Five Ingredients to a Successful Property Development - November 2019
November 18, 2019 / Written by Rich Harvey
By Guest Blogger, Peter Koulizos, property lecturer and author
Property development is much more complex than property investment. Buying an investment property requires a lot of research, just like property development but as you are holding the investment property for many years, time can be forgiving. If you paid a little too much for it, it’s okay because that extra $5,000 or $10,000 will be insignificant compared to the capital growth, if you but the right property.
Property development on the other hand, is not so forgiving. The process is much shorter (generally 12 months for small scale property development) and it involves much more money. To help ensure that your development is successful and you make money, consider these five critical ingredients.
Set Your Goals
This is the first step in any property development (and investment) venture. This will help you decide if you build and sell all the dwellings, keep all the dwellings to rent or sell some and keep some.
Whatever your goal, the number crunching (feasibility studies) and location are important considerations.
If you plan to keep one or more of the properties, location is paramount. You need to ensure that you are in an undervalued, up and coming location so that you have some decent capital growth. In regards to the feasibility studies, you must ensure that the end value of the project is more than the total cost of the project and that the rental income, together with the depreciation benefits, creates a neutral or ideally positive cashflow from Year 1. Having negatively geared property is okay of you have older established houses on good sized blocks of land but new dwellings on smaller blocks are not known for their great capital growth potential. Ensuring that the cash flow is neutral or positive from Day 1 will help make up for limited capital growth.
If you plan to sell all the properties, location is not as important but your feasibility studies are your key tool to success. You should aim for a 15% to 20% gross profit margin. More on feasibility studies later.
As mentioned earlier, ensuring you build in the right location is critical, especially if you are planning to keep all or some of the properties.
The type of property you build is also crucial to your success, whether you wish to keep or sell the properties. Some questions that need to be answered include:
- Should you build single or double storey?
- If you are building two storeys, should you have at least one bedroom on the ground floor?
- Will you include 2 bedrooms and a study, 3 or 4 bedrooms?
- Is a double garage essential?
- Will you include granite top benches and expensive appliances in the kitchen?
- Do you need to include a bath tub in the bathroom?
There are many more questions that need to be answered but these are just a few to get you started. Research is vitally important to the success of your development. It is not just a matter of “build it and they will come”.
Choosing the best site for your development
There is an endless supply of houses and vacant blocks of land for sale that could be built upon. However, not all potential development sites make for profitable developments. There are a number of factors that you should consider. These include:
Location: This has already been mentioned but there are a number of factors to consider in regards to location. Is the site near amenities such as schools, public transport and shopping facilities? Whether the end user of your new property is a buyer or renter, many people place great importance on proximity to amenities. Are you in a wide, tree lined street where there are other appealing homes in the street? You don’t want to finish up as the only big expensive house in the street if you are surrounded by low quality homes and nobody else is developing in the area.
Topography: Is it a flat block of land or is it situated on a slope or is it undulating? If your site is not flat, there will be extra costs to make the block level. To the naked eye, a block may look flat but even a difference in elevation of just one metre can add tens of thousands of dollars to your costs. In the end, a buyer will pay what they think the property is worth. They don’t care that you spent an extra $20,000 on levelling the site.
Size: Is your block large enough for multiple dwellings? Is your block wide enough? Size does matter in property development but there are other important issues. Check the zoning regulations of the local council or approving authority to ensure that you can develop your site.
There is an art in finding development sites but there is a science in selecting the best site.
This is probably the most important ingredient of a property development project. If you don’t get this part right, you are stuffed! Some key points include:
Include all costs – You don’t just add the cost of the land and the cost of the build and that is your total cost. What about your interest costs? What about all the property professionals involved in the project such as the designer, engineer, surveyor, etc? They are going to work for free. Don’t forget the tax component, especially the GST.
Use present costs and values – Too many “mum and developers” try to second guess what their project will be worth in the future, when it is finished. Don’t work on future values; you should work on what the project would be worth if it was completed today and if there is any uplift in price during the construction period, that is a bonus.
Conduct a scenario analysis – To minimise your risk, you should do three sets of numbers; best case, worst case and most probable case scenario. You need to know what the likely outcomes are, especially in the worst case scenario.
The construction will be one of your biggest costs so you need to ensure you get this right.
Selecting the Builder - I’d suggest that first drive around the area you want to develop in to find out who are the builders that are active in your preferred location. Secondly, ask your friends, family, work colleagues, etc for their recommendations, in particular for builders that you should not use. You should work on coming up with a list of three to four builders and then you can decide on which builder is best for you and your type of project.
Building Contract – You should strive for a fixed price contract as this will minimise any blowouts in costs. Once you have signed off on the designs and the contract, do not change your mind on the design! Builders can make a fortune on variations; this is where they have to change something in the designs because you have changed your mind, after you have already signed the contract.
There are many more aspects to consider when developing property but if you can get these five ingredients right, you are on the right track.
For more information on small scale residential development, you can check out this ten part series, “Property Development 101”:
You can also view this series of videos on a property development I completed earlier this year:
To have our friendly buyers agents contact you:
call us on 1300 655 615 today.