When Is It The Right Time To Develop Properties?

Property investors can come in many kinds with many different strategies. Two of the more common types are those who buy and hold for as long as possible; and those who buy, flip and sell for a profit.

‘The Holder’ seeks to accumulate a certain number of properties, consolidate them over time by using interest only loans and then get to the point eventually where they can begin paying down the principal on the properties.

Usually the final stage occurs when they have been able to increase the rent enough over time that it covers all their costs, with cashflow leftover. That way, the investor has a bunch of properties paying themselves off without needing to sell any.

‘The Flipper’ will try to pick up a property for a bargain price, conduct a renovation or something else that adds more values than it costs and then sell it for a profit and move onto the next property to start all over again.

In his early days as an investor, b Invested founder Nathan Birch thought about being a flipper and earning a salary each year from buying and selling property. But the more he learned about inflation, debt, and the trajectory of property prices, he realised being a holder was a better strategy. So much so that he now holds more than 230 investment properties.

A new development

Nathan’s significant foundation portfolio now provides him opportunities that he would never have had while starting out. One of those would be to develop property. But does he want to do that? And if so, when would be the right time?

Nathan says it’s about working out whether you want to be an active investor. The key thing to remember is that if you buy a property, develop it and then sell it, you have made a bit of cash, but you no longer have a property.

If the market goes up in following years and that property is worth $2 million, but you sold it for $500,000, you may not be happy with your choice. If you keep the asset instead of selling it, your net worth will continue to increase over time.

External factors

Over time, inflation will see you earn enough in rental income and value growth, that your debt will eventually seem insignificant. And so will the money you would earn by selling a property now instead of holding.

Ten years ago, selling an apartment for $500,000 might have seemed like a great result, but if you did so it would be the last dollar it ever earned you. If you held it, it would have meant a couple of hundred thousand paid to you in rent over that time, plus an approximate doubling in value (much more in some markets).

Then there are interest rates. The competition to buy cheap debt over the past decade has meant that values have been pushed up. Meanwhile, returns on savings accounts and term deposits are just about non-existent. It makes more sense to have debt than cash and that balance doesn’t look like shifting any time soon.

So when to consider developing?

Nathan says that he would possibly consider developing when he saw value in doing so. Perhaps if he is locked out of the property market sometime in the future, or prices have climbed too high, he could look at the assets he has already bought and whether developing them could add more value.

But for now he is accumulating assets, building his net worth position and his cash flow position every week. This is a strategy that has served him very well and Nathan believes in picking a clear strategy, with achievable goals in mind and sticking to your strengths.

To watch the full podcast episode on ‘Property Development In Today’s Market’, click here.

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