Differences between Investment Property and Property Development
Nhan Nguyen is a highly successful property developer and investor and has been working in the property industry since the age of 21. He has amassed an amazing amount of knowledge throughout his career and built an extremely impressive portfolio. We are lucky enough to hear some of his expert advice and learn from his incredible experiences.
Join us as we discuss the pros and cons of buying/renovating and holding against buying/renovating and selling, as well as delving into some of our personal experiences with hidden costs and GST when buying properties, and what to look out for as buyers.
Nhan and I will be discussing the different strategies for finding deals based on our personal experiences as investors.
I suppose there’s a lot of different ways to find deals and also execute deals and whether you’re going to hold it or sell it. I think one of the most common ways that people do when they look for a property is they look at, let’s say a buy/reno and hold. And I know I’ve done that before, and sometimes they’ll do a buy/reno and sell it, and sometimes they’ll sell it without intentionally originally buying it to sell, but sometimes, you know, time passes and they’ve got a bit too much debt or they want to access some cash. So, you know, what are your thoughts there, Tyrone, have you, you’ve done a fair bit of buy/reno/sell, buy/reno/hold? What’s your preference on this?
Yeah, I’m not really much of a fan of selling properties unless I need to, I’m sort of the longterm kind of investor who wants to buy these properties and just hold onto them for as long as I can, because I know that over time, property doubles in prices, you know, it takes 7 to 10 years or so. And if you do the, I guess the strategy behind actually purchasing with the intention that you will actually make money when you buy rather than waiting and hoping and praying that it will go up, then you actually already have, hopefully anyway, purchased a property that is already profitable from day one. There are also ways that we can actually add value, which is what I’ve done to a few of the properties I have. And that can also increase the equity as well.
And over time, you know, property prices, as I said, double in value, and I’ve got a residential property, which has doubled in value over the last 10 years, and I haven’t done anything to it. And I think that’s the thing, like if you sell it, unless you have to then you continue to capture that, that growth and that growth allows you to be able to withdraw more equity out and then use that equity to leapfrog to the next property or do other things with it. Otherwise once you sell it and you have to pay down that debt and depending on what you want to do as well, if you’re looking to, I guess, retire, you need to actually use this income for living off. Then it might be a strategy there. So as we say, there’s no one strategy that fits all, but it’s basically just talking from experience and what we think has worked. So what do you think on that side of things now?
Yeah, I think oftentimes my answer to that is it depends, right? It depends because capital growth, you might say, doubles every 7 to 10 years, but it’s very, very specific to certain areas as well. I know you’re from Sydney and capital growth there is quite prolific. It goes up a lot and it also can come down a lot. I know between 2017 and 2019, the market pulled back significantly. So I think, I think let’s zoom out a bit, is that depending on what your outcome is and how much energy you’ve got and how much, or how active you are in the marketplace. Look, I’ve got clients who’ve done the buy/reno and hold scenario. I think they got up to 10 properties and in the areas that they were in, various areas in Queensland and New South Wales, they just didn’t experience capital growth.
And all that experience was an increase of debt as they refinanced the equity, pulled that equity out and bought more properties. And so I think in theory, the buy and hold… buy a property a year, let’s say every year for 10 years can work, but you gotta be really, really mindful of what suburbs you choose. Negative cash flow is obviously a big deal. Don’t buy it just for negative gearing. I.e. claiming it on tax. That can be very dangerous. But yeah, I think it’s a balance. I think, like I said before, if people are very, very active and they’re doing one, two, three property deals a year, a buy and sell can work because then it becomes a business. That’s the thing. Is it an investment or is it a business for you? And I think that’s the key thing. If you’re only doing one or two property transactions, every one to five years, I think buy and hold is a great strategy.
You know, you’re not gearing up with too much debt and you’re not exposing yourself to too much volatility or change in the market because you’re just essentially holding it for the long term. But if you’re transacting on a lot of property, let’s say two or three properties a year, even, you know, one property a month, even buying twelve properties a year and holding them at 500 grand a piece is not sustainable. So I think the key question is, is it an investment or is it a business? And then we can basically choose which out of the two you go. So what, what are your thoughts on that Tyrone?
