Why Investors Don’t Always Make Good Property Developers

You've probably heard that buy-to-let property is a great investment that yields high returns. That much is true. You've probably also heard that just about anyone can make good money by investing in real estate. That's not true. In fact, investors do not always make good property developers for a number of reasons.

When we say ‘investors’, we're talking about the traditional investor who's typically used to dealing in securities, currencies and other forms of ‘paper’ investments. The thing to understand about property is that it is a real, tangible investment. It requires a completely different mindset than stocks and bonds.

Here are five reasons why investors do not always make the best property developers:

  1. Lack of Patience - Imagine an investor looking to get rich quick on property refurbishment. Cities and towns offer many cheap houses that can be gobbled up easily and quickly, so that's just what the investor does. Little does he realise it takes time to earn back what he spent on purchasing and refurbishing. Make no mistake about it; investing in residential property requires a long-term mindset.
  1. Focus on Purchase Price - The investor placing most of his money in securities usually looks to buy low and sell high. That may be a great strategy for stocks, but it doesn't always work in real estate. For example, auction properties may offer great bargains, but the long-term return may be limited due to neighbourhood conditions and other circumstances. Bargain-basement prices are not always the deal they seem to be.
  1. Changing Markets - Experienced property developers know the real estate market is constantly undergoing changes. Those changes are certainly more gradual than what is observed in securities-based investments, but they can have a greater impact on the overall yield of a particular investment. Investors not willing to pay attention to the changing real estate market are more susceptible to losses.
  1. Property Management Knowledge - While it's true that there are great returns to be made in the buy-to-let market, maximising those returns requires some knowledge about property management. With paper securities, you can forget about them as long as they are doing well. Property developers do not have that luxury. They are always having to worry about things like tenant relations, repairs and maintenance, local housing laws and so on.

  1. Human Factor - When an investor purchases property he plans to let out, he is purchasing an investment that involves a human factor. Where paper investments do not have a direct impact on anyone else's life, real estate does. Many investors do not take this into account. The results can be everything from frustration over late rental payments to mistreating tenants. If an investor is not a ‘people person’, he probably will not make a very good property owner.

Property developers are a unique kind of investor that tend to put heart and soul into each investment. If you are prepared to put the time and effort into building a good residential property portfolio, you should do very well with this type of investment. However, if you are the type of investor who likes the benefits offered by traditional securities and other paper investments, residential property may not be your cup of tea.

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Nick Hopkinson

by Nick Hopkinson - Property Investment commentator and Fruitful founding director.

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