Buy and hold vs development

I spoke to a property portfolio strategist recently and asked a number of questions regarding strategies and returns. One question I asked was, if there was an option to do multiple developments and to continually capitalising on them while growing the asset base, how would the individual’s net worth be different if they simply bought and hold for the long term?
The answer I got was the buy and hold would likely be in front. This is because you would have less capital tied up in the construction. The build depreciates and land appreciates. So the portfolio with a higher land component is likely to outperform one with lesser. Also he outlined that development can happen at any time in the investment journey and the build costs would roughly remain the same but the land costs however goes up at a much greater rate. Therefore if you put more capital in the construction at the earlier stages of the investment journey, less is working for you in terms of capital gains. The manufactured gains however can be reaped at a similar cost any time in the future.

However in some ways I disagreed because this doesn’t take into consideration the manufactured growth that can be produced in a development and by capitalising on this early on may create a bigger asset base to allow for greater developments/investment opportunities faster.

What are others thoughts on this topic? Would you go development or buy and hold for the long term if your aim is to simply grow your net worth at a faster rate?

 

I think you need a combination of both. Starting off you need to develop to accelerate capital growth. This enables further borrowing more quickly. Then purchase buy and hold properties with development potential. This increases capital growth without doing anything.

 

Everyone's circumstances and mindset are unique. Some people like to keep their development stock, some people sell some and keep some whereas someone like me - at present - will sale all.

In theory, i agree with your view that selling helps you in doing next project sooner. If you sell, its your REAL profit. Otherwise its just on paper. Obviously, you can refinance and get maximum equity out. I have been there. I built duplex in Perth in 2011. In 2013, i refinanced and got 100k out to be used for next project. However, market tanked after that and i was waiting till date for market to recover which it has now. If market had not tanked, i had sold it in 2015. So its this unknown about which direction market takes is what prevents me from holding. However, if market would have improved further, i would have been very happy. Personally, i subscribe to theory that no one has gone broke if they earn profit. Also, a bird in hand is more valuable than 2 in bush.

 

I take it they don't find development sites?

I think development wins if you make money - but not all do. Some buy land develop and sell say a year later and make a profit and pat themselves on the back, but most of that profit was due to natural capital growth so they could have make similar profit without the risk by using buy and hold.

 

So I suppose you are alluding to the fact that the end goal is to accumulate more buy and hold properties and let capital growth do the work?

I guess it would simply depend on the deals available to you at the time. If you are able to secure a bigger deal with greater profit, it makes sense to sell. If you are able to rinse and repeat similar deals at the same cost, perhaps you can just sell enough to fund the next and keep the ones that are cash flow neutral.

They aren't buyers agents so don't look for properties. However, what they were alluding to was that you would be holding on to a portfolio with less land component relatively speaking compared to a portfolio of properties where you are doing developments. You should be doing calculations based on what was manufactured and what was from land appreciation to know the real value of the development profit. This should be fairly apparent if you compare your initial feasibility to what the actual costs were after the project completion. If you made money after everything went over budget - the profit probably wasn't from the development itself.

 

The key here is "faster". You cannot force a property to grow by holding, but you can by developing.

 

I have found the perfect balance for me is build, keep some, sell some. Rinse and repeat.

This way I enjoy a growing portfolio and chunks of money to live a great lifestyle.


What most won't tell you is that whatever you think it costs to develop, it costs a lot more. The time factor from one project to another can range significantly and much is out of your hands. You need money to keep you living in the mean time. And many people break even or lose money. The challenges/stresses never end.

 

I guess what you are saying is you are building a portfolio and cashing in (taking some profits) along the way to fund your lifestyle as well as the next project.
It sounds well and good to me too and the way i understand it to be an outperformer if done right vs buy and hold

 

As I get older, I want to be able to fully enjoy my portfolio through cashing some of it in from time to time. But needless to say it all depends on where you are in your investment journey.

I don't get much enjoyment from owning yet another address.

 

It seems like a weird comparison to me. The skills required and other barriers to entry are not the same.

If you have the capital and skills to be good at developing, then you will obviously do better with that. If you don't (especially the skills), then buy and hold might be for you.

I guess you could make some sort of "average punter" comparison. In that case for me I've seen more people burnt by developing than actually make money.

 

You raise some good points, thank you.
I suppose i was asking the question in the view that both strategies were executed under ideal circumstances, what the final outcome would be strategy A vs B.
Understanding that there are variables and risks that would adjust the actual outcome.