With any investment, higher returns come with higher risks. Put your cash in the bank and you will receive a low return between 1.5-3.0% depending on the amount and term. It is a low return however the chances of losing your investment are almost zero. However, with current inflation running at 1.8% (RBA Sept 2017) you are barely getting any real returns. If you are looking for higher returns then you could buy listed shares. Take Fortescue Metals in 2017. It provided a 13% dividend yield however the share price dropped over 20% during the year meaning that even though you received a good income from your shares you went backwards on the value of your investment with the capital loss greater than your income received. The volatility in the share price is the underlying risk driven by a number of factors that influence Fortescue's future earnings.
Property investment is no different. There are low risk and high risk investment options. Let me take you through the three main risks.
Town Planning - Lodging your plans with council can be a daunting task. If your plans are for a house then it can be pretty straight forward as long as you comply with the town plan and don't request too many relaxations; it should be approved fairly quickly. However if you are lodging plans for a subdivision or a townhouse development things can turn out to be a little different depending on what conditions the various departments in council choose to impose on your development approval. They are not always predictable and sometimes these conditions can render your site unfeasible requiring you to appeal to the Land Environment Court or equivalent in your State. Using an experience town planning to prepare and lodge your application and requesting a pre-lodgement meeting with council can eliminate some of these risks.
Market - also know as the property cycle. This is particularly important when buying a property that has not been constructed yet. Remember you are buying at today's price however buy the time you need to settle the property the market conditions may have changed. If you are undertaking a development, then the time between buying the land and selling the properties can be 12-18 months. Get it wrong and you profit can evaporate. Professional developers buy when the market is at the bottom, hold for a full cycle and then develop as the cycle is on the way up again.
Construction Costs - The cost of construction goes up at 5% per annum on average. Lock in your building price with a fixed price contract. When undertaking a renovation there are many hidden costs that you can't see such as needing to upgrade plumbing and electrical to current building code. When undertaking a development unforeseen development approval conditions can add additional development costs not included in your original feasibility.
The best advice we can give first time property investors is to keep it simple and choose something with lower risk such as a house and land package where the builder does everything for you and you get the experience of constructing a new dwelling. Want to take on a little more risk then undertaking a dual occupancy build is similar to a house and land package however there is potential to make equity once the properties are strata titled. This is a great first introduction to property development. Once again the builder will undertake all development approvals and in some cases the strata title process as well.
The only way to minimise risk is experience. Get it wrong and you will end up with a low return equivalent to putting your money in the bank or worse.
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