Advanced Investment Strategy: Developing multi-unit dwellings

As property investors build wealth and experience in property, seeking to develop property is an attractive way to accelerate returns.  This is particularly common after Australia’s latest property boom, with Australia’s Rich List featuring several property developers.

Early stage property developers usually begin by developing small.  This type of developing usually involves constructing;

• Duplex’s – usually done with project home builders and simpler to develop. The development process is often handled by builders which makes this like standard house builds.
• Townhouses/Villas – usually custom projects with specific designs tailored to individual development sites. This typically requires property investors to get involved in the process of designing, team management, etc.

Property developers usually start with smaller developments like these first and then work their way towards bigger projects over time.  The profits from these projects are used to form the capital for larger projects over time. 

Why is it attractive:

• Offers scope for large returns to equity. Usually property developers work on a 20% development premium as a minimum return on investment.  This means for a development cost of $2million, developers will be seeking to earn a $400,000 gross return before taxes.
• Access to leverage. Lenders will fund most the project cost, offering you scope to access debt to complete these projects.

Why is this unattractive:

• Capital required: This type of investing usually requires large amounts of capital, hence its usually done by advanced property investors.
• Risk: The market may turn while investing, making it difficult to sell your product. It may be worth having exit strategies in place in case this happens.  For example, turning the dwellings into rental investments may help buffer against market related risks.
• Complexity: Most development sites differ from each other and there is a myriad of things that can go wrong.  For example, neighbours from the council may object, cost overruns, etc.