So, you want to be a property developer!
This can be a great way to make money, if you know what you are doing. The property development process can be a long and complex one, from finding a site and selecting the builder to financing the deal and building and selling. Property development can lead to significant profits but it can also lead to significant losses so the more you have planned and thought about your project, the more likely you are to succeed. Remember the old saying, “A failure to plan is just a plan to fail”.
This “Property Development 101” series won’t be able to teach you everything there is to know about property development. However, if you read each instalment over the coming months, you will learn about the fundamentals of property development and it will make you aware of what questions you need to ask so that you can make educated and informed decisions.
Over the next few instalments, I will be outlining the major steps involved in property development. These include:
Setting your goals
How to find development sites
Choosing the best site
Working with council
Selecting a builder
Real estate agent/property manager
Setting your goals
This is the first step in any property investment venture. This will help you decide if you build and sell all the dwellings, keep them all or even keep some and sell some. Your goals may be one (or more) of the following:
- Retire early
- Retire wealthier
- Increase your cash flow
- Work part-time
- Give up your day job
Below I have provided a very brief outline of a development project so as to help clarify which strategy could be best to meet your goals.
Let’s assume that you plan to buy some land and build a pair of townhouses.
|Land – including purchase costs||$400,000|
|Development costs – including site works, construction, holding costs, etc.||$600,000|
|SALE PRICE – (2 x $600,000)||$1,200,000|
Retire early – You could retain both town houses and not do any more developments. If you kept them for 15 years and they doubled in value to $2,400,000, you could sell them to pay off the loan of $1,000,000 (assuming you originally borrowed all the money to do the project on an interest only loan) and you would be left with $1,400,000. After taxes, you would probably still be left with over $1,000,000.
Alternatively, if you plan to give up work well before you’re due to collect your superannuation/pension, you could be more proactive. If you sell them as soon as they were completed, you’d realise the $200,000 profit. After taxes you could still end up with $100,000+ net profit. If you developed several times, you could end up with a $1,000,000 to retire on.
Another possibility is to keep one and sell one. This option allows you to have one property growing in value and also bringing in rental income if it is an investment property. With the profit you received from selling the other dwelling, you could help fund the next development.
Retire wealthier – The best way to create long term wealth is to hold onto the properties. The longer you hold them, the more they should increase in value.
Increase your cash flow – You will need to sell both properties so that you can pay off the original debt of $1,000,000 and use the profit, after paying your taxes, to increase your cash flow.
Work part time – If you sold both properties and were left with $100,000 after tax, you could use these funds to take off 1, 2 or 3 days a week for many years to come.
Give up your day job – Sell them both, keep the $100,000+ net profit and once you have spent this, do another development. Sounds easy? Wrong! I don’t know of any banks that would lend $1,000,000 to someone who has no job and only completed one property development project.
The ideal scenario is to keep your day job and after you have completed several developments and you are gaining confidence and more importantly the bank has confidence in your ability to be a successful property developer, then you can consider going part-time and finally giving up your day job.
If you wish to keep your properties, ensuring you build in the right location is critical. There are a number of macro and micro location factors to consider.
Macro-location: You