While many real estate investors look to buy-to-let arrangements, REITs, or real estate investment clubs as viable ways to profit from real estate, a small subset of the investor market profits from housebuilding or property development.
What Is Housebuilding or Property Development?
Housebuilding or property development is the process of building structures on a piece of land that will later be used for some productive purpose. For example, a real estate investor may buy a piece of land, erect a home on it, and then rent it out for rental income.
What’s more common, however, is for real estate investors to lease land, or to build commercial structures that can be leased out to businesses. This is far more profitable than building single-family homes for rent.
The process, however, is fundamentally the same. Different permits are required for commercial structures, but the idea is that the real estate investor will build new construction rather than buying a used property.
Property owners must secure construction loans, in addition to loans for the land.
One of the major advantages to property development is that, over the long term, development has consistently outperformed other investments. Land is a finite resource, making each development more valuable as supply dwindles. Land values continue to rise under conditions where population increases.
And, with loans for property investing easier to come by these days, it’s an options many real estate investors are reconsidering.
Because property development is considered the “head” of investment – all other real estate activities depend on development, it is the most profitable way to invest in property, and it’s this potential profit margin which is the real driver for most investors who decide to go this route.
While the potential upside is almost limitless, there are important disadvantages to investing in property development. For starters, if you do not develop in the right location, your returns could evaporate quickly. Like traditional investments in property, location is everything.
Projects where potential rents are low aren’t necessarily bad investments, but overbuilding in such areas will likely reduce the return.
Residential property development can be tricky to master, since you have to essentially be part city planner and part real estate investor. For example, inner city properties become scarce as populations grow. People who want quality homes start to move to the outskirts.
But, which side of the city should you build on and can you obtain the necessary permits and entice people to leave the downtown area?
Another disadvantage to property investing is zoning restrictions and classification. This is almost always controlled by a government official or regulator, whom you do not have authority over.
Sites that are not zoned by the local municipality for development are unlikely to be rezoned, meaning that prime real estate may not be available for development in an area that is otherwise perfect. These kinds of roadblocks can make it hard to develop in certain cities and areas of the country, or in entire countries, depending on zoning laws.
Finally, for every stage of development, you must ask for permission from city officials. Planning permission can slow development. It can even crush an entire project if you cannot obtain approval for a particular block layout or you’re having trouble passing certain ordinances or codes.
Who Is Property Development For?
Property development is for more experienced investors, or for investors who are able to work closely with a mentor with experience. This is very much a trade profession in the sense that you must have a legal, real estate, marketing, and construction team and there’s no official degree or schooling you can take to prepare yourself for what lies ahead.