Okay, let’s get an understanding of why you should learn property development? Why as an investor you should now look at becoming a property developer and learning property development. So let’s look at a few things. The number one reason is profit. When you develop your own project, you end up with townhouses or apartments at cost and I’ll explain that to you in an example a little bit later, which you can either sell in the market for instant cash profit or you can decide to keep the profit in your property or you can have a mix of both. So the number one reason nonetheless is profit. That’s why we do everything. That’s why we do business and property development is no different than a business. Every little deal is actually a business venture.
Deposit – you can use your profit or your equity as a deposit for your next investment property or your next deal because you’ve generated all this equity in your project and your holding it down so without actually even selling it you can use that extra equity as a deposit for your next venture or your next investment property.
Capital gain, the moment you develop there is instant capital gain. As you know, because you actually got it lower than the market there is instant capital gain when you do develop your own property.
Rental yield, your total cost of the development for your unit will always be less than the market value, which gives you higher rental yield. Now there could be somebody else who bought the house right next to yours and they paid full retail, let’s say $700,000, but you on the other hand only paid 550,000. So the rental yield is exactly the same because he’s got a 4 bedroom house and maybe you’ve got a 4 bedroom house and you both can rent it out and you get the exact same rent, however, because you’ve got it at a lower rate, your rental yield is always going to be higher than anybody else’s.
There’s also some tax benefits. If you develop and hold your properties, you can claim substantial depreciation. You can avoid capital gains tax if you are holding them for long term and if you hold them for 5 years, you don’t even have to pay GST on them. So, there are different tax benefits available.
Higher return on capital, well because you leveraged off the existing equity in your property, the upfront payment is far less than the return. Therefore, your return on new capital invested can be in the range of 80% to 100% and I will show you an example very soon.
Portfolio explosion – When you acquire properties at cost you acquire a lot more properties in a shorter amount of time. That gives your portfolio an instant boost.
Greater savings if you are following a develop and hold strategy, you can avoid agent’s commissions, marketing costs, GST and all of which will add to your bottom line. This applies when you are actually holding them so there are no other extra costs associated with it.
Acquiring property at cost
Let me give you an example. So if you were an investor and you would have bought each unit at an average value of $700,000 or $651,000 for example, if you were to buy ah this as an investor and you would have paid full $700,000 for it, but as a developer because you got in the deal from the very beginning and you made everything happen, you get to keep your developer product with an average profit of almost $173,000.
Would you consider this a good discount for your next investment deal?
So these are the main benefits when property developing and each one of these, the rental yield, the capital gain and the deposit, they all help you really exponentially grow your property for portfolio.