Yeah, totally. I think that’s exactly right. Like maybe we could sort of talk about it from these two points of views, one starting off with investment and then the other one talking about business. And then we can talk about perhaps the pros and cons, the strategy that we can use, to use these strategies, either the buy/reno and sell for potentially an investment strategy point of view, and also buy/reno and hold investment strategy, because they both work in both instances, both for investment and business. And I guess from my, I guess, experience working on say buy/reno and hold from an investment point of view that has actually helped because I know that yes, I’ve had to put money upfront into particular property. I’ve been working on a property at the moment that is pretty much finished renovations, which has still got a few minor little things like adding a heater or just changing a slight few things.
But most of it has been done. And I’ll give you a little bit of background as I’ve been talking about, I’ve got a commercial property down in Victoria and that commercial property is a mixed use actually. So that’s got two units up the top and three retail stores down the bottom. I had been spending the last probably few months or so remotely with the trades person and also a plumber and also an electrician to renovate the top part. And we’ve actually converted parts of it originally from offices all over into two separate units. And those units have a new bathroom, new kitchen and also an additional room now. So from one bedroom to a two bedroom. And that whole process was a full renovation upstairs. Once we did that I’ve increased the rent from originally $200 a week from upstairs to $560 a week now.
And both tenants are now fully occupying there. I had to put in roughly about, if I added it up, it’s about 40K or so to actually split these into two units, because we also had to do rewiring of some of the electrics to get them on switchboards, separating the gas meters, the power, et cetera. So I guess in that point of view, I’m like, okay, long term wise, I’m planning to hold onto this property because its positive cashflow went from a 7% yield up to 10%. And it’s a great investment, you know, to put this one in place. It is in more of a regional town and that’s the reason why that particular property has a high yield. But then I know that if it were… because it’s a commercial property and I’m adding value to it, I can actually manage an increase or manufacture the equity quite easily. So in about say maybe six months down the track, I’ll probably go back to the bank and say, look, you know, this is the kind of rental I’m getting and how much do you think this valuation would be worth? And it should probably increase between anywhere from a hundred to 200,000 equity in that property. So that’s an investment, you know, for me, from my point of view and from that experience that I’ve been doing. What do you think about that?
Yeah, look, I think it’s definitely positive what you’re doing and insightful, and I know that you’ve got a fair bit of experience with other resi stuff in the past, so that’s definitely exciting and good on you for doing that. I think just being mindful, and this is for general listeners out there is that I think yeah, the buy and hold strategy can work. Like I said, I prefer to, to balance the buy/reno/sell with a buy/reno/hold balance and do potentially both of them, because there’s definitely benefits in both. Like you said, with the hold, you get that capital growth and you’re not, you don’t expose yourself to a lot of transactional costs. I think let’s talk about, you know, from a buy/reno/sell, let’s say you did that to that property. I do think that buy/reno/hold has a lot of positives versus buy/reno/sell. So like, let’s talk about transactional costs when you’re selling, you’ve got agent’s commission and then you’ve got to pay capital gains tax as well.
And all the stamp duties as well and all those additional costs that go to the government. Yep.
Absolutely. Absolutely. Look, when you’re buying and reno, buying and selling, or buy and hold, you’re gonna pay the stamp duty anyway. But yeah, when you’re selling, there’s going to be additional transactional costs. There are additional taxes. If you’re selling vacant land or brand new dwellings, like townhouses or apartments that may require paying GST as well. So buying and selling versus buying and holding can be a lot more transactionally expensive and a lot more transactional costs for not that much more value, but the holding side of things I find for myself, let’s say you want it to hold five properties. There’s a couple of things you want to be mindful of is obviously serviceability, serviceability so that every property you hold… it crystallizes your serviceability. So what I mean by that is, let’s say you buy a property and you borrow 500 grand. You know that you can’t use that 500 grand to go buy another property.
