Investing in residential property can be a great way to earn a return on your investment, but did you know that property development can actually multiply your return?
That’s right, by developing your property you can add property value to it and potentially earn a much higher return when you sell it.
Of course, property development is not without its risks and you’ll need to do your homework before embarking on any project. But if you’re looking for a way to boost your investment return, property development could be the answer.
Problems With Buy And Hold Strategy
The buy and hold strategy in real estate has been a popular and successful investment strategy for many investors. However, there are some potential problems with this strategy that investors should be aware of.
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1. No Control Over Return On Investment
The first problem with the buy and hold strategy is that there is no control over the return on investment. With this strategy, the investor is simply buying a property and holding onto it for an extended period of time, hoping that the value of the property will appreciate over time. However, there is no guarantee that the value of the property will appreciate, and in fact, it could possibly depreciate in value if you bought the property at the peak of the market cycle.
2. Lack Of Diversification
Purchasing a property is a huge commitment and requires a considerable amount of starting capital. You are tied up in one property for the long run, which means you may miss out on any other purchasing opportunities. When an investor buys a single property and holds onto it for an extended period of time, they are putting all of their eggs in one basket , which could be a risky proposition.
3. Tenants Can Be The Biggest Risk
The income you get from renting out a property is highly dependent on the tenants. If the tenant doesn’t pay rent, damages the property, or decides to discontinue the lease, the rental income is at risk while you continue to pay for other ongoing costs such as mortgage repayments.
4. Increasing Ongoing Costs
As time goes by, ongoing costs of owing a property such as repairs, maintenance, insurance, and council rates can increase. This can eat into your profits, and make it difficult to hold onto your investment property long-term.
Why Should You Consider Property Development?
There are many reasons to become a property developer and consider property development as an investment option. Let’s go through each of them.
1. Cashflow Boost
New dwellings are generally more appealing to renters and they are more willing to accept higher rents. Also, depending on how many new dwellings are built on the subdivided block, your rental income multiplies if you decide to hold the investment as multiple dwellings are generating income for you instead of just one single rental income before the development.
2. Build Equity
If executed well, the bank valuation of a newly finished development project generally increases. Free equity is the bank valuation minus the cost of land, construction, and debt. This increase in property value can be used to secure for loans for other investments, or can be sold for a profit. You can even sell half of the portfolio for profit, and hold the other half to collect rents. The more you build equity, the more leverage you have to own more properties and build wealth.
3. Tax breaks and deductions
Property development can provide you with significant tax breaks and deductions. The costs of development, including the purchase of the land, the construction of the buildings, and the marketing of the properties, may be deductible against the investment income. Of course, it is always advisable to speak to a qualified tax accountant for more details.
4. Portfolio Diverisification
By developing multiple properties, you can diversify your investment portfolio and spread your risk. This is because the value and rental income of your investment will not be entirely dependent on the performance of just one single property.
5. Multiply Investment Return
By carefully selecting the right development opportunity and using leverage to finance the project, you can potentially make significant profits by selling each of the property.
What Are The Risks Of Property Development?
When undertaking any property development project, it is important to be aware of the potential risks involved. Below we outline some of the key risks to be aware of:
1. Project Cost Exceeds Budget
One of the biggest risks when undertaking a property development project is that the final cost can exceed the initial budget. This can happen for a number of reasons, such as unanticipated building costs, increased material costs or unexpected project fees.
2. Project Complexity
Another risk to be aware of is that the project can become more complex than initially anticipated. This can lead to delays in the project timeline and can also increase costs. Additionally, you will also need to deal with many contractors to get the project going. For this reason, SQM Architects can do your work of contracting, negotiating and pricing dealings on your behalf. You will not have to worry about the long process.
3. Property Market Cycles
It is important to be aware of the current state of the property market when undertaking a development project. If the market is in a downturn, it may be more difficult to sell the property once the development is complete.
4. Council And Planning Regulations
Before starting the property development project, you must submit an planning permit application to the local council for approval. The council will evaluate the details of the project for further process. This can be a long process, and if your proposed project does not meet the regulations, then you can face application rejection, which will cause delays.
How Do I Know If My Investment Property Can Become A Property Development?
The answer to this question depends on a number of factors, including the type of property you own and your development goals. There are a few key things to look for that may indicate that your property has potential for development.
- Check the zoning of the site. Does the zoning of the property allow for development of multiple dwelling units? This information is typically available through your local council or here.
- Is the property large enough too be subdivided and developed into multiple units?
- Research the local market conditions. Is there a high demand for rental units in the area?
- Do you have the financial resources in place to fund the project?
- Also check out 10 Things You Should Look For When Buying A Block Of Land And Building Later.
Wrapping Up
If you think your investment property has what it takes to be developed, then it’s important to seek professional advice to assess its feasibility. SQM Architects can provide you with an in-depth analysis of the property and its development potential. This will help you make an informed decision about whether to proceed with a development project.
How to gain professional insights for FREE, no strings attached
Unsure about your next building project? Get expert advice, no strings attached! Take advantage of our FREE consultation at SQM Architects. We’re here to answer your queries and bring clarity to your vision. With our transparent process and reputable track record, your project is in capable hands.
About the Author
Sammi Lian, the founder of SQM Architects, has dedicated over 15 years of her career to the architectural industry. She works diligently with property developers, builders, investors, and homeowners, using her skills and knowledge to facilitate their building design needs.
