Smart Investing – Land Banking

If you’re a serious property investor you will be interested in 2 things:  Capital Growth and Rental Return.  Both are equally important.  Your rental return will determine what shortfall you will need to cover each month (or what monthly income you will generate).  Your capital growth is where your equity sits – and you’ll want to see this value grow steadily over time.

The key with property as an investment is that it’s a medium-to-long term investment.  It’s not common to purchase a property and experience sufficient growth to cover the costs of acquiring and selling the property in a few years.

But there are some clever ways to speed up the process.  This is particularly true when it comes to purchasing in a new development when it’s being sold off-plan.  Here’s why.

Very often a developer will “sweeten” the pricing of the release phase of a new development.  This is because of the need to achieve a certain number of sales for their funding to kick in, or to demonstrate the market appetite for the product.  If you get in early you benefit from the launch pricing.

Secondly, you benefit from the additional time that lapses between your signature on the contract, and the delivery of the property.  There can often be a delay on many months, even years, while the developer gets the services installed before he can give transfer of a plot.  Where a turnkey property has been bought, the developer still needs to construct the dwelling before you pay and take ownership.

In many cases we’ve seen the growth in the value of a development property increase by 25-30% by the time the purchaser actually pays for it.  That’s growth before you’ve acquired and paid.

What are your risks?  The developer may decide not to proceed with the development in some cases (if the contract allows for this).  The sale would be cancelled and you’d have your deposit refunded as this would have been held in trust.

There is always the risk that the market turns, as it did in 2007-2009.  When that happens it’s always best to hold on to your investment as it’s only when you actually sell the property below your cost that you lose.  In most cases where you hold on to it the market recovers and you’re in a positive situation.  The same is true of any property investment, not just a development property.

Also pay attention to the infrastructure around a new development.  What shopping centers or new schools are planned?  Will the roads be upgraded?  Where you see significant investment in the infrastructure you often see higher appreciation in property values.

Once you’ve identified the smart opportunities be sure to get in early before the prices increase.  Benefit from the initial capital growth resulting from keen pricing and the longer time it takes for delivery.  Let your new investment work for you even before you’ve paid for it.  Now that’s smart investing!

Steve Caradoc-Davies
Principal, Harcourts Platinum

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