Why Residential Development?
Depending on the economy and the state of the real estate market, interest by the average person in residential real estate development fluctuates. In a rising market, interest is fired by any number of television programmes, showing how easy it is to make your fortune by real estate investment, property development and house renovations. The message is usually, “Anybody can do it!”
The truth is, real estate investment is a great investment for the average person, but there are traps, and it is so easy to get caught out, and lose money. Before you get started there are some very obvious steps you should take.
These include the following:
- Always do your homework very thoroughly.
- Seek the professional advice of a trusted accountant and a reliable local real estate agent whom you know and trust.
- Don’t over commit yourself financially — prepare a simple cash budget to determine your surplus income that could be diverted to fund an investment.
- Be prepared to make your investment a long term investment. Unless you are a builder or professional developer it is unlikely that you can be very successful in the short term.
- Try to understand the cycle effect of the real estate market. There can be a right and wrong time to buy and sell real estate just like any other commodity.
- Get tax advice on any planned investment.
- Have your home and/or other property you own valued to ascertain just how much equity you have to fund your investment
Having said all of that, buying the right property at the right time and value adding to that purchase rather than selling, can result in you building personal wealth and a comfortable retirement.
The late Con Polites had a very simple philosophy that enabled him to achieve the success he did. Put simply it was, “Buy and never sell!"
Another very simple philosophy is to see your income (salary and wages from your employment) as the means by which you fund your investments. Your investments then in turn fund your luxuries.
If you have equity in your home, you must put it to work. The thousands of dollars worth of equity you have in your home is as good as money in the bank – use it! Talk to someone who can show you how.
It is not difficult to be very successful at residential property investment and development, but good advice is essential.
There are many options to consider when contemplating residential investment and/or development the most likely options are as follows:
Option 1
The purchase of a residential property, a house or a unit, that you will rent out and hold for the purpose of benefiting from the capital growth.
Advantages:
You can use the equity in your home and borrow 100% from the bank to fund the purchase, requiring a manageable amount on a monthly basis to fund the investment.
Rental income on the property increases your borrowing capacity and funds a good portion of the mortgage.
The likely shortfall in rent will mean the property is negatively geared, thus allowing for significant tax savings on your normal income.
An average growth of approximately 10% p.a. over a ten year period will mean a significant increase in your nett worth.
Option 2
The purchase of a residential property that will not only provide a rental income to offset the costs of holding the property and servicing a mortgage but, because of the very nature of the property and its location provides for some development opportunities, or value adding potential.
Advantages:
All of the above, plus the options of redevelopment and adding value by developing the site with two or three new homes.
Increase your portfolio, without the costly exercise of buying and selling.
Sell on the new homes if the market conditions allow you to make a reasonable profit.
Hold the properties for a minimum of five years and you can save significantly on GST and reap the rewards of the capital growth.
Retain the properties as part of superannuation in the longer term.
It is clear that everyone's needs will be very different depending upon age, financial position / cash flow and even personal preference.
Our booklet "Residential Property - Investment & Developement - A Helpful Checklist" has been prepared mainly for those who are considering residential property development and need some guidance as to how to go about it. You can contact our office on 08 8358 0555 for your free copy.