Investing in someone else’s property development

If you’re interested in making money through property development, you don’t have to jump straight in with your own project; another option is to use your capital to finance a development as an investor.

As Peter Hutchinson, Founder of Master Capital Group explains, this is a route taken by many who have the equity but not the time to put into a property development.

“You can trust the people that you have doing the development and you will get a set return … your money is working for you,” he says.

Property investment vs. development

Developing is a tempting option for some because there is potentially a greater profit to be made compared with a fixed rate investment. However, developers are the last to be paid after the banks and any investors, so if a property doesn’t realise its expected value, it’s the developer’s cut that will take the biggest hit.

But it’s actually the time and expertise required to successfully complete a project that many developers underestimate, says Peter.

“The benefits of investing in someone else’s project are you don’t have to put any time in and you’re not relying on your own experience to complete the development,” he says.

Some people already have full-time jobs and want to complete a property development on the side. This can work up to a point, as a lot of the preparation work can be done outside of office hours.

If you have the drive, property research and feasibility studies can be completed at night, Peter says. And there are courses that you can complete at night or over a weekend, but these can’t fully prepare you for the work involved with managing your own project – that comes down to years of experience.

He explains that Master Capital Group can provide an extra level of support for clients who need to fit things around work and family commitments, but there are some elements of a building project that demand involvement during office hours.

It doesn’t matter how big or small the project is – Peter himself started out with just a small splitter block – you still need to be around during the day to monitor progress and attend meetings.

“You need to be able to spend time at a town planner or spend time at a council doing pre-up meetings; you might have to go to VCAT which is during the day. So it is a full-time position and it does require a certain level of expertise to complete the project, to run it as on time and as profitably as you can,” says Peter.

He also warns that a lot of the courses available don’t go into any detail about the many costs involved with property development. They tend to focus on the profits you can generate but gloss over things like stamp duty, capital gains tax and consultancy fees.

These all need to be taken into account when doing in-depth feasibilities on a project, says Peter. His company can provide advice on how to deal with councils, which town planners to use, and who to engage for legal advice – but these people all have to be paid. He says it’s essential to use a financial planner on all projects to make sure the numbers stack up and you’ll be able to obtain sufficient finance.

Risks of being a property investor

As with any investment, there are potential risks. Delays to the project can affect profits and keep investors waiting longer for their return.

Master Capital Group’s experience will help ensure that potential causes of delays are picked up on before the project commences, and they will build in a certain amount of contingency time and funds, but there will inevitably be unexpected things that crop up along the way.

Some things may be out of the developer’s control – such as weather or council complaints – but other things like pre-sales, financing, and building design are in the hands of the developer and as an investor you have very little control over these things.

This is one thing to consider when deciding whether to invest in someone else’s development or begin one of your own, says Peter.

Identifying new property developments

In some cases, property developers have identified a great opportunity and have the expertise and time to bring to the project, but are lacking funds. This is where investor finance is needed. Master Capital Group will complete all the feasibilities to ensure the project is viable, and then will work to match the developer with an investor so the building can get underway.

Master Capital Group also has a team of people who research potential sites and identify development opportunities which can then be invested in.

But the company is very selective when it comes to investing; Peter says they have looked at in excess of 100 properties in just the last year, but have only invested in a few.

“There’s a lot of time and effort that goes into research, and the experience that comes from this helps you know what to look for,” he says.

Whatever the origins of a project, the figures are kept completely transparent so investors can see where their money is going, and in the end they get a percentage of the profits or a fixed rate of return on their investment without having to put any time into project management.

Investors can maintain some level of involvement which may give them enough insight and experience to complete their own development further down the line, and in this way property investment can be a stepping stone to development.

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