Don't set and forget, do the numbers
The old ‘set and forget’ method of building an investment portfolio by paying retail price, suffering years and years of negative gearing pain watching cash flow out the door, waiting for the market to rise over time just so you can repeat the exercise again later is gone forever.
Blogger: Grant Muddle, Malyshka
Astute investors know that in the current low growth environment you have to build your equity in upfront by acquiring properties at cost price – not by paying retail! To do this you need to be involved in property development.
A major advantage of developing and holding an investment property, instead of buying a new, comparable ‘already developed‘ investment property, is that the procurement of the investment is at cost, rather than at its retail cost, assuming that the costs to develop both kinds of investments are the same except that the purchase price of the ‘already developed’ investment also contains a developer’s profit.
| Property Developer | Retail Investor | ||||
| Market Value | $575,000.00 | $575,000.00 | |||
| Less Development Profit | $109,964.00 | ||||
| Purchase Price | $465,036.00 | $575,000.00 | |||
| + Stamp Duty | $18,900.00 | ||||
| + Legals (Purchase) | $3,500.00 | ||||
| Total Cost of Property | $465,036.00 | $597,400.00 | |||
| Less Deposit | $150,000.00 | $150,000.00 | |||
| Implied Loan | $315,036.00 | $447,400.00 | |||
| LVR | 55% | 78% | |||
| IO Mortgage at 6.5% pa | $20,477.34 | $29,081.00 | |||
| Rental at $575 per week | $29,900.00 | $29,900.00 | |||
| Annual Net Cash Flow* | $9,422.66 | $819.00 | |||
| Profit via Equity | $109,964.00 | -$22,400.00 | |||
| Owned Equity | $259,964.00 | $127,600.00 | |||
| * Excludes insurances, rates etc. but also excludes tax allowances for Depreciation | |||||
Other advantages of ‘developing and holding’ an investment property (over buying a new, comparable investment property) are that it is likely that:
(1) the initial yield of the investment is likely to be higher - because your buying cost is much less (see annual cash flow above);
(2) obtaining external finance for further investments will be easier from a “loan to value” perspective (55% compared to 78% above); and
(3) in Australia, stamp duty on transfer is payable on the value or purchase price of the ‘already developed’ property (when it is transferred) but only on the value/purchase price of the property at the time of purchase, i.e. before the value of the new improvements are considered, in a develop-and-hold scenario.
With respect to developing for profit, ‘developing and holding’ is more likely to enable one to maximise the sale price of the property that is developed, i.e. one can sell more readily when there is peak demand for an income-producing property if one is prepared to hold the property for an extended period, and why wouldn’t you when it is cash flow positive?
Why would you want to buy ‘off-the-plan’ or pay retail prices?
About Grant Muddle
Grant Muddle is the Managing Director of Malyshka Pty Ltd, a property development group with a twist. Educating investors into the ways of building financial success via property development, and acquiring properties at near developer cost, giving them instant "profit" (via equity).
Grant has a Bachelor of Accounting and an MBA in Strategic Management and brings with him development experience from Australia, India and the United Arab Emirates as well as a passion to help investors make the transition from investor to developer with ease.