Property Investment Or Property Development?

[megsaletta]

Investment Property Or Property Development?

I would like some advise, am I better off buying a investment property or buying land and build a house and sell for profit? Thanks, Jason.

 

[Perp]

There is no one answer to this question - it depends entirely on your circumstances and goals.

If you're looking to build a portfolio, then whether you build or buy existing stock, I wouldn't sell. I'd always refinance once it goes up in value, and pull out existing equity for more investing, rather than sell.

Whether you build or not depends on whether the market value of the built home is greater than what it cost you for land + build (ie whether you instantly create equity by building), and I believe this is pretty difficult these days. A few percent is possible, yes, but I'd prefer to go for the most capital growth that I can - which tends to be in established areas - and pick up the extra few percent this way, than through the hassle of building.

Many people lost sight of the difference between:

* property investing - which is (relatively) passive, where wealth comes from rental income and capital growth and

* being in a property-based business, which is active, and wealth comes from your own work, eg property developing, wraps, flips (renovate to add value then sell), etc.

Neither is right or wrong, but the money stops as soon as you stop operating a property-based business, whereas the money keeps coming from investments. Of course, you can do active strategies to generate money that you use as deposits on investments, but I'd always make sure that there's some residual benefit AFTER the work is done.

 

[BayView]

They are both investment properties, but there are two different strategies involved.

The IP that you hold is like the farmer that buys a few cows, breeds off them and keeps them all, using the whole herd for milk. The milk is sold to create the income; a bit like rent. The idea is to increase the herd to increase the milk output and the cashlfow.

The IP that you develop and sell is like the farmer who buys the cows, fattens them up and sells them at the market for slaughter or whatever. He is a trader and needs to continue to keep bying and selling to creat the cashflow.

Some farmers do both.

Both strategies can work, but the buy and sell one is more short term, and is a lot more reliant on the timing of the market, the purchase price, the sale price; there's a bit more juggling required.

My concern with the buy and sell strategy is a lot of people use the cashflow from the sales to live off, which is fine, but they don't necessarily accumulate a lot of wealth as they constantly offload the asset and spend the profits.

I believe you need to have a plan to re-invest some of the profits into some long term assets as well to create more wealth if you are going to be a trader.

 

[Francesca C]

Hi Megsaletta

When you say developing by building a house, do you mean a single house or a blocks of villas/townhouses?

I have a property portfolio of long term buy and holds, I buy these property and will never sell. I buy near water for this strategy or at least 10kms from a city.

I also use a developing strategy, I buy large corner lots, knock down the house and split into 3 or more lots of land.. or I renovate the front house and sell off the back block.

I do not like to deal with building for a number of reasons 1. it takes longer 2. it increases your risk.. and here in Perth at the moment it actually costs alot more to buy land and build than to buy an established property. So not all strategies work in every market.

If you want to develop, you have to listen to your market, and what they want.. not what you think may work.

I believe if you want to be a successful property investor you need to utilise the long term buy and hold strategy and incorporate developments of same nature.

 

[Mry]

I would start with a few buy and holds before jumping into developing. I know a few people doing the development thing and it is quite time consuming, fraught with problems and you have to fund the entire development with no cash flow coming in from the project until a tenant walks through the door or through an eventual sale.

Some people do developments to create a cash flow positive rentals or to make a quick buck, but in my experience the people who buy and hold tend to be wealthier and more stable in their financial position.

 

[Kennethkohsg]

'

Many people lost sight of the difference between:

* property investing - which is (relatively) passive, where wealth comes from rental income and capital growth and

* being in a property-based business, which is active, and wealth comes from your own work, eg property developing, wraps, flips (renovate to add value then sell), etc.

Neither is right or wrong, but the money stops as soon as you stop operating a property-based business, whereas the money keeps coming from investments. Of course, you can do active strategies to generate money that you use as deposits on investments, but I'd always make sure that there's some residual benefit AFTER the work is done.

*********************************
Dear Ozperp,

1. In terms of Robert Kiyosaki's definitions, when all the required systems are built-in into a property-based "business", money should continue to follow in even though the business owner is away overseas holidaying for extended period. It would actually be the employees running the business on behalf of the business owner. What the business owner contributed would be his capital for the business and his expertise to build up the property business system, rather than using his time in running the business himself, as essentially the business owner would be using his business system to leverage and work through the employees.

2. If the business owner is required to be always around at the place of business to make things happen there, then technically speaking, we are talking about "self-employment" and not a real business in operation, as has been defined by Robert Kiyosaki.

Cheers,
Kenneth KOH

 

[Kennethkohsg]

Hi Megsaletta

I do not like to deal with building for a number of reasons 1. it takes longer 2. it increases your risk.. and here in Perth at the moment it actually costs alot more to buy land and build than to buy an established property. So not all strategies work in every market.

If you want to develop, you have to listen to your market, and what they want.. not what you think may work.

***************************
Fully agreed.

Cheers,
Kenneth KOH

 

[Xenia]

Development is higher return and higher risk. What is your risk profile? Can you afford to hold a development site for up to a year with no rent? This needs to be worked out before you can answer the question.

 

[sparky23]

You can make a lot of money from low risk developing by going with house and land packages using a reputable builder and selecting the right area. Choose the right package and you put in small amounts along the way (settle the land, then progress payments on the build) which keeps the holding costs down. My Shoalwater houses came out in front by $170,000 each in the space of a year. Cost for house and land - $330,000 each, end value - $500,000 each. Despite WA being over the boom according to API Shoalwater has gone up another 17% in the 12 months to September. There are other plans aned ways of doing things some of which can be as little as $5,000 deposit until completion 6-12 months later.

Point being it can be done.