You have to keep stacking on top and top and top. So five properties, 500 grand debt each, let’s say you’re up to two and a half mil. So the holding side of things, one, it crystallizes your capital as well as your debt. So versus if you were to sell, let’s say you did five transactions — sold three kept two or sold two kept three, and you get the best of both worlds because when you sell, yes, you do have to pay tax. Yes, you have to pay the agent’s commission, but you do get that cash out. If the market goes down, you don’t lose any of that equity. If the market goes up, you already got the money in the bank. So I think, yeah, it is a balance between the two cause selling, yes, you do pay a commission and tax and things like that.
And that’s part of making money through any business. It’s just with property I think that what I love about it is you have options. Like if you run a fruit shop or, you know, sold shoes at a shop or you sold paintings, a lot of stock that people have doesn’t generate income. If you buy and sell cars, you’re not going to make income from holding a car unless it’s a very rare Ferrari or something. So it’s got to experience your appreciation of that stock. So I think that’s a beautiful thing. The other key thing is negative cash flow. If you’re holding it, if you’re holding something, you’ve got negative cash flow, you might be waiting for capital growth and I think positive cash flow is very important to maintain, being able to service it and not have to dip money into your pocket.
Because if you’re losing $500 on a property, every time you buy one every month, five properties, that’s two and a half grand, that really ties you to your job. So don’t get me wrong, positive cashflow has a place and hold or holding property has a place, but that’s why I like to do both because you get the balance. I call it, ‘Left leg, right leg’, where one leg balance is, you’re in a buy and hold and capital and cash flow play. I’m doing, you know, the mini boarding houses that we’ve talked about previously as a whole play of created equity through the land, and then super positive cash flow through the bills of five tenants per house, times two. Right? So whereas my 30 lot subdivision I’m selling everything because holding 30 vacant blocks of land is an absolute whole pocket, and it’s a disaster. So I think it’s the end of the day, the power of intention, what your intention is and what your resources are because not everybody’s going to be doing development while they’re working full time. A lot of the listeners, wouldn’t you agree Tyrone, would be mainly PAYG, working for someone else wanting to maybe, you know, quit their job down the track, but looking at different ways and different methodologies?
Totally. And I can relate to that experience cause I still work full time, but I’m also doing a similar play. It’s just funny how we’re talking about it now because it’s kind of made me think, okay, my strategies are very similar to what you’re doing. I’ve still got my commercial properties and residential properties, which I purchased by reno and hold, those are my hold strategy or whole play. And then I’m doing the joint venture partners with the other people that are doing the development. So, you know, with those ones, those are pretty much buy, reno and sell. And that’s, that’s been the strategy. They all buy, subdivide and sell. And I’ve had those couple of deals as well that one of them’s returned it back, a nice, 20% return and the other one’s returned back, or hasn’t returned back yet, but we’re going to be getting a return back on that one soon.
So very nice. Yeah, no, when I think about it, it is the best of both worlds because if you don’t have those two… one, you know, it’s good to be able to just buy and rent and hold, but then at the same time, as you said, you need that kind of cash to be able to inject back into these properties, to pay them off over time. So that way you can also leverage and, you know, continue to grow. And I like that. I think that’s great. And it’s just so important that we talk about it because a lot of people just sort of just go down one path and it’s good to focus on one path, but at the same time, you’ve got to also understand that, you know, having a combination of best of both worlds makes it the sort of better or ideal strategy to be able to help you grow faster as well too. Otherwise you kind of get stuck. Yeah.
