How to know when to sell and when to hold a new development

Even before you start looking for your development site, you’ll need to clarify one thing.  Are you developing to sell or to hold?

To answer this question, you may need to answer another:  Is your strategy short or long term?  If it is short term, then selling may meet your needs to make a quick return on your investment. If you have a long-term strategy to build up a property portfolio, then holding will be the way to go.

There are several factors that will influence your decision:

Location

Your development is in an awesome location but in a poor rental market.  An example of this may be a coastal area where there may be higher demand from owner-occupiers wanting to purchase low-maintenance property to retire to. In this case you may sell to realise your profits, as holding would not be viable due to low rental returns.

Timing

If you complete your development and the market is in an upswing with high demand, then you may get a higher-than-anticipated sales price. So this may influence you to sell. But if the market is down and there is an oversupply of property but a tight rental market, then holding may make sense.

Interest rates

An important factor in calculating holding costs is interest. If interest rates are around 6.5% as they are now yet the rental yield is around 8% in the area you’re developing in, then holding the properties makes good sense. You may look at fixing rates for a few years, to take the risk of rates rising out of the scenario.

Taxation

You need to discuss your personal and/or company tax situation with your accountant before starting to develop property. There is capital gains tax to consider when selling as well as GST implications when selling new dwellings. These alone may sway you to hold. You also need to check on land tax to see if this will affect you if you decide to hold.

Most of Property Bloom clients develop to hold.  This is because they choose to access the equity – which is created through the development process – through refinancing on completion.  This means they don’t have selling costs like agents selling commission, capital gains tax and GST.   Once refinanced, they can pull some equity out of the development if they choose.

Another deciding factor in holding is in the areas of the Hunter Region we develop in is that we are getting very strong rental returns. We find that we can maximise the rent because the villas are new. Tenants do pay a premium to live in a new dwelling. Also the vacancy rates are less than 1%.  The gross yield on completion can be as high as 9%. The yield does also depend on the size of the development.  A three-villa project will have a higher yield than a dual occupancy.

Another reason our clients hold is take advantage of the high depreciation benefits they receive on the new dwellings.  On a typical dual occupancy, our clients are receiving around $17,000 in year one (based on diminishing value method). If you are paying lots of tax, this is definitely one of the rewards of holding.

The final reason Property Bloom clients hold is because they want to build up a retirement fund and take advantage of future capital gains. In the suburbs we develop in, there is high potential for capital growth because of many factors including increased population, projected housing demand in the council’s regional strategy, spend on infrastructure and the benefits that the coal mining industry bring to these towns.  The long-term growth figures are over 12%.  So if a client can create say $80,000 to $120,000 in equity through the development process and then holds for 10 years, he or she stands to receive 12% growth on average, each year.  The future value of the development will be considerable.

Whatever your strategy, make sure you put down a solid plan that you feel comfortable with and set up a professional team to help you achieve your goals.