An Alternative to Investment Property: Property Development

Australian Property is an Exceptional Investment

Many investors, both within Australia and internationally, are looking to add an Australian investment property to their portfolio. The reason is evident: Australian investment property has performed exceptionally well over the last fifty years, especially so for the last ten to fifteen years.

From 1970 until now, Australian residential properties have grown 4,090%, or 85% per year. This drastically outpaces inflation which equates to 5.3% per year over that duration. In 1970, the median house price across Sydney, Melbourne, and Perth (data on other cities is unavailable) was $16,333. In 2017, which marks peak prices in the largest markets, the median price across all capital cities was $684,4263. This is a total increase of $668,093 over that duration.

Investment Property Factors

While lucrative, there are several factors involved with purchasing a property as an investment that may prevent investors from purchasing. Firstly, buying a property has a high barrier to entry in the purchase price. Buying a typical property will require a deposit of over $50,000 plus another $450,000 or more in finance from a lender, which will require ongoing interest payments. In addition, there are also the ongoing expenses of owning a property such as maintenance, body corporate, and/or land tax. Secondly, the performance of an investment property is solely influenced by the market, which means that for a property to be a successful investment it requires extensive research to choose a suitable property. Finally, due to the high transactional costs associated with buying and selling a property, it can only be feasibly done as a long-term investment without impacting profitability; think decades, not years.

An Alternative: Property Development

What many investors do not realise is that there is another investment option available that allows them to capitalise on the excellent performance of Australian property: property development.

Investing a property development project can provide the benefits of an investment property (chiefly a high ROI) while overcoming these factors. Investing in a property development requires more funds upfront ($250,000), but doesn’t have any ongoing expenses or hidden costs that chip away at your cash flow, and so can be more affordable depending on your current savings, cash flow, and equity.

While the performance of a property development is affected by market performance, it isn’t dependent upon it. As long as the combined sales price of the developed properties is higher than the cost to build them, we still achieve a profit. There are a variety of factors other than final sales price that also influence how much profit a particular development will generate, such as the purchase price of the land, construction costs, and loan interest. This allows investors to achieve a profit from the lucrative property market without being completely dependent on the performance of the market.

And last but not least, property developments can take as little as 18 months to complete, depending on the complexity of the project.

Both investment property and property development are excellent vehicles to generate wealth, and ideally, an investor would have both in their portfolio. But depending on your circumstances, this may not be feasible. However, investing in a property development is an alternative investment opportunity that may allow you to harness the performance of Australian property if you are unable to purchase a property of your own.

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