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There are many ways to hold a property development asset depending on your objectives and risk appetite as an investor. Here's how to hold them.
As a project manager, White Gorilla Developments’ Neal Ashworth usually assists his clients throughout the entire development process—from feasibility study to building. Most of his clients hold their properties by themselves through a trust fund while some team up with other investors and sign as proprietors.
Smart Property Investment’s Phil Tarrant explained: “One investor [can own] a whole block and [take] the whole thing [by himself] … into a trust structure, [while some] might get … three, four, five investors to [pull] up and [come] together.”
Holding development assets through a proprietary company (PTY) involves the same process as opting for a trust fund.
According to Neal: “They'll structure it on however they [want to] invest on their side of things … Everyone will just tip money into the pool—a trust fund or a new PTY … It's written up with dividends [and] with what they own.”
“They own the percentage share [of] that business or the unit share trust ... and that becomes a trade in entity … Then, [they] purchase a loan in the entity and it all goes through [the same process].
“I manage it on their behalf, [and] report back to the investors … The bookkeeper reports back when it's sold and it's written contractually,” the property professional added.
As part of the structure, there will be a written agreement among all investors involved regarding exit strategies.
“[If] something happens and [an investor] wants to pull it out, they draw a line in the sand and value that where it's at … value that PTY. Give them all the money back on paper as soon as the buyback ends. There's all exit strategies within that structure as it’s written,” Neal said.
Aside from exit strategies, you must also consider stamp duty and tax consequences when choosing a way to hold your assets, especially if you want to band together with other investors.
Many property investors are often attracted to the glamour of being a property developer, but before you actually implement the strategy, remember that there are a lot of moving parts to consider and manage once you’re in the game.
The markets change all the time, and their unpredictability poses the biggest danger for investors. However, once you do a full cycle, there will always be an exit strategy for you.
According to Neal: “You … [always have] the land … [You] got that asset … Then, you can do plans and permits.”
“If something changes, you can sell the land with plans and permits. [If you have already built on it] … you [can] keep them, [lease them], or you can sell them,” he added.
In order to make sure that you’re managing your assets well and you're making the right decisions, consistently educate yourself and make it a point to maintain good communication with your team. While there’s no one formula for success in property development, passion and dedication bring investors a long way.
“They've got to have the appetite for it and know what it's all about … [It doesn’t always have to be] the big miracle high-rise stuff … Just what they're geared for and what their risk appetite is for,” Neal concluded.
Tune in to Neal Ashworth’s episode on The Smart Property Investment Show to know more about the step-by-step process of getting the best chance of maximising cash flow and how to excel in the property development industry.