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And I think that when you are a developer, let’s say you don’t have a job and you’ve transitioned to being a developer. Sometimes you want to hold stuff, but you can’t from a cash flow point of view. I think that’s the biggest concept is cash flow. So I learned the strategy that we’re talking about in terms of ‘build some’, ‘sell some’, ‘keep some’ from various colleagues of mine and the ‘sell some’ part was very positive to reduce debt and access and liquidate and be able to access capital as well as profit. Whereas the ‘hold some’ is definitely for a potential long term cash flow and potential capital growth there. So I think, you know, people focus on one or the other, if you want to take another step back is let’s say someone works for someone else. You’re an employee and then you have investment property. So when you’re an employee and work for someone else, essentially your job is the cashflow source.
So instead of buying and selling houses to make profit from that, you’re going to work and making five grand a month, ten grand a month, something like that…. to keep that cash going. When you don’t have a job and especially when you’re starting out and you haven’t got the passive income through the properties, yeah that’s where you’re needing to transact on those properties to access those profits, so you can eat down the track. Once you create a portfolio and you’ve got 50, 100, 200, 300 grand passive income, then you know that you’re at that next level, that buying and selling isn’t as urgent. But what you will find is that you’ll probably want to do bigger deals. You might want to renovate blocks of flats or do five lot subdivisions because then at that stage, your skill set should be to the point where you’re able to command bigger projects, project manage, and fund bigger projects and extract bigger profits as well. But you know, everyone’s got their own skill set.
Nhan and I move on to discuss some of the key costs and hidden fees associated with property development which you, as buyers, might not be aware of.
Firstly, Tyrone and I, we’re just declaring that we’re not accountants, we’re not financial professionals in any way. It’s just from our experience and everyone’s circumstances are different. You know, my wife is an accountant and I’ve spoken to many at length about different transactions where some things that applied to me don’t apply to other people. So please just check with your accountant before you go out and do anything because yeah, we can’t be providing that kind of advice. But look, for example, these 30 lots of subdivisions that I’m doing, plus other subdivisions that I’ve done in my experience and my accountant said to me, and it’s generally applicable when you’re producing brand new stock… Brand new stock, you have to pay GST. So the only flip side of that from a positive point is that any of the GST that I pay from a construction point of view, civil works, buildings fees to consultants, I get to offset that against any GST I have to pay. So that’s, that is one compliment or one concession that does work. So definitely GST as a developer is something you cannot avoid. And it’s crazy with the new laws, and I think it’s Australia wide, is that at settlement the buyer has to withhold 7% of your sales price, right, to account for and pay the ATO GST in advance. So before, what would happen is, you’d sell a block of land, do your BASS, and then pay the GST after you’ve done your BASS three months later. But obviously there were a lot of people screwing the system over with what they called… they’d ‘phoenix’, the company they’d dissolve it and not pay the ATO, the GST, which is not fair for everybody because, I pay my fair part of GST. As much as we whinge and complain about it, it’s just part of doing business, right? So we live in this nice country… You have to do that.
That’s true. And I thought I’d probably want to sort of maybe jump up a little bit high on a macro perspective and how it works in a business. So it doesn’t have to be in property, but it could be just operating a business as buying and selling products or operating as a service. And I guess when you look at it from that point of view, every product that we sell, if you’re turning over, I think it was 75,000 as a minimum a year, you start to pay GST on top of your goods and services. So if you’d look at it from that point of view, every business does pay GST. It’s just that we’re taking property, whether it be subdivision lots or a brand new house or townhouse build, those are actually the products. And I guess you’re adding an extra 10% on top of that. Is that correct to say from a business perspective?
Yeah. So essentially it works out to be one 11th. So one 11th. So when you’re working backwards, it’s one 11th of the sales price. There are things like that, what we call the margin scheme, which I’m not going to go into, which allows you to adjust that a bit. But, you know, I wish that land was like business in some ways what you’re talking about, like selling, buying and selling light bulbs or printers because there’s no land tax when you buy and sell paper, buy and sell TV. Right. But I still gotta pay land tax. It’s a big cost in projects, especially as they take longer. Second thing is no stamp duty in business when you’re buying and selling printers or tables or cups or mobile phones, right? So I hear what you’re saying, but as a developer, we’re getting stung all over the place, agents commission, you know, that’s no different to any marketing costs that you’ve got.
