Are you the Primary or Secondary Investor and Why It Matters
Are you the Primary or Secondary Investor
and Why It Matters
What many Australians entering into the property market may not realise is the significant difference in targeted returns when it comes to investing at different points in the property development process. We identify the differences between participation in early or late stage investments, acting as either a primary or a secondary investor. Focusing on this simple concept can greatly improve investment performance and how quickly you reach your financial objectives.
Are you a Primary or Secondary Investor?
An example of a primary investor is an investor that buys a block of raw land then aims to add value through subdivision into multiple blocks. The secondary investor on the other hand, is likely to be the purchaser of one of these subdivided blocks with little or no room to add value except through future, organic capital growth. This is the traditional off-the-plan purchase that most Australian mum and dad investors have grown to be familiar with.
However, if an investor can take the mindset of a primary investor, it allows them to look different at the properties they currently own, and the types of property they may consider for investment in the future.
“The challenges is two parts… access to the same opportunities as the primary investor … and mitigating risk”
The challenge is two parts for families. The first is to gain access to the same opportunities as the primary investor. And the second when achieving the primary investor point is mitigating risk and their potential life savings. No one wants to lose their shirt.
Quantifying the difference
To give you an idea of the difference in potential returns of a primary and secondary investor, let’s look at two different ways of investing $200,000.
A secondary investor purchasing a property valued at $200,000 relies on the future returns on the $200,000 value of the property, with a national 25 year average hovering around 6.8% growth annually.
However as a primary investor, you could be looking at immediate returns on your assets of 15% (conservatively) to over 25% (what many experts achieve), through methods such as subdivision into multiple smaller lots, or re-zoning of the property. Increasing your asset value by 20%, for example, you would see an immediate $40,000 increase in cash if you sold your property or in equity if you keep your property. Either way you’re way ahead in the property investment game at a potentially faster rate, while also benefiting from the future capital growth on a more valuable asset if you keep it.
If we keep our investment and look at it within a conservative 5 year scenario, the difference in your pocket could add up even more to over $55,000. Assuming 6.8% growth rates over a 5 year period. The secondary investor’s $200,000 asset may “only” increase to $277,899. In contrast the primary investor’s $240,000 asset (with 20% initial margin) may now have increased in value to $333,478. This disparity in returns will only continue to grow the longer the investments are held, highlighting the rewards of taking the primary investor mindset.
How does the average Australian go from secondary to primary investor
So how does the average Australian go from being a secondary to a primary investor in the property market? The first is probably looking in their own backyard, literally! Perhaps your own home or earlier investment may have the potential to be subdivided, allowing you to extract extra value without even having to look elsewhere!
For most however, learning the ins and outs of property development can be a steep learning curve and this is where investors may start to work with established developers and property investment experts in the field. If you go down the second route, you should ensure that you pick the right people – ensuring they have the expertise and experience to see the project through and a track record of successful projects.
For more on winning projects and mitigating risks see more of Michael Blogs Property
Own Your Own Block (OYOB)
Property investment strategies and property advice.
*Information resourced from: Investormastermind; Stephen Chandler, EFTA and Property Development Institute; Rate City and CoreLogic.