Property market update: Melbourne, July 2022
Melbourne continued its downward spiral in July, as the property values in the city recorded deeper declines during the ...
Investors who have succeeded in the buy-and-hold strategy often look into property development as the next step in their property investment journey, but how do they know if this wealth-creation strategy will work for them?
White Gorilla Developments’ Neal Ashworth said that one of the very first requirements in property development is a good serviceability.
“As long as you got the serviceability to take on another loan, finance, or you have the cash to support it, you may do property development,” he said.
Investors are advised to have at least a principal place of residence or around two to four investment properties that they can use to refinance or pull money from.
According to Mr Ashworth: “My clients often got a portfolio up to a certain level… All the rent returns and percentages of growth, they just want to step it up to the next level.”
“They can use that equity, they can use what they’ve already got and see how much this next model will bring them in return. They can add extra properties to their portfolio.”
Before diving into this sophisticated strategy, investors are advised to take the time to discuss their current financial situation with their accountants and advisers in order to determine whether property development could actually aid their wealth-creation journey.
For people new to property investment, Mr Ashworth suggests getting familiar with the process of buying existing assets before dipping their toes into property development.
Apart from financial capacity and serviceability, aspiring developers also have to consider whether they have the time and the right connections to dive into a new strategy.
Do thorough research and seek the assistance of property professionals who have already paved the way to success for other developers, Mr Ashworth advised.
“Go see a financial planning adviser just to know where you’re at with all the stuff that’s going on. Find out how you’re going to refinance, where you’re going to get money from, [your ideal] timeline... Get all that advice ready so your stall is set.”
Finally, do a “stress test” on the initial investments for property development. Find out just how much upside benefit can the assets provide.
If the investor’s current financial situation allows for building three to four townhouses on a 1,000-square metre block, they would need approximately 22 per cent upside benefit to make sure that the development is worth the while.
According to Mr Ashworth: “About 22 per cent and above… That example is a million-dollar lend, million-dollar build. So, 3.2 per cent sales – something like that is what to look for.”
“You could do that percentage. You stress test it and do the percentage up and down. See what can be.”
While it’s not possible to control market movements, interest rates, and other growth drivers, investors are encouraged to take advantage of their ability to control the “contractual side of things” as well as the path to their end goal.
“What you can’t control is that timeline from the council, but to help with that… you just keep with those controls. Everything outside that is just normal commercial negotiations,” Mr Ashworth concluded.
Property refers to either a tangible or intangible item that an individual or business has legal rights or ownership of, such as houses, cars, stocks or bond certificates.