I’m sure everyone makes a mistake somewhere along the line in overpaying but by holding it long term the property price will eventually catch up and correct your mistake.


As always, if you have any questions about any of the above content feel free to leave a comment or contact me directly.

Cheers,
David

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