Why Real Estate Development is a good investment tool?
Real estate development is time bounded. It helps to preserve capital and give relatively high return.
The term "Time bounded" refer to a development project that is well defined by time, as the developer's aim is to built within a specific timeframe and sell. This translate to timely investment return for investors.
Capital Reserve is very often related to reputable developers that very rarely lose money. In the process of building up the real estate, one can view it as a value adding process. As the project itself will appreciate during the construction period, your capital is protected. This is one of the key advantages that help investors to build consistent returns year after year such that it has become one of the best instruments in building retirement portfolio.
High returns is achieved as it often requires a large capital investment, and hence typically give high returns.
Why investing in property development could protect your principle?
To understand why development can help to protect your investment, we need to look at two portions in real estate life-cycle:
- Developed portion – ready home and price driven by market force
- Owners are exposed to market risk. They aim at buying low and selling high for profit. However, they will lose money if they buy high and sell low at under extremely market averse conditions.
- Under-Developing portion - project value appreciate under developing stage
- Development is the process of building or renovating to enhance the value of the real estate. Projects under development generally appreciate in value as we keep on adding value during the course of development stage. Hence, investor capital is generally protected as value at this stage hardly go down.
Developer typically buy land to build directly and sell, not to hold. Hence the "development time/period is always clearly defined". If one decides to invest as a co-developer, a timely and predictive return can be expected.
Therefore, investing in development project is widely regard as a form of "principle protected" investment.
Why development is always not available for people on the street to participate?
Development is typically not available for the man in the streets as large capital outlay and expertise is required. Hence, even though everyone knows that there are very good returns, this high barrier of entry prevents most people from participating.
If one is able to get hold of a development project, traditionally the funding come from three areas, developer's own fund, bank loan, investment from high net worth individuals or institution. It will always be a challenge to get funding from all three areas. Namely, a new developer will always have limited fund. The bank will always require some form of guarantee. As for high net worth individuals and institutions, they might not easily invest in projects from a developer that does not have much track record.
What you should look out when choosing to invest in property development projects?
There are many factors and below are 3 key elements that you should look out for when choosing development projects:
Right Developer
A developer which has an established track record has a greater chance of completing the project timely, as compared to an inexperienced newcomer. Hence, choosing a reputable developer with good track record can reduce your investment risk.
Property Location
Real Estate is always about Location, Location, and Location. It is the one of the most important factor when deciding which project to invest. E.g. when purchasing a hotel as an investment, one will always look out for hotel locations nearer to city centre as compared to those in the suburban areas as it will greatly affect the hotel occupancy rate, hence potential return.
Risk & Returns
One of the most important frameworks in property development investment is to understand its risk versus return. One would expect higher returns for high-risk projects. There are many risk factors involved in a real estate investment. For instance, the loan amount - the amount of borrowing relative to the price paid for the land. A plot of land purchased for $2 million with a $1.4M loan would have a 70% loan to cost ratio. The higher the loan is to the cost ratio, the greater the risk becomes when the developer default on their debt service if they go into any cash flow problems.