What if property prices are going up faster than you can gather? Now this will tell you when you should invest.

Inv.

Good point...it's already like that!

So what would you do?

I received an email from a friend with the follow question.

I want to invest and have a couple of options…

1. Invest in off plan property called XXXX. I would take financing from the bank, buying at low 1000dhs/sqft. Keep it for 6 months to year (maybe longer if the appreciation is good) and then sell it for capital gain

2. 2. Invest in already finished property - finance it and rent it. Based on that I would then use that property, for getting bigger loans easier (use property as guarantee, and then do the step No.1)

Before I answer the question, ask yourself what you would do? And just as important why?

So what is the answer to the question? Well I am sorry to report that there is no correct answer. That is to say what might suit one person might not suit another. As I have said in the past, many factors come into play and these need to be considered. But let’s have a look how the figures stack up.

Off plan.
“Flipping property has undeniably given huge returns for those investors who got in early. The question is will it now? The underlying factor is supply and demand. Diminish the demand and prices will fall, that is not yet the case here, but in the future it will be, so buying off plan is no longer a question of taking the first thing that comes along and then selling it again several months down the road for a handsome profit, it can still be done but those days are numbered.

The Scenario,

Picture this scenario. A developer launches a new project. This development has 5 buildings (A,B,C,D and E) of G+10. Each floor has 6 apartments, three facing south and three facing north. (A total of 60 apartments per building) Building A has a lake view in front, building B and C have a G+5 in front of them and buildings D and E have a full building in front of them. A G+10 is also at the back of each building.

You decide to buy one of the apartments off plan (For arguments sake the prices are the same, only building A is 5% higher because of the view) As building A was more expensive you decide to buy in building D.

Several months later you want to sell, as I said in the past it probably wouldn’t have been a problem, but now the market has mushroomed further with the launch of many more developments. This is the moment when those speculating will start to feel the pinch. Of the 300 apartments (D and E) have no view, that’s 120 apartments. In B and C only apartments from floor 6 to 10 in the front have a view (30 total), meaning 90 again have no view. In build A those on the front have a view (30) whilst those at the rear have no view, again 30. So in total only 60 apartments have a view of which 30 have the lake view. Which means only 10% have the lake view. In a secondary market that becomes more competitive and buyers more discerning, it is vital to have the edge when it comes to selling.

Back to the numbers.

Question 1.
Invest in off plan property called XXXX. I would take financing from the bank, buying at low 1000dhs/sqft. Keep it for 6 months to year (maybe longer if the appreciation is good) and then sell it for capital gain


Again for arguments sake let’s use the following:

You have Dhs 300,000 to invest and the apartment cost 850,000. The property is off plan and the payment terms are 15% down (127,500) and then 10% every 3 months 5 payments and the balance of 35% on completion.
So you make the second and third payments of Dhs 85,000 each. You have paid a total of 297,500 not including any administrative costs. (Doesn’t leave you much in the bank either) You have now owned the property for 6 months. During the year prices have risen 40% meaning you property is now worth Dhs1,020,000.(20% for the six months) If you sell before the next payment you would have made Dhs 170,000 profit (or 20%) Not bad. That’s if the market is showing growth and assuming you can sell, refer to the scenario above.
However if you are taking finance from the bank then you must factor in the interest payments and this will considerably diminish any returns, that’s assuming you can get the loan in the first place..

Question 2.
Invest in already finished property - finance it and rent it. Based on that I would then use that property, for getting bigger loans easier (use property as guarantee, and then do the step No.1)
You have Dhs 300,000 to invest and the apartment cost 1,200,000. This time the property is completed. That’s why the purchase price is higher, all a question of supply and demand remember.
You take the mortgage of 900,000 for 25 years at a rate of 7.5% then the repayments would be approximately Dhs 80,000 per year. In five years you would have repaid about Dhs 72,925 from the principle of your mortgage. With the rising costs of inflation it is good to hold the asset as it will also appreciate, holding money in the bank could result in the opposite. If bank rates are 5% and interest is rising 12% then you are effectively losing 7% per annum.
If the property appreciates at only 12% per annum compounded, then the property would be worth in the region of 1,630,000 in five years.
Renting the property at current market rates would generate in the region of Dhs 100,000 per annum. This would at least cover the mortgage payments with current market conditions. However it is widely expected that interest rates will drop further, this will result in lower repayments. A 1% drop for example will mean repayments reduced from Dhs 80,000 to Dhs 73,000 per annum.. This will help should the rental rates begin to decline (expected from 2010 in my opinion)

This is the longer term and more passive approach to property investment. What may suit one individual may not suit another so it’s all about calculated risk…but I hope this helps.

Good analysis!!!
thx

Another factor of buying off plan properties is the "Completion time"!. The longer the dealy, the more that you lose money in real terms, and all the other opportunities costs.

With the raising costs of construction, e.g. Structural Steel raise 80% from last year, and cement raise by 40%. The cost of the building is going up in Dubai, and the developer will lower the qualities of the finishes to maintain their profit margin.

The more complex u make it it will be harder than rocket science
My simple formula for success
PROFIT=SALE-COST
buy low cost - buy good stuff and sell ASAP LIMIT YOUR GREED I iwould say and see how u make money .

__________________
TRUTH is the only "property" I have

The formula is good...and yes simple. So why can't everyone make it work?. Probably the greed, but understanding the basics certainly helps.

A good formula for the modified internal rate of return would be
V = -R (1+i) ^n - [R (1+i) {(1+i) ^n - 1}/ i]
Where "V" stands for expected future value of the investment, "R" stands for present value of the investment, "n" stands for the time period the investment is to be made, and "i" stands for rate of interest for the designated period "n", "^" denotes exponential figure.

But knowing that Cash In - Cash out would probably do aslo