Let’s begin by explaining what we mean by property development. In short property development refers to the process of purchasing real property (property or land) with the goal of enhancing its value by renovating or extending the property to earn a profit on the investment. It’s really that simple. But, doing it correctly isn’t always easy.
Although there are numerous economic benefits of developing properties but it is equally essential to be aware of the negatives as well as the dangers for novice or novice developers. We will explore the advantages and disadvantages of developing properties, while highlighting the benefits of working with a reputable development firm…
Pros
1. Potentially high potential return on investment
The main benefit of developing properties is the possibility of generating a substantial return from your investments. But, finding a property development possibility that is likely to provide the desired amount of returns can be a challenge especially for developers who are new to the business.
2. Often , shorter duration of investment
Speed is a crucial factor with any property development project and the objective for every developer is to finish the construction and then sell the property in the shortest amount of time in order to guarantee maximum income and the highest annualized return. If you are able to do this the property development industry can earn higher returns than other types of investments, such as bonds and shares.
3. Greater stability
Through time, properties have proven to be a secure investment option when compared to other options for investment. Despite its ups as well as downs real estate market overall tends to be more stable than other markets like the market for stocks. This is likely because it requires a longer period of time for sale (whilst shares are sold in a second) and also due to the property market is nearly always in high demand.
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4. Investment leverage
This means that when you buy a house you are able to buy more in less. You make investments with your money and the bank lends you more money in the form of mortgage. Leverage can help you maximize the return on investment when you see an increase in your income.
It is a fact that the banks loan substantially more to borrowers when buying property is a sign of the safety of investing in real estate. Banks have a higher confidence in lending mortgages for buy property than they do in lending to other markets.
But, many first-time property developers have difficulty obtaining an additional mortgage, especially when they already have a mortgage on their personal property, and/or their deposit doesn’t yield an adequate loan-to- value ratio to afford the investment property they want.
Cons
1. It’s not particularly liquid.
If you want to have immediate access to your funds then property development might not be the best option for you. This is because unlike the shares you invest in you are not able to sell your property in a flash. The process of developing a property can take several months. There’s also the time needed to sell. Once the property is been sold, you can have access to your funds.
2. Setbacks and unexpected issues
In the absence of expert guidance and advice Property developers are often forced to encounter unexpected issues that increase the construction and cost of development of a project. The increase in cost will directly affect the investment return and, if costs are significantly higher than the budgeted amount and even cause an expense.
3. The project is delayed due to delays in its completion
When you’re working on a development project, it’s crucial to meticulously (and realistically) estimate the time the time it will take to sell. The longer your property remains being advertised and the longer it is, the more you’ll have to pay in mortgage or financing fees which will result in a decrease in profits and decreasing annual return.
4. Barriers to entry
Many first-time developers don’t consider the expenses associated with buying and selling an investment property. The recent changes in stamp duty rates for second-home ownership mean that if you purchase an investment property while you have your own property, you could face substantial stamp duty costs. It is important to be included in your cost analysis.
Final Word
Like any other financial venture it is essential to establish the goals you want to achieve prior to deciding whether or not to invest. A property investment could be an excellent way to increase your portfolio, but like with any investments, it’s essential to investigate and seek advice from a professional in case you’re uncertain about any aspect of your investment.