We all know that income producing real estate is a proven, long-term, tax effective strategy for building wealth. But for some it is just too slow. These days many investors are looking for an edge to cut them apart from the pack and dramatically shorten their journey to financial freedom.
When it comes to maximising the financial return from property nothing comes close to the pinnacle of all property strategies – property development. But is property development for everyone. Time, energy, passion and knowledge are essential, as is the time to roll out a project.
However, the good news is that there are two paths to property development riches. The active way is to be a developer. The passive way is to invest in a development which is run by an experienced developer and share in the development profit or loan funds to the development entity for an interest return.
Examples of the first form of “armchair developing” would include investing in a property syndicate with multiple other investors using a trust or company as the investing vehicle. Depending on the intention of the syndicate, investors could expect a cash return (profit share) on sale of the product or in some cases would hold the finished property as a long-term investment having acquired it at developer’s cost price.
On smaller projects the sole investor might enter into a form of joint venture with the developer by supplying the required equity to obtain project finance. The investor might also be on title and the loan and would typically be rewarded by way of profit share.
Both above examples have the investor being part of the project. Typically, they would be on title, on the loan and therefore share in the profit and risk of the project.
Another way investors can invest in development projects is by loaning the development entity capital for an interest return. The investor is not on title, not on the development loan and doesn’t share in the profit and risk. They are more like a bank – lending money for an interest return and taking security typically in the form of a mortgage.
When the total development costs are raised a first mortgage is offered. When equity is raised to facilitate lending from a financial institution a second mortgage is offered, obviously at a higher interest rate than for first mortgage.
Important matters to consider when investing in development projects include the experience and reputation of the developer and in the case of capital raising for it to be compliant under ASIC guidelines and promoted through the correct Australian Financial Services Licence holder.
I personally hold a representative licence for Managed Investment Schemes under a full AFSL holder. Having developed many syndicates in the past, these days I develop projects with single investors and raise capital for specific projects. Soon I will be raising funds in $100,000 units on a first mortgage to complete the development of a retirement village on land I have subdivided from a Greg Norman designed golf course.
Bob Andersen is a developer with over 30 years’ experience who is the founder and managing director of Positive Property Strategies Pty Ltd.