Finance News

Why Passive Property Investment, not Property Development, Suits the Vast Majority of People

Rose Jinks - November 20, 2017
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By Paul Mahoney, Managing Director of Nova Financial 

When it comes to investing in property, we really view it the same as we view any other investment option, and that is as a means to an end, a way of better utilizing your money to better contribute toward financial freedom in the future, or an early retirement, or even just a normal age retirement but with a comfortable lifestyle.

We meet with a lot of people who are looking to buy and renovate or convert commercial properties to residential property, or from scratch property development, and that is often spurred by something they’ve read, or a TV show they’ve watched, or maybe a seminar or a program that they’ve attended.

Often, those people that we are meeting with and who are telling us these things have absolutely no experience when it comes to developing property or to managing a project of such a scale. An analogy that I often use for this is that you don’t read an article, or do a course, or attend a seminar and then start performing brain surgery.

Paul Mahoney

Paul Mahoney

The reason for that analogy is property development is a profession, not a hobby. It’s something that people spend years and years perfecting and working for other people to learn that trade, how to manage contractors, or even just a main contractor to make sure they’re doing the right job for you and deliver a profitable project. That’s not something that you can just learn overnight.

Regardless of the people that you might speak with that tell you that there’s so much money to be made in property development, and, therefore, why would you want to go and invest in property passively and achieve average returns of 5 to 10% yields and 5 to 10% growth? To be honest, that can actually be quite strong returns, especially on your deposit when you’re using leverage to multiply that return on the overall asset.

In our experience, though, you are far better off investing passively if you don’t have the expertise in property development – and I must stress that expertise cannot be learned in a matter of days, or weeks, months or even years. It’s a very detailed process, and I’ve come across far too many people that have been burnt, that have taken that leap to develop property without the right experience and without the right expertise. There is just so much that can go wrong.

For example, if you do go down the route of choosing a main contractor to manage all of your subcontracts, such as an electrician, a plumber, a plasterer, all those things that are required for a renovation or a development project… If you choose somebody else to manage that for you, then that person essentially has your livelihood in their hands. You need to have absolute confidence that they’re going to do the best possible thing for you to minimise cost, minimise time, get everything done as quickly as they can and, therefore, deliver the most possible profit.

What incentive does that person have to do that to start with? Unless you’re incentivising them based upon cost and profit, which, of course, you could do, firstly, you need to make sure they’re a trustworthy person. You can also do that. You can look at testimonials. You can look at all these things that these people might have done in the past, but, again, without any experience, are you going to do that efficiently?

If you’re going to manage it yourself, things become a lot more complex. I wouldn’t recommend that even more so, but I suppose if we break it all down so far as picking a main contractor, making sure there’s no issues so far as the design process, a sound structure, or planning or extra costs that you might incur, and then also making sure that you’re not going to run into any economic issues such as a recession half way through your build, which might impact upon your funding or the stability of your contractors and their ability to actually deliver on the promises or the contracts that you’ve put in place.

There is just so much more risk involved. Property development is a business. It’s a profession. It is very, very different to passive investing and, therefore, of course you’d expect to make more profit from it, because you’re taking so much more risk, which isn’t always the case. Any development or renovation projects will make 10-15%, which we’ve had clients outperform just by buying off plan and doing nothing. For all the success stories that you hear in this realm of property investment, I’m telling you there are significantly more failures, especially when we’re talking about people that don’t have experience in this area.

I’m not trying to be discouraging. I’m being realistic. I would strongly recommend when it comes to starting out in property investment to build your way up in complexity. Start with something quite passive and simple. Build up toward doing perhaps small-time renovations. Then, you can work your way up to bigger projects, which is the general, intelligent way of doing anything, rather than jumping in the deep end at the start before you have the expertise or the knowledge to do it.