B Invested

Property development vs building a property portfolio

There was news out last week that a piece of timber was up for auction for $400,000 according to The Sydney Morning Herald. The splinter in question was from the keel of Captain Cook’s famous ship, The Endeavour. Yes, the one that sailed by Australia on a circumnavigation of the globe between 1768 and 1770.

Now, why would you pay $400,000 for a piece of wood? Well, this piece is thought to be one of just two pieces of the ship in private hands. That, and it’s inscribed by Sir Joseph Banks’s sister, Sarah Sophia Banks.

So, it’s rare. And supply and demand is what drives upwards the price of any kind of worthwhile investment.

What’s that got to do with property?

Well, timber just happens to be outrageously expensive all over Australia at the moment. So much so, that some would-be builders or developers would not find the price of a piece of The Endeavour so far-fetched.

And why is that? It’s in super short supply. And the demand for it is like never before, along with various other building materials. And there are several reasons for this.

Housebound or short of a house?

  1. First of all, the amount of time Aussies have spent at home during more than a year of being locked down at various stages has made us care more about the space we live in. If we’re not allowed to leave, we’re going to want to improve our surroundings. That requires home renovations.
  2. Government stimulus designed to keep us all afloat as the economy deals with the pandemic fallout has been aimed at enticing the building of new homes for first home buyers. As a result, the popular Home Builder grant for new home builds saw 121,000 applications across Australia.
  3. This past summer was one of our wettest seasons ever, but the year before saw dreadful bushfires in various locations. The effect was devastating for a number of reasons and one of those was damage to the timber supply.

What does that all mean?

The consequences of this are that tradies are in short supply, materials are rare as hen’s teeth and those wanting to build or renovate face rising costs and lengthy delays. And there is no end in sight, with these conditions predicted to last for at least the next six months, as demand gathers towards a peak late in this calendar year.

The other thing to bear in mind is that if you are thinking of engaging a small builder, they are unlikely to be able to get your work done in an acceptable timeframe, or within the budget you had in mind. And with the rising costs and delays on projects, they may even be struggling to stay in business.

So do you build a house, or build a property portfolio?

It’s a well-known fact to b Invested clients that founder Nathan Birch started out buying affordable properties on city fringes and performing superficial renovations to add value and be able to withdraw equity for further investments.

With the current situation for timber and steel, it may be more difficult to follow the renovation part of his strategy.

A renovation today may not even add enough value to a property to cover the money you spent and the time you waited.

But the more important part of his strategy, building a property portfolio with the help of equity and positive cashflow, is still achievable.

Investing in properties for below market value and getting them tenanted ASAP with positive cashflow, should see you make good money this year in a rising property market and then long term over multiple property market cycles, with a hold strategy.

And the best part about that is that you’re not relying on external factors that you can’t control; such as unavailable tradies or delays and price spikes on materials.