Why you need to develop instead of buying established

Is there anything more risky than investing in property? YES!!! Investing in established property when you should be developing property to invest.

Gone are the days where it was a lot easier to pick the hot areas in the market to buy established property and wait patiently for ‘time’ to grow your equity. In the current market, you now have a choice to develop predictable equity upon completion of a development. How is this possible? It’s a new concept by Zegna for the property development market, I call it being a ‘Micro Developer’.

The Micro Developer Model is the future.

It’s for anyone who wants to grow their wealth through property development whether they are seasoned or first-time investors, 1st homebuyers, retirees, down-sizers… the list is endless. This model  generates instant equity on completion of a project. By making a decision to ‘build to develop’ (Micro Developer) rather than buy established or buy off the plan, you are able to grow your wealth and achieve your goals in a shorter period of time.

An example scenario.

Here’s a story about Joe, Joe has a $500k budget, $100k in savings and pre-approval for $400k. Joe likes the city life, he wants to live in the Perth metro area so he’s decided to look at apartments rather than live on the outskirts and commute in for work. Joe also has a life partner, Elle. Joe and Elle want to start having a family in a few years so they are looking to make a smart decision NOW that will help them generate equity for their future family home. The apartment choices they are considering are to buy established, buy off the plan or build to develop.

Here is a brief summary of the pros and cons that Joe and Elle are considering within their preference of investing in a small, multi-apartment block.

Option 1. Buy Established

PROS

  • Move in straight away
  • Choose specifically the area that you want to live

CONS

  • Wait 5+ years to generate substantial equity (subject to the market)
  • Unable to access your $100k deposit until you sell
  • Risk of building or apartment maintenance issues
  • Subject to one off strata levy fees that are not within your control
  • $400k mortgage, purchase price $500k
  • Approximately $18,000 stamp duty (if you are not a 1st homebuyer)

Option 2. Buy Off The Plan

PROS

  • Brand new, no maintenance issues
  • You may be able to purchase for a lower, negotiated price due to incentives in place that help move the project forward to build phase

CONS

  • Takes a long time to generate $100k in equity (you are buying the developer’s profit)
  • Unable to access your $100k deposit until you sell
  • A chance the project might not go ahead if pre-sales are not met in time, this wastes time that you could be generating equity
  • No direct relationship or contact with the builder to ensure the apartment meets the quality or customised finish of your specification (contact with sales agent only)
  • $400k mortgage, purchase price $500k
  • Approximately $18,000 stamp duty (if you are not a 1st homebuyer)
  • You need to wait to move in, no guarantee on when the project will start, dependant on many variables
  • Your name is not on the title until you take possession in approximately 18 months

Option 3. Build to Develop (Micro Developer)

PROS

  • Potential to make instant equity (on completion of the project)
  • Brand new, no maintenance issues
  • You are on the title from the onset as a developer, upon completion your $100k deposit belongs to you and not the bank
  • Option to sell for profit upon completion or retain as an investment
  • Direct relationship with the builder/developer to ensure all finishes are to your specifications and to maximise equity on the end result
  • Flexibility on specifications to customise your apartment to your requirements
  • The final cost is $400k instead of $500k as you have generated approximately $100k in equity
  • If you are a couple, you could develop 2 or more apartments and pool your generated equity into a bigger property
  • If it is your sole place of residence, there is no tax on the equity (profit) which you have made the minute you move in
  • No stamp duty on the full end value, you are only paying stamp duty on your portion of the land i.e on a 9 unit development, approximately $4,000

CONS

  • Approximately 18 months turn around time to take possession
  • Less flexibility in choice of location
  • You will need $100k deposit for the land portion (varies depending on the area)

In summary, consider what is most important to you. Is it that you want to live in a certain area? Or to move in now? Or is your priority to generate equity? Or buy and hold, keeping the equity as an asset?

Joe and Elle’s goal of generating predictable equity FAST for their family home led them to deciding to invest in the ‘Build to Develop’ Micro Developer Model. Elle also had $100k in savings and a $400k pre-approval so they each decided to become Micro Developers, which will generate them approximately $100k in profit each, a total of $200k that they can use to achieve their goal. Ask yourself, would they have generated the same amount of equity had they chosen to buy established or buy off the plan?

Our first Micro Developer project is at capacity, if you’d like to have a chat about our next project coming soon and how you can start your journey as a property developer, I’m more than happy to discuss.

*generate equity.