The Next Step for Property Investors: Property Development
Many Australians are taking advantage of the current interest rates cuts to give their investment portfolios a boost. And it’s a reasonable strategy (but I have cautioned against being hasty and committing to fixed interest rate loans).
The question is: what should you be investing in? Well, since you’re reading this on a website that dubs itself ‘the property investor’s choice’, I feel pretty confident in guessing that your first thought was probably to get an investment property.
Which is a great strategy – the markets in Melbourne and Sydney (the worst affected by the downturn beginning 2017) have shown clear signs of recovery over the last four months, so now would be an excellent time to get in.
We all know the benefits of property investment. I’m preaching to the choir, here.
But what if there was a better way to leverage the benefits of Australian property to achieve a higher return, faster?
The answer is property development. Whereas the returns of property peak at just under 8% per annum (Sydney dwelling prices in the ten years leading up to January 2018), property development can achieve returns surpassing 15% per annum.
Of course, property development is less of a passive investment and more of a full-time job. Which is where something called ‘property development syndication’ comes into play. You provide a property developer with your investment capital and they do all the work for you, giving you your share of the profit at the end.
You might be thinking that it sounds too good to be true, but it’s the real deal. This is an investment strategy that’s outlined in Regulatory Guide 77: Property Trusts and Property Syndicates (RG 77) issued by the Australian Securities and Investment Commission in 1994. RG 77 outlines several legal structures which can be utilised to collectively invest in property, including property developments.
The reason why property development is more profitable than just buying-and-holding is that the developer is able to directly adjust the value of the asset themselves rather than being entirely dependent on market forces to make a profit. If you start with a single detached home and develop it into six townhouses, you have fundamentally changed the asset. You have changed one thing into another thing, and the new thing’s value is separate from the old thing’s value. This is the basic idea behind property development.
The turnaround of property development is faster, too. You may have to hold onto an investment property for 5 to 10 years before its feasible to sell it again. Whereas most property development projects are complete in 2 to 3 years.
There’s more to investing than just chasing the highest return, of course. Investors need to consider their own objectives, their financial position, and what risks they are willing to accept.
But if the current lending conditions have you thinking about buying another investment property, maybe it’s worth considering diversifying your investment portfolio to include a property development project.
Food for thought.
If you are interested in this type of investment, then please don’t hesitate to contact us.
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The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.