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  1. #1

    Investing v Developing?

    • Established Member
    • 2
    • 12 posts
    • LocationIpswich

    Posted April 28, 2014 Report post

    Hi people,

    I was just wondering what proportion of you "invest" in property and what proportion of you actively develop?

    I have listened to all of the podcats and read the books, which were all very useful, but the topic of "development" i.e. building houses or adding significant value doesn't seem to come up that frequently. Is this because the barriers to entry in terms of cash and importantly skills just makes it more difficult for most to achieve? I don't necessarily see "investing" as a safer option due to interest rate fluctuations, even if you do price potential rises in to your calculations.

    I guess my question is with a pot of say 150k cash and a 5 year short term timespan, what would be the most profitable strategy?

    a) Buy BTL property cash, light refurb, 75% LTV mortage, which leaves say 20k in the property. Repeat on to the next one etc. There will come a point at which you can no longer effectively buy for cash, which may mean you end up leaving 25k in the property. Unless you are very skillful there will come a point at which you run out of money to invest, maybe within 12 months depending on how prolific you are.

    So after a year, you may end up with a portfolio generating something like 8k per annum net plus perhaps another 10k from capital appreciation, assuming the market is moving in the right direction. Does this sound realistic from most people's experience?

    Alternatively look to use the leverage in situations where you can achieve high capital growth?

    150k deposit, with the right financing could open up some very nice opportunities if you know what you are looking for.

    I can only speak for myself, but we are in the final stages of a 2 year project to build our own home, having purchased a small, unloved house in a good area, on a good sized plot and ripped it apart, more than doubling the size of it. Yes this has required a huge amount of work, not to mention help from family and friends, but the ROI is around 100% on this over 2 years.

    I have them taken this increased equity and joined forces with a couple of guys I know to buy another project, which, subject to planning may well achieve a 400-500% ROI, over probably the same time period, with the potential to achieve 1000% ROI on the same plot. Perhaps I have been very lucky or I just have a nack of spotting these things and making them work?

    This is leading me to think that despite the BTL route offering good, long term, steady growth, it is actually quite restrictive because you can become extremely illiquid.

    Has anyone had the same musings?

  2. #2
    Hi Paul, I think what you are saying is correct to a sense.
    I'm focusing on development at the moment rather than building an investment portfolio due to own situation.
    It all really depends on your situation and your goals. For me, I want to build a pot of money through development so that I can invest solidly in rental properties in the next 2-3 years.
    As everyone on here will tell you, property investment is a long term road to wealth with the benefits blossoming the longer you invest, but it isn't the only road to wealth in property. It certainly isn't the fastest. Personally, I think a mixture of the two is the best option.

  3. #3
    As you say Dale, there is certainly more than one way to skin a cat!
    The bit that is tricky is the "doing both" strategy as for development cash is king. If the right opportunity comes up then you want all the cash you have to hand, or would be wanting to sell your BTL properties quickly to allow you to follow the higher return.
    The mantra of "you never want to be sell property" only really holds true if you are never exposed a potentially greater return.
    The other interesting point is a the general BTL strategy is that you never want to be in a position where you need to sell quickly, which is sensible.
    But there is some argument that by merely holding any BTL property, that isn't liquid you are inviting the situation where you may WANT to sell it quickly, even voluntarily selling it at BMV because your money could work harder elsewhere.
    For instance if you have a property that is giving you a 10% ROI, ticking away nicely and someone says to you they have an opportunity which would make you a 50% return over a short period then the sensible option is to sell the BTL quickly, even at BMV to get your money working harder for you elsewhere.
    It is for that reason that the two strategies to me are mutually exclusive. As you say it depends on where your priorities lie.

  4. #4
    Dale out of interest if your goal is to build a pot big enough to create a good size portfolio, assuming you have been successful in developing, you would have built capital faster that way than BTL could have, therefore why would you switch strategy to a less successful one than you were using up to that point, unless circumstances dictated you wanted an easier life? e.g. Retirement

  5. #5
    Hi Paul ,
    It is horses for courses , i would suggest that development is not the right path for most newbies. It is a risky area that requires a lot of experience and years of gaining good contacts or perhaps i should say years of dismissing the bad contacts !.I dont think there is any point developing to BTL ( unless it is big numbers ) to much risk when you can just buy BTL of the market.
    Your numbers apear very optimistic , 20% of GDV is industry norm a good scheme might take that up to 30/40% but that would have normally entailed more risk. Most three way JV,s fail as its hard to get consensus on the the many difficult risky decisions to be made along the way your risk appetite is unlikley to be aligned .
    My advice to someone going into development would be;
    * become an expert in a type of housing or a specific area , know your niche market better than anyone else
    * If developing learn planning or be prepared to pay for a good planning consultant , most profit in development is made or lost in the planning process.
    * Get a good builder on board from day one
    * Do not work with friends or family
    * Be realistic about timescales
    * form a relationships with a funder or broker
    * Joint ventures yes loose partnerships no .
    * Start with end play clear , change will eat your profit .
    * dont forget CGT the tax man loves developers ( Stamp duty , affordable housing , CIL , CGT)
    * finally and i know rob & rob dont agree with me on this one set up and use LTD companies , its risky business on so many levels protect yourself
    I wish you well in your plans



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