Have you ever considered getting involved in property development?
With the good old boom days of the Australian property market well and truly over, many investors are considering how they can become more actively involved in growing the value of their property portfolio.
They realise that simply sitting back and waiting for their equity to snowball is no longer a real option, so pro-active investors are contemplating donning the developer’s hat and physically adding value to their assets in a bid to increase profits.
Over the years, while we’ve seen many developer-investors succeed in their endeavours, we’ve also seen many fail.
Generally they all start out with the best intentions, but some never make it beyond the starting line while others fail to reap any rewards at the completion of their project.
In this second part of our property development series I will explain the following three critical points you must understand before undertaking a development;
- What property development is all about
- How to determine if you have what it takes to be a successful developer
- Why you should consider property development
As we progress through our series of articles, you will learn the essential steps to follow in order to finance your project, manage the risks associated with property development, recognise the perfect site, conduct the all-important feasibility studies and deal with the many dilemmas that can crop up as you go.
There is no doubt that the risks of undertaking a development can be great, but the rewards can be even greater.
WHAT IS PROPERTY DEVELOPMENT?
One definition of property development is “the continual reconfiguration of the built environment to meet society’s needs.”
Infrastructure that we take for granted, like roads, sewers, houses, office buildings and shopping complexes don’t just magically appear.
Somebody must motivate and manage the creation, maintenance and eventual recreation of the spaces in which we live, work and play.
For the purpose of this series, I am going to be focusing on a specific classification of development that is achievable for the “average” investor contemplating getting their hands dirty.
Rather than get into the complex world of high rise apartments and major developments, we will look at how to succeed with small to medium projects.
I advise investors to “cut their teeth” on minor undertakings when starting out.
Ideally, your first foray into development will be something as basic as completing renovation works on an existing property within your portfolio that could use a bit of updating – maybe a new kitchen and bathroom, new flooring, etc.
From there, you might progress to subdividing a block of land that has an existing house and possibly building another one at the back, followed by demolishing an established home on a larger allotment where the zoning allows for two or three town houses.
In order to be successful at property development; you have to crawl before you walk.
Most mistakes are made with the first few projects you undertake, so it’s best to learn from these without having to risk your life savings.
Ambition is a crucial asset for any property developer, as is the ability to think big, but over-confidence can be your worst enemy.
So remember to start out small and learn about the property development process with a small project that won’t make or break your entire investment career.
It is also important to note that any project involving the construction of four or more dwellings on the one site will be considered a “commercial” endeavour by the banks and can therefore be more complex to fund.
IS PROPERTY DEVELOPMENT FOR YOU?
Property development is an extremely creative process, therefore property developers must be creators by nature.
As a developer, your role is to take a project from the conception of an idea, right through all the stages of design and approval, financing, construction and marketing and eventually the leasing or sale of the project.
Successful property developers are a bit like movie producers.
They assemble a highly talented team of people and skilfully lead them to develop a profitable outcome.
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Developers need to be proactive and make things happen.
They must also be creative, flexible and adaptive to take their project through the development maze, not to mention all of the bureaucratic red tape that’s involved with council applications, zoning restrictions and the like.
As a developer, you need to work hard, have patience, remain focused, and have a burning determination to succeed.
There are a few key basics you are going to have to undertake as you move along the path towards becoming a successful developer.
- Educate yourself
- Take your time
- Do the research
Developers are investors who commit their equity, expertise and talents to convert land from its current use to a higher and better use.
They require a good understanding of the town planning and construction process and marketing of real estate projects.
The developer carries the financial risks of the project but stands to reap the rewards if it is a success.
In other words, the buck literally stops with you – the developer.
To become a successful property developer you need to be a good coordinator, because you must assemble a team of talented people and proficiently lead them to deliver a profitable outcome.
Developers are more than just property traders who buy low and sell high; they are knowledgeable in their field, have good negotiation and people skills and understand how to optimise profits while managing risks.
As a developer, it is your responsibility to make sure the risk you are taking on is equal to the potential reward at the end.
That is, the higher the risk, the greater reward you should aim to achieve.
WHY SHOULD I CONSIDER PROPERTY DEVELOPMENT?
While many Australians consider that one of the smartest ways to invest your money these days is in property, what is not so well known is that professional property investors are safely generating higher than average returns by participating in the wholesale end of the market.
You see…by becoming developers, they avoid paying retail for their new properties.
But there’s more to it than that, when you develop the properties that you intend to hold for long-term investment you get a number of other benefits:
- Strong long-term capital growth – because you bought in the right locations
- High rental yields – because your tenants pay you the full “retail” rent – they don’t know that you built your property below the retail price
- Greater depreciation allowances – because you got a new building.
- Instant equity – this is the developers margin that the average property developer makes when selling a property, but that I believe you should retain by keeping your developments as long-term investments.
In other words, you have a high growth high yield investment that is cheap to hold onto – something pretty rare in today’s property markets.
PROPERTY DEVELOPMENT IS ALL ABOUT CREATING YOUR OWN EQUITY.
One of the many reasons I favour property development as an investment strategy (for those who can afford it) is because, if done correctly, it “manufactures” equity.
By buying a development site and adding value through development you can either refinance or sell the end product at retail prices, and have the ability to not only save money, but make more.
Think about it – you buy at wholesale prices, add substantial value, thereby creating significant equity and then use that equity to refinance and borrow more, giving you the option of undertaking further developments or adding more “bargain buy” properties to your portfolio.
Now my preferred strategy is to develop, add value and refinance – not sell because that way you don’t have to pay tax or GST and, of course, you get the ongoing capital growth of your new investments
However, I hope I haven’t made it sound too easy, because there are lots of minefields along the way, but in future articles in this series I’ll discuss how to walk through the maze of property development.
If you want to learn more about the property development process you may be interested in How To Get Started in Property Development