Properties with development potential make the best investments

If you purchased an investment property in Melbourne at the beginning of 2020, you would have seen its market value decrease by more than 10 per cent in the space of a few months. 

Good news though, its value is now probably back to what it was when you purchased it.

Because of stamp duty and selling costs though, you’d lose tens of thousands of dollars if you sold it today. 

Assuming your financial circumstances haven’t changed dramatically you’d best keep it for at least another few years, and hope that no rental issues arise.

There is a smarter way to invest in property – one with less risk and greater upside. 

Whether you intend to develop or not, properties with development potential tend to increase in value more over time than those without.

Importantly, they provide you the means to manufacture equity growth without getting your hands dirty. Properties with development potential provide you with future options.

As a recent case study, Jim reached out to us via our website in late 2019. He’d completed a modest development in Queensland the year before, and was keen to tackle another in his home state of Victoria.

I had a couple discussions with him, shared some case studies and references, and he appointed us to find him an investment property with development potential. 

His budget was around $1 million, and his aim was profit. Ideally, he’d sell all the units upon construction completion, but he foresaw some uncertainty with his work, and if construction finance wasn’t forthcoming he wanted to be able to offload the permitted site for a modest profit.

For more than 200 days, I’d tracked a property within a Residential Growth Zone in Melbourne’s northwest. Even though the market had started to pick up from mid-2019, the advertised price gradually dropped from $1.32 million to $1.23 million to $1.15 million. 

The vendors wanted to go bush, and were highly motivated to sell so that they could start their new lives. There was clearly a bargain to be had.

Prior to bringing the property to Jim, I spoke with the council, my town planner, a couple of local agents, one of my preferred builders and architects, and an arborist. 

I sent the preliminary feasibility to Jim, and he liked it. With his go-ahead, I firmed up key assumptions: site yield, construction costs, resale values, and planning risks.

I negotiated the purchase on Jim’s behalf: $1.07 million, 12-month settlement, and reasonable access for planning purposes.

Jim paid my invoice for advocacy services, and then appointed me to project manage all planning and design work. Within nine months, we secured a planning permit for six triple story two bed townhouses and one double story three bed townhouse. The market value of the property jumped significantly.

Jim had recently changed employers, and construction finance would be hard to come by. 

He appointed me as his vendor advocate, and we chose a good local agent that I had a long history with. Within a couple months (and a few weeks prior to settlement), we negotiated the sale for $1.35 million 

To the uninitiated, you’d think profits were nearly $300,000. Not so. Jim had to pay stamp duty, legals, finance, and accounting; he paid consultants and the council to attain a permit; he paid for advertising and sales; and, he paid me to look after everything from start to finish.

Jim walked away with about $100,000 in profit. Yes, he would have made significantly more than his 32 per cent return on equity if he saw the development through to completion. Alternatively, he could have rented the property out, and ‘banked’ his equity gains.

But, in a year where a global pandemic reaped havoc, he’s very satisfied with his decision to take the money on offer, and set himself up to capitalise on the good purchase opportunities that are starting to present themselves in 2021.

If you’re thinking about investing in property, I encourage you to consider properties with development potential. Do your homework and appoint the right professionals – by manufacturing equity and creating options for the future, you can reduce your investment risk significantly. And, development is a lot of fun.