Property development versus property investment

Do I build or do I invest? You won’t find a more common and confusing decision in the real estate investment world, whether you’re a first-timer or a property pro. So many benefits and risks exist when consider property development versus property investment, and you’ll need to weigh them all up before plunging into either avenue.

As a property investment syndicator, we find people incorrectly assume we’re also property developers. We’ve made a very deliberate decision to stay away from developing sites, instead favouring to add value to existing commercial properties around Australia. There are very sound business reasons for this, which we think you’ll be interested to hear when making your decision about which option is right for you.

Here’s why we think investing in an existing, established property is a better business decision than developing a new one.

The risks of developing a new property

All entrepreneurs and investors have an appetite for risk. How big that appetite is depends on the individuals concerned.

We invest in existing properties for which there is already demand (or for which demand can be created with smart investing). Developers take a far riskier approach to business than we do. They take a greenfield site (i.e. undeveloped land within a city or rural area) and create demand for that land by encumbering it with a building.

There are a million things that can go wrong in the development process. And that’s the developer’s skill: mitigating those risks. For you, as you consider developing versus investing, you’ll have to assess whether you’re willing to take them on.

Development risk comes in three main forms.

1. Issues with the land

Purchasing and developing on a vacant block may present risks with the land itself. This is why you must carry out a thorough due diligence to ensure your plans are land-use compliant.

Many factors can affect construction; from Aboriginal heritage issues to the gradient of the ground itself. The position of any existing underground electrical or plumbing work will also influence your options of how you can build. You’ll need a surveyor to help with this.

But when you acquire an existing property, these issues have long been dealt with. Sure, extensive due diligence is still required before making any investment. But you’re not going to turn up a nasty surprise that could leave you stuck with an asset from which there is no hope of earning an income.

2. Environmental factors

Environmental issues can stop a development in its tracks. Of course, sometimes these can be foreseen.

Take a site that was once used as a petrol station. There will be concerns over the contamination of the soil, which you must address before any development can go ahead. It might be fine, in which case you can start your build once all necessary approvals are in place, or could look like such a nightmare that your best investment will be in walking away.

Sometimes environmental issues take you completely by surprise. We’ve even heard a story of a rare butterfly appearing on-site during an environmental survey. All future development halted for twenty years. That’s not the sort of risk you’ll find purchasing an established property.

If you invest in an existing property, environmental risks generally are far less likely to crop up as a concern.

3. Financial and tenant-related risks

There’s a saying in property that “ants don’t pay the rent”, because when you’re buying land to build on, the closest thing you’ll have to an occupant is the ants crawling over the vacant piece of dirt. In other words, your property isn’t – and won’t be – providing you with any income until you have four walls, a roof and a satisfied tenant.

But when you buy an asset with a tenant already in place, you have an income stream from day one. This is a huge buffer against the financial risk developers take on.

Developing is a crucial part of both the residential and commercial property industry. And many entrepreneurs and investors have become wealthy on the back of it. At Properties & Pathways, us and our investors, take a more cautious approach to risk. We’re here for passive income and executing smart investment tactics. The result of which (while past performance is not indicative of future performance) has historically generated a substantial return for our investors.

Want to be kept in the loop about our future investments? Subscribe to our mailing list for FREE property insights. We’ll be in touch every month with the news on the economy, the Australian investment landscape, and of course the evolving commercial property market.