Armchair development is the term used for developments where a property developer invites investors to contribute capital to a development in return for a share in the developer’s profits. The arrangements for sharing profits and capital required varies by the size and scope of each property development. In this article, we’re taking a look at armchair development and if this could be an effective way to diversify your portfolio.
In most armchair developments there’s a mix of traditional lending and investment from individuals. As the name suggests, being an armchair investor is associated with the fact that you can profit from a property development without having to be directly involved in the planning and building. In return, the investor receives a share of the developer’s profits for contributing capital at the start of the project.
Some of the key advantages of being an armchair investor is that a person can remain more liquid than if they were putting capital towards an entire property for their portfolio and the investment won’t require bank approvals if a person is using their own idle capital. The returns are also based on a much shorter-term basis than traditional property investment. Armchair developments typically provide returns on a short to medium term basis.
To keep the funds of armchair investors protected, a developer must keep the investors’ funds in a separate investment company. These funds can only be utilised for authorised and invoiced expenses incurred in building the development. The minimum capital requirement to be an armchair investment is typically between $25,000 and $30,000. Of course, these figures may vary between development companies, the size of the project and the maximum number of investors that the development company wants to take on.
In terms of returns, bigger projects like townhouse developments and apartment buildings will typically have larger profits. With these projects, however, there is more risk that the development will be delayed or subject to budget overruns due to all the moving parts in a large development. Some investors may choose to use their returns to purchase property in the development or use that equity for other investments. This will depend on the investor’s unique situation and the agreement between the developer and armchair investors.
Like any investment, there are risks associated with armchair development. You should always do your own due diligence and make sure an investment is right for your unique situation before putting your capital towards an investment.