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What to do and not do when buying into a development

2018-01-10

Buying into a development can seem like a daunting task for some people, and so the CEO of a construction company, who is also an investor, shares tips on how you can make a good investment.

Len Warson, CEO of Glenvill Homes, is responsible for building developments and is an investor himself, so he lends a certain amount of expertise when it comes to buying into developments.

Speaking to Smart Property Investment, Mr Warson outlines three things that investors should be doing when looking to buy into a development, as well as three things to definitely avoid doing at all costs:

What to do:

Understand your own and external economic conditions

“I think the first thing an investor needs to know or do is to understand statistics, understand the marketplace,” Mr Warson said.

“Without getting too complicated, I think a lot of what we do all the time is look at history and say: ‘This is where the market has been’. But we need to look at the future and go, especially in Melbourne, there’s a lot of migration happening and people are moving to all different suburbs, so what was hot or what was seen as bluechip five years ago might not be that today.

“In my view, one needs to understand migration, they need to look at where people are going, where they’re living, and they need to respond to that.”

Follow infrastructure

As well as getting a solid understanding about the current economic climate, Mr Warson also said following infrastructure projects as they happen is vital.

“I think that, following infrastructure, so they should read the papers and understand what’s going down as far as infrastructure upgrades,” he said.

“If a town’s going to get a fast train ... they should follow that because obviously the market’s going to improve a lot and capital growth will happen.

“Like a business, if a fast business was to move to an area, then you’re going to have great employment opportunities, and that’s going to result in demand for housing or investment in every sense.”

Look at the developer

Before locking into an investment, investors need to do as much homework as possible; if investors are looking to buy into a development, they should take a long, hard look at the developer.

“I think that investors, if they’re going to buy off-the-plan as an example, they should look at the developer that’s behind it,” Mr Warson recommended.

“I’m a builder for a lot of developers in the medium density space, and some are just after making it as cheap as possible and others have a reputation and want to really honor that, so they’ll build a much better building ... that’ll have far less warranty and maintenance over due course.”

What not to do:

Get caught up in fashion

Investors should always keep an eye out for trends, but following them too closely could severely date your portfolio.

“I think other things that are really important is for investors to not get caught up in fashion. What’s high fashion [now] won’t be [fashionable] tomorrow, so it’s really important not to get caught up in stuff that’s too of-today,” Mr Warson warned.

“Especially in apartment buildings where the outside of an apartment building is going to look best the day it’s finished, and it’s only going to date, so you want to look for stuff that’s a little bit more enduring.”

Asking too few questions

If investors are looking to create wealth, education is key, so going into the investment game without a firm understanding and not asking enough questions could spell out financial ruin.

“If you’re an investor and want a long hold, I think it’s important to look at the structure of the building, so understand what it’s going to be made of,” Mr Warson said.

“If you’re buying an apartment as an example, lightweight building or is [it] a full masonry building? Obviously, the masonry building’s going to have a lot less warranty and maintenance and look better in 10 [to] 20 years’ time than the lightweight building.

“A lot of people don’t ask enough questions and even [when] buying an investment property that’s standing, get a structural report to make sure it’s good and understand how it’s made.”

Rely too much on marketing renders

When looking to purchase off-the-plan, the best assessment you may have is a 3D computer graphic render. As the development may take years to be built, investors should be comparing the render to the progress.

“If you’re buying off-the-plan again, [you] just got to be careful of marketing renders,” Mr Warson warned.

“Often renders get value managed, so you want to make sure what’s in there is what you’re getting. Often, I’ll see renders with windows floor to ceiling. Often that’s not delivered, but it makes the apartment look a lot better, so I think it’s really important that you understand what you’re getting. Don’t just assume the render is what it’s all about.

“If a developer won’t honour a render, then they’re a developer you should stay away from, because they either don’t have a commitment to their representation or they don’t understand enough, and therefore you don’t really know what you’re getting.”