I’m happy to pay that. And people work hard to do that. And I’m not against that at all. But I think the other things that I’ve mentioned is definitely land tax. There’s just lots of fees that you pay the council and the government to get things approved. And those time frames are very, very long at times as well. And like I said, yes, stamp duty legals, in the way of mortgage registration fees, holding costs, obviously if you’re going to borrow money, it’s gotta be holding costs there. Legals, I’m not sure if there’s anything else I missed there, Tyrone.
I don’t think you’ve missed anything. I’m just curious in terms of say a percentage wise, how much does that take in need to factoring during development? Because there’s quite a number of things as you said there, legal, stamp duties, land tax, you know, council fees, that’s quite a number of fees just in itself. Like I wonder how much that accounts for roughly?
Ah, look let’s, let’s just put it this way. And every council’s different. There’s also a thing called council contributions, and every state is different. I know in Queensland, for example, across the board, roughly it’s $29,000. My land that I’m selling is an average price of 250 to 270, let’s say, so that’s more than 10% of the purchase or sale price I’m paying to the council per block, not just the overall deal, per block. Right. And I know that in Victoria and New South Wales, it might be different. Might be, I think, as per valuation in different states. But that’s an example in Queensland there. Also, you know, that GST, I reckon it’s probably 3 to 5%, probably closer to 5% of the net actual costs of 15%. Just that example alone is of transactional costs that the buyer is paying when they buy that property. Right. And like you said, you look at developers and go, ‘Oh, you know what, they should be driving Bentley’s.’ And if we didn’t have to pay those fees, I would be driving a Bentley. Yeah, it’s just crazy.
So let’s just say, are we talking about these costs, or incurred inside the actual block? So say for example, the blocks 220, would that cost be already absorbed in that 220? Or would that be charged on top of that block?
Yeah, that’s already included by the time it goes to the market and let’s say we sell it for 220, all those fees and charges are already accounted for internally as an expense. So the contributions itself would have been paid already as a hard cost in terms of… We’ve already paid that to the council before we can actually get the title. However the GST is extracted or taken out or paid to the ATO once we sell it. So one is a cost that we pay out, the other one is a post settlement cost, if that makes sense. Actually it doesn’t come out of your pocket, it just comes out of your gross revenue proceeds.
Yeah. Gotcha. So basically we have to factor in, you know, in terms of, to be able to make a profit on these deals. You’ve got also factor in the cost that you purchased the blocker and you know, whether that be a hundred to 150,000 any take away the sales cost, which is 220, also the revenue that’s come in, which is 220, for example, and the minus say another 15%. So your margin is between you know, the 150 to 200,000, probably even less now when you actually do all those calculations. So you’re actually playing with a small margin here then actually. And that’s why there’s, there’s gotta be volume for this to actually work.
Oh, absolutely. And that’s why the fundamentals I talk about in the principles of the courses, you make your money when you buy. And that’s why I suggest people think big and start small because these numbers and calculations can get quite intensive. And when you’re doing a one-into-two or even just a buy/reno/sell, you’ll get more aware of what the costs are. Margin schemes, GST. Because, for example let’s say you do a development, a one-into-two, you keep the existing house and cut off the backyard you know, to make it even more complicated. In my experience with my clients, is that the house, because it’s existing, there’s no GST. But the vacant block of land might have GST payable, right? So then you go, well, okay, one product has GST applicable. The other one doesn’t. How do you work that out and how much do you pay GST?
And that’s when you gotta bring an accountant in to work your way through that. So like I said, without offering financial advice, that’s where it starts getting complicated, but it allows you to essentially save some money on the GST by retaining some existing product. Sometimes like, for example…I’ll give you an example. I’ve got a double block on the market at the moment, 600 square meters. It’s approved to sell. So it’s approved for two blocks of land. So two, 300 square meter blocks. I’ve got an approval for it and it’s on the market. And I spoke to my wife who’s the accountant and I said, ‘Well, look, if I knock the house down and I sell the blocks of land, will I pay GST or am I better off selling it with the house on it?’ And from her point of view, selling it just with the house on it existing, just with a paper approval, is going to be a lot better for me.
