Property Development vs Property Investment

People often look at Property Development and Property Investment as two different activities, carried out by two very different categories of people. A “property developer” gives the image of well-dressed person, driving a sports car and living in a mansion. A “property investor” paints the picture of a high income manager or business owner, buying properties to hold and to store their wealth. Most would see property development as a full time activity, while property investment as a part time activity.

The reality is that there is no clear line between them as Property Investment is using properties as an investment vehicle while Property Development is a strategy to achieve better returns with properties.

Property is an Investment Vehicle, Development is a Strategy

Most of us would agree that investment paves the way for our retirement, and hopefully helps us achieve our financial freedom before we reach the age of retirement. The main vehicles of investment are shares of publicly traded companies, properties, and private businesses. Property investment is certainly one of the most popular and proven vehicles in Australia.

Think about your own property investment journey. When you buy an investment property, what do you “do”? Some of us buy and hold it for long term capital growth. Some may buy and hold for rental income. Some renovate and sell. These are all “strategies” to achieve your property investment goal. So is Property Development.

Property development could be complimentary to your property investment journey. Let’s look at a few examples.

Goal 1: Retire Rich

Let’s say you plan to buy an investment property to hold for the long term, mainly for the purpose of capital growth. The idea is to have bought a few by the time you reach retirement, then sell part of those to pay off the rest completely so you receive rental income without having to pay mortgages. This is a great strategy to ensure you have good passive income in the later years.

Now you can achieve similar results when you add property development as one of the strategies in your investment portfolio. For example, you could buy an investment property and add an extra dwelling on the lot, so after you sell the existing house, you are left with a brand new townhouse with reduced mortgage payment, resulting in positive cashflow. Or you can develop 6 townhouses, retain 1 and sell the rest to own it completely without any mortgage. You are effectively achieving your goal a lot quicker and may very well be in your targeted position a lot sooner than retirement.

Goal 2: Sell 4 Houses to Buy a Hotel

In Monopoly, you can upgrade your rental income by building houses on your site. By the time to build the 5th house, you essentially sell the 4 houses in exchange for a hotel, with massive yield.

If the real world, you might plan to buy investment properties for capital growth for the purpose of selling them at a profit in later years, then buy into a bigger deal with much higher yield. It could be warehouses, offices, shopping centres, or even property development itself. Or some of the profit may go into funding your dream home or dream lifestyle, while the rest go back into growing your investment portfolio.

Why not go into small scale development straight away? You could start with a 2 units development, sell all the units after project completion and move onto a 3 units development. At one point you could consider investing in commercial properties with higher rental yield or part of the profit could be utilized for your personal goals.

Goal 3: Cash(flow) is King

Capital growth is great, but you may think it takes a long time to fruition and therefore you want to buy a property with positive cashflow. Brilliant thinking.

Positive cashflow and capital growth are almost mutually exclusive, and a property with both is often considered a holy grail. You are more likely to achieve good capital growth for properties in the urban area, while finding properties with positive cashflow could very well lead you to regional areas with lower potential of capital growth. If you have a few properties within the metropolitan area with good growth potential but netting negative cashflow, it is logical to consider buying in regional to balance the portfolio.

However, if you utilize property development strategy, you are very likely to achieve both positive cashflow and capital growth. Take the previous example of adding an extra dwelling on the lot and sell the existing house. You are likely to achieve positive cashflow while the brand new townhouse in metropolitan area still gives you the potential for capital growth. That is certainly very close to being the holy grail.

The Question of Capital for Property Development

You might think, “Well, the concept is marvellous, but in reality a property investor does not have the capital to execute development as a strategy.”

Property development is best utilized as a complimentary strategy for seasoned investors, instead of being the first strategy you use to start your investment journey. The reason being starting with a simple buy and hold strategy is great to learn about the process from researching for the right property through to settlement. Development would be a more advanced layer on top of the usual investment process.

If you are a seasoned investor and bought multiple properties, there may be a property or two within your portfolio that could benefit from the development strategy, either to increase its value, paying down debt after project completion or being held as a positive cashflow property. Therefore, the capital required is not as high as you may think.

Maybe the properties in your current portfolio are not suitable for development, and you are looking at your next investment property. Instead of targeting premium affluent suburbs for capital growth potential, how about buying a few suburbs away so you can execute the development strategy with similar capital level?

Property development is a very versatile strategy that could help you achieving your investment goal in a much shorter timeframe. So if you are already a seasoned property investor, consider using property development as a complimentary strategy to boost your portfolio performance.

If you find the concept of development strategy is sound but don’t know where to start, reach out to us for a Free Consultation.

Disclaimer: The information contained in this article is general information and its presentation has not taken into account any person’s circumstances, objectives, financial situation or needs. An intending investor should assess the suitability of any investment or development in property in light of his or her own needs and circumstances, which they can do themselves or by consulting an appropriately licensed financial adviser and/or taxation specialist.