One of the cardinal rules of investing in property is to manage your risk. Generally the lower the risk associated with a particular investment, the lower the return and vice versa. The key to successful investing is to maximise your returns while keeping risk at an acceptable, manageable level.
Blogger: Grant Muddle, Malyshka
The extent to which you balance these two competing imperatives will depend on your risk appetite.
Residential property development has potential high returns, and risks can be managed to limit detrimental outcomes (as an extreme bankruptcy) – competent and complete feasibility, use of professionals to forecast costs and times etc. can limit the consequence of things you cannot manage like increased interest rates.
Even though there are numerous risks involved in residential property development, the rewards you stand to gain are much higher – and this is why one becomes a property developer
A continuous cash flow can be generated from the sale of dwellings, or alternatively a developer can hold the properties for further capital growth and in the waiting time receive an income from rental. As a developer since any loan will be at cost of the project and not value, your rental should more than cover any interest – hence they should actually produce an net income for you.
In addition to the depreciation, a number of other expenditures involving property development can also be deducted as expenses. It is often possible to deduct the development expenses, property rates & taxes and the any payable interest as an expense, ultimately reducing taxable income.
Apart from the Manufactured Equity you make undertaking a development project, you can also keep the properties you develop as long term investments. The value of a property increases essentially based on demand, and in Australia property typically doubles every 7-10 years (depending where in the property cycle you have procured the property). You will be able to use your equity as leverage for bigger projects – if that is your risk appetite.
Almost all property developments are built with funds borrowed from a bank or other financial institution. This process is commonly known as leveraging. You can use either your project or equity to gain this leverage and develop the property.
About Grant Muddle
Grant Muddle is the Managing Director of Malyshka Pty Ltd, a property development group with a twist. Educating investors into the ways of building financial success via property development, and acquiring properties at near developer cost, giving them instant "profit" (via equity).
Grant has a Bachelor of Accounting and an MBA in Strategic Management and brings with him development experience from Australia, India and the United Arab Emirates as well as a passion to help investors make the transition from investor to developer with ease.