Often considered the sexier side of property investment, developing property is becoming increasingly popular, especially amongst experienced investors. Property development can complement a longer-term capital growth play of buying and holding property, offering manufactured capital, equity, and the potential for strong returns across a much shorter time period.
So, for those investors who are wanting to advance their portfolio and are looking towards development as an avenue to achieve this, what are their options?
Land subdivision and small-scale development
When most property investors first consider development strategies, they’re usually referring to land subdivision and small-scale residential developments (like duplexes and triplexes).
The concept of subdivision is simple – you divide one big block into two or more smaller blocks. A common strategy here amongst property investors is to purchase older, established homes on larger blocks. These properties will often have subdivision and development potential, and investors have the option to benefit from growth and rental returns in the short term, before looking to subdivide and develop later in their investment journey.
Successful subdivision, regardless of whether you plan to develop or sell the new blocks, comes down to careful planning and consideration before you make the initial purchase. Before purchasing a property or block with the goal of subdividing, it is important to undertake due diligence and feasibility. Most buyers will start with the zoning/R-Code of the property, which is an important consideration, as this will determine the land size needed for each of the new lots. Owners should also investigate council building requirements to make sure that potential buyers can build a market-fit home on the proposed lot (or else risk being unable to sell the land once subdivided). In addition, it’s crucial to conduct due diligence to rule out any significant issues with soil or earthworks and undertake substantial research to confirm that there is an established market for small lot land sales in the area.
If your block of land has the appropriate zoning (or you purchase one that does), then a duplex or triplex development can be another avenue to increase your equity and provide a source of income, whilst also offering tax benefits. There are a number of options when developing small-scale residential properties. Owners can choose to sell off all properties and realise an immediate return on investment, live in one of the properties while renting out the other(s) or rent out all the properties to help bolster their income stream.
As with any investment, there are certain risks with small-scale developments. The upfront outlay of capital is substantial, and investors need to have a clear understanding of their end goal, as well as the feasibility of the project at hand. Small-scale development is best suited to people who want to hold onto part of their investment, as short-term profits are less consistent and reliable. Another catch that investors need to be aware of is the impact that development finance will have on their ability to qualify for other loans. Often, having development finance underway will impact your ability to apply for another home loan (e.g. to buy a house), so it is important to consider your investment goals before setting up development finance.
While the Australian dream has popularised standalone houses on larger blocks, demand for apartments has increased in recent years as buyers recognise the location and lifestyle benefits that they offer. As councils change their zoning and planning schemes to reflect this need for inner-city living, opportunity exists for investors to develop apartments that satisfy the demand from buyers.
While apartment developments can present lucrative opportunities for investors, the initial upfront costs and capital outlay required to complete a development of this type makes them unattainable for most investors on an individual basis, with high-quality boutique apartment developments typically costing anywhere from $2 million to $15 million to complete For those investors who can undertake an apartment development, investing significant capital into one development project can also increase their risk exposure.
For those wanting to benefit from the potential profitability of apartment developments, pooled investments through residential funds are becoming an increasingly popular method.
Residential funds allow investors the opportunity to gain exposure to these larger and potentially higher-quality projects without the capital outlay and risk that is associated with individually undertaking an apartment development.
Due to the lower capital outlay involved in these pooled investments, residential funds also allow investors the opportunity to diversify their portfolio and spread their capital across different projects and locations, resulting in a more balanced portfolio whilst mitigating the risk exposure that comes with investing significant funds into a single project.
Finally, residential funds are managed by a team of professionals who can utilise their expertise to secure the best results for the project. They can coordinate the entire project from feasibility through to completion and sale, ensuring the end-product is targeted to the right market. For individual investors wanting to undertake a development, the process can be extremely time consuming and difficult to manage, which is why residential funds can be a preferred option.
Choosing to develop property can be a great strategy for experienced investors who are looking to further grow their wealth through a more aggressive equity-building strategy. Fortunately for investors, there are several avenues that you can explore, allowing you to tailor a strategy to your unique goals and appetite for risk.
As with any investment, development does carry a degree of risk, and it is important to speak to a financial advisor to find an option that aligns with your long-term goals and strategy.
If you would like to find out more about Momentum Wealth’s latest residential fund opportunities, or to discuss a property development strategy in more detail, contact us for an obligation-free consultation.