Yeah, it’s just an investment. I’ve held it for more than 12 months. I’m going to get a better tax position from that. They’re knocking the house down and selling two vacant blocks of land from that point of view, cause I’ve got to pay tax obviously, cause I’m making money, and then potentially I’ve got to pay GST on the vacant blocks of land. So it’s a double whammy in that particular instance, I’ve just put it on the market as is, as an investment property with an approval in place. If people choose to develop it, that’s really up to them.
So say for example, that vacant block of land that you decided to build a brand new house on that, would you have to pay GST on that?
So like I said, I’m not an accountant, so in my scenario I’ve got 600 square meters with an existing house on it because it’s got an existing house that I’m selling. That’s fine. But if I do knock that house down, subdivide the blocks and build two new houses. Is that your question? I reckon you wouldn’t have to pay GST. Obviously I don’t know, but I reckon you wouldn’t because of brand new stock, if I rented them out, then maybe it’s a different story and down the track sold them as investment properties. But I think there’s a big word that the tax guys talk about, which is intention. ‘What’s your intention. Are you planning to sell it? Are you planning to keep it?’
Yeah, that’s definitely an accounting type of question, but that’s fascinating, certainly different strategies to think about actually, because this, this actually comes back down to yeah, as you said, the intentions behind what you want to do with it. And if you actually have that clearly thought out at the beginning and worked out with an accountant, the strategies behind how much tax implications you have and how much profit you’re gonna make, you’ve got to figure out which one’s going to be the better deal, the better way to go about.
Exactly, exactly. And a lot of these costs are unavoidable. And that’s why I reckon it’s very important to have an accountant on your team very early on the piece so that you can negotiate and look at and basically navigate the opportunities there. And at the end of the day we accept it. It’s just a cost of doing business. We got to put that into the feasibility and when there’s a price that we offer a seller, that is the price based on our calculations. It’s not because you know, we’re trying to squeeze an extra margin out of it. Most of the time, you know, you’d be lucky to get, you know, 22, maybe 18% on a bigger subdivision. But my big one, my fees, I started off with about 29% based on the fact that project’s took an extra year or two longer. And we’re probably down to 18% with holding costs, extra fees and charges, extra requirements from council, less blocks that we’d anticipated.
So it’s just the way it is. That’s why having those fat margins are so important. And coming back to our buy and hold conversation previously is that when you’re buying and holding, you don’t have as many transactional costs, not as many moving parts, you’ve got a tenant, which is your income. And so you don’t have to worry too much if you’ve gotten it wrong and you paid too much initially, as long as it’s not eating its own head off too much with negative gearing… you’re holding, it is not a life or death situation. Whereas if you’ve got a development site, you’ve paid too much and you’re not aware of 30 grand-a-block here, 10 grand-a-block there, and you’ve got several blocks that can multiply very, very quickly. And especially if it’s vacant, you know, that can eat into your cash flows very, very quickly and you can be losing money quite rapidly.
Yeah. So one is sort of more of an active strategy and one is sort of a passive strategy. And I guess when you look at the two, it’s good to sort of have both because one can sort of weather the other, if things don’t go well. I mean, ideally the situation is we want positively to have everything go well, you know, for the development and also for portfolio that you grow with these properties, but at the end of the day, if you want to sort of accelerate your growth and to actually purchase more properties, you know, build them, sell them, keep some, you know, it probably is a strategy that needs to be in for consideration before actually going and jumping into that because it can definitely help, but there’s also some negatives, which was kind of also explained. And I think it’s been a great open conversation this today because it’s going to give two different points of view because you know, you’ve done it on a larger scale and I’ve been doing it on a smaller scale and there’s pros and cons to both.
