In addition to property developers having a naturally keen interest in determining how financially feasible a proposal to develop a property for profit might be, most if not all of them are also interested to know how viable it will be to hold that development as an investment for themselves.
Compared with ‘developing for profit’, ‘developing and holding’ is more likely to enable one to maximise the sale price of the property that is developed because one can sell it more readily when there is a peak demand for income-producing property if one is prepared and able to hold the property for an extended period. Also, holding ‘in perpetuity’ one’s income-producing properties that one has developed means that selling costs, vendor’s conveyancing costs and capital gains taxes are not incurred, whereas developments that realise a trading profit incur selling and vendor’s conveyancing costs as well as income tax on that profit. Even if a new income-producing property is sold after being held as an investment for more than twelve months, the capital gains tax rate on the sale is likely to be much lower than the income tax rate on a profit from selling the property on the completion of its development.
On the other hand, what is possibly the biggest downside to ‘developing and holding’ for a developer is that, once the developed property is held as an investment, the funds that a developer might have available to fund new developments could be significantly restricted because, until the held property is sold, most or all of the developer’s equity in the investment might not be usable as security for financing a new development.
If one develops and then holds a property investment, instead of buying a new, comparable ‘already developed’ investment, a major benefit in doing that is that the procurement of the investment is at wholesale cost, rather than at its retail cost. This is the case because, if the total development costs for both kinds of investments are the same, the purchase price of the ‘already developed’ investment is likely to contain a developer’s profit whereas the develop-and-hold investment does not.
Other benefits of ‘developing and holding’ a property as an investment, relative to buying a new and comparable investment property, include the following:
The main potential downside of developing to hold an investment property, relative to buying a new and comparable investment property, is that there is a construction risk for the developer, who is intending to hold his/her development. In other words, there may be problems achieving a high quality of construction of the improvements to the property within the budgeted cost and time. Some of these problems could include the risk that: the building contractor for the development does not perform to a satisfactory standard, an unusually long period of inclement weather occurs during the construction period, and required building materials for the project may not be available when necessary. Of course, the exercise of high-quality risk management of the development process is the key to keeping these types of risks to a practicable minimum.
Feastudy Professional, which is produced by Devfeas Pty Ltd, enables the efficient and very detailed financial feasibility study of developing a piece of real estate and then immediately holding the developed property, or portion of it, as a property investment.
To undertake a 'Develop-and Hold' Investment study in Feastudy Professional, I recommend that you use a Develop-and-Hold (D&H) Investment feasibility study file, but firstly you must create and then save a relevant source Development file in the program before you can enter data in a D&H Investment file that is linked to that source file. (A source Development file must not have “Subdivision” entered for its Type of Development in the Development Identification window and must have at least three months of Construction Cost cashflows to be a valid file for the purposes of the D&H Investment study.)
I also recommend that you enter data into the source Development file as if all of the components of the development are sold as soon as practicable for fair and reasonable prices and that the settlements of the sales of these components occur after the construction of the development is completed. Among other things, this will help to provide information on the feasibility (or otherwise) of the development on completion for yourself, your partners and for any potential external financiers. In any case, the program will ignore the Sell-On Income, Selling Fees and Vendor’s Conveyancing Fees data that are entered in the source Development file for the purposes of the D&H Investment study because the program assumes that these data inputs are not relevant to the development or that part of the development that is held as an investment.
Once you have created a relevant source Development file, click the New option from the File menu of the program and then click the Develop-and-Hold Feasibility Study button to start a new financial feasibility study for a D&H investment proposal and select the relevant source Development file for the proposal.
When a D&H Investment file is linked to its source Development file, the program imports data from the source file into the D&H Investment file for, among other things, the calculation of the Investment Development Cost and cashflows for the Develop Period of the study. For the Hold Period, which is usually the main rent-producing period after the Develop Period, you enter your data in the D&H Investment file’s data entry windows.
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