Have you been interested in property development and wanted to get involved but not quite sure where to start? Have you considered investing in other developer’s projects as a starting point to build your knowledge and understanding, whilst earning a greater return on your money than other investment modes? If you are interested in knowing more on how to invest in development projects then this blog post is for you.
Investing in small-scale residential property development can be a great way to diversify your investment portfolio and make your money work harder for you. As with all investing, it comes with inherent risks that you need to be able to quantify and weigh up against your individual risk profile, but when done correctly can produce significant returns that greatly exceed other passive investing types. Private funding through investors is a very common means for property developers to fund their development projects, with the specific investor agreement and potential return being structured based on whether you are coming in as a joint venture partner, a money partner or a serviceability partner on a particular project.
Simply put, a joint venture partner typically has a large stake and investment in a development project, either as a landowner of the existing property being developed or through being the majority financial injection in the deal. They will usually be receiving an agreed percentage split of the profits in the project. A money partner provides an agreed investment amount to either help acquire or run the project through to completion and receives an agreed percentage return on their investment. A serviceability partner may not have capital to invest but has the borrowing and financial capacity and ability to obtain and service a loan and may receive an agreement percentage or a profit split. The investor agreement can vary significantly based on the size of the project and the level of investment sought and may include both a percentage return on the money invested and profit split type arrangement.
What should you expect to see from the Developer if you are looking to invest?
Firstly, an Information Memorandum (IM) should be provided to prospective investors that outlines the full details of the project you are looking to invest in. The IM contains a range of detail on the project including project overview, development team overview, project feasibility and financials, marketing plan and exit strategy, project schedule and risk register to name a few. This document should contain all the key and pertinent information an investor needs to assess the quality of the investment and be well informed on the prospective project.
An Investor Agreement should also be drawn up legally and outline all relevant project details, level of funding being provided, security against investment and the relevant legal terms and conditions relating to the agreed arrangement. This should always be reviewed by your legal advisor prior to the agreement being executed.
What are some of the key things to consider if you are looking to invest in other developers’ projects?
1. Is the developer and their team experienced in the type of project being proposed? – What is the background of the developer and their track record? Who are their team (Town Planner, Civil Engineer, Surveyor, Specialist Consultants) and what is their collective experience they bring to the project?
2. Has the developer identified all the constraints and issues in the project and planned how to address them? Projects can vary from simple 1 into 2 splitters to more complex large land subdivision/ construction projects. The constraints and issues for a particular development need to be identified and established upfront with a detailed plan on how they will be addressed to ensure the Development Application has the greatest chance of success. This is where the quality of the team supporting is critical in helping to identify and deal with those issues.
3. Is the deal profitable? – Has the developer shared a detailed project feasibility with the investor to show the numbers expected in the deal? Have they factored in market down-turn to the forecasted sales prices? Have they been conservative (or optimistic) and is there a sufficient contingency built into the feasibility? Is there enough buffer in the profit projections?
4. How long are your funds required to be in the deal before being returned? – What size and complexity are the project and expected duration? Are your funds required for 6 / 12 / 24 months and is interest paid at project completion or as instalments? Is there an option to have your funds released early?
5. What are the risks involved and have they been appropriately considered? – Does the project already have Development Approval? Are there risks to delay from council or contractors? Is the development proposing something outside of the development code for the council and likely to be met with resistance? Is there a detailed risk register and mitigations included?
The above are key summary points and a solid starting point, it is highly recommended you always seek your own independent legal and financial advice as part of your own due diligence and decision-making process. Property Development can be a great investment area when carefully considered and assessed and undertaken with the right developer and project (of course!).
Langton Developments is currently in the early stages of planning our next project (a >4 lot land subdivision) which we hope to secure in the coming months for a Q1 2023 commencement.
We are interested in talking with potential investors from our community who may be interested in being a joint venture, money partner or serviceability partner on one of our future deals. Our key focus is building long-term and collaborative relationships with our investors that grow wealth for all involved. As part of investing in one of our projects we will also offer the option to shadow us during the delivery of the project and learn property development first-hand, enabling you to grow your skills and look to complete your own projects down the track. Our fully transparent and inclusive approach will ensure you are part of the entire project journey from start to finish and part of the Langton Developments team.
If you are interested in having a discussion on future investment opportunities or simply want to know more on anything in this blog post, please feel free to reach out for a chat at any time.
Thanks for reading,
Chris & Jon
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