Going ‘Off Plan’: How to benefit from an expanding Europe with tax-free real estate


by Kevin Stillmock

Europe continues to expand its Union by letting in new member countries like Romania and Bulgaria. Hard-working Europeans are funding this new growth with their tax dollars. What many don't know is that they, as well as Americans, or any other savvy individual can profit from the investment there tax dollars have been making in these countries.

Real Estate values in these areas, bolstered by the coming European Union, continues to grow in value at a maddening pace, making some people very rich. Many Europeans are aware of this and are wondering how they can make there cut. Americans are increasingly finding out about this opportunity, which offers much higher returns then traditionally found in real estate investments there. The best way to get in while the getting is good and make your profit off of the expanding European Union is by going ‘off-plan.' This incentive-oriented investment opportunity allows you to make a maximum return on a minimal investment.

What exactly is an off plan?

In simple terms, an off plan property is one that is net yet finished construction. Normally, ‘off plans' are offered in an apartment or condominium complex or a development of houses or townhouses. The buyer "reserves" a property or properties in a development found in one of a various number of stages from planning to completion. Off plan opportunities exist in a number of countries. The most popular and profitable include Turkey, Bulgaria, and Romania. They are generally represented by representation firms which oversee the project development on a daily basis for its investors and provides diverse services such as mortgage assistance and property management once the development has been completed.

Why Off Plan is considered such an attractive investment consideration.

One key to why buying 'Off Plan' can be such a good investment lies in the fact that normally you only have to pay approximately 30-40% of the purchase price as a deposit and then often nothing until completion of the property when the rest can be financed on a 60-70% mortgage (however some off-plans are staged in 3 to 4 payments). How this model plays itself out in practical application can be seen in the example below: Purchase Price: $ 100,000 (September 2006) Deposit payable: $ 30,000 Let us assume that you sell the property in September 2008 (assuming the maximum wait period for almost any off-plan project) just before completion and that you sell for $130,000 (this is a much lower return than has been achieved in recent years). Your profit is $30,000 which is obviously on the $100,000 asking price a 30% return, but remember, all you have had to pay is a $30,000 deposit so your actual return on cash invested is 100%. You've doubled you're investment money. Many people also finance the 30-40% deposit by through releasing equity for their existing property and so do not actually have to have any liquid cash to take advantage of this profitable investment opportunity. Tax benefits, capital growth expectations, and rent-ability also play a major role.

Why do developers offer it?

The developer is very keen to sell as many properties as early as possible to minimize the risk to themselves and to obtain better interest rates on their development loans from banks and investors. To help sell the properties at this early stage the prices are normally extremely competitive for the reason above and also because there is often little to show potential purchasers except a floor plan and artists impressions of the finished development. Liquidity is also a major consideration.

What are the potential risks?

The biggest potential risk is also the most obvious. The property becomes part of a development never completed. The best way to ensure that this doesn't happen is to buy from a reputable seller with a solid track record of past performance and from a developer with a similar sterling record. Some off plans are offered in developments that have close relations with banks, which will readily approve a mortgage against one of there off-plan properties.

This is another sign of the credibility and bank-ability of a specific project. Clearly, the early the investor gets into the project the more risk he or she technically is taken on. This must be waged against the greater profit that may come from getting in at a lower entry level that should be below the current market value. How is such a high return possible?

The following factors all help increase the value of a development during and after construction:

1) Lower than 'market' prices offered by the developer initially. As discussed above, the developer is keen to sell the properties as quickly as possible so prices are normally very competitive.

2) Best properties get sold first. Normally when a development is released a pattern emerges, i.e. penthouses, corner units and ground floor with private gardens tend to sell first which then in leads to price rises.

3) Show home available/building commences. As soon as the main structure of the development starts to take shape and/or a show home is opened prices normally increase substantially as prospective purchasers can see much more easily what the finished development and individual homes will look like.

4) More units sold. As the developer starts to sell more and more properties the original prices will continue to increase which obviously means that if you wish to sell your property it is obviously going to be worth more

5) Final Completion achieved. Once the development is finished you will be the owner of a brand new apartment/house in a new development. The person who wants to buy at this stage will be prepared to pay significantly more for somewhere they can move into or rent out immediately rather than when the development was just a plan on a piece of paper and a plot of land or a semi-constructed dwelling.

The reasons listed above explain why prices should normally increase as a development is built. It is not uncommon for a property to be bought and sold again before a brick has been laid and even sold again several times before final completion.

NO CAPITAL GAINS TAX

One of the reasons for the popularity of selling before completion is that there is NO CAPITAL GAINS TAX to be paid at all if you make a profit however big by selling before completion. This is a form of ‘property flipping.' HIGH FUTURE CAPITOL GROWTH OUTLOOK When you purchase an off-plan property at the right price and in the right area high capitol growth is to be expected. This is the reason why developing countries like Bulgaria and Romania, receive a good deal of the off-plan investment business.

You may be getting in at an extraordinary price or in a particularly hot project with increased profit potential, which makes the increased payment demands worthwhile. Then again, you might not be. By seeking a qualified guide in the process, you'll know which off plan investment is right for you. Recapping some of the strategic advantages of investing in an off plan:

• You always buy under current market value ensuring an automatic profit

• You benefit from growth of property value while development is under construction without having paid the full property cost

• Ability to avoid Capital Gains Tax

• It takes little time and effort on your part

• Invest in regional hotspots without leaving your home but have a potential holiday getaway.

• Ability to "flip" property after putting down as little as 30%

• Property management firms can rent out your property, creating a regular stream of income/paying off the mortgage on the property. In Eastern European countries like Romania, it is not uncommon for an apartment building complex to be 70% sold out before groundbreaking. The reason is quite simple. An apartment bought off-plan in a beautiful, new building in desirable location can be purchased for less then one in a run-down "Soviet style" concrete block. While, I am particularly compelled by the opportunities available with off plan opportunities in Romania, each investor must consider his or her personal needs before making a final decision. As buying off plan can also be a lower-entry cost for those wishing to have a second home in Europe or elsewhere, there are those investors who will want to buy in the area or areas that are most appealing to them while offering a solid return on investment. Smart off plan acquisitions provide the ultimate opportunity to leverage an investment opportunity, stay liquid, and reap the most profit possible in the world's hottest investment locations, all with the littlest stress possible. It's all based on a principle you probably learned in elementary school "the early bird gets the worm." Off plans are the juicy "worm" of the real estate market.

About the Author

For more in-depth assistance please visit Romania Report | Become an Expert in Investing in Romania http://www.romaniareport.com We look forward to hearing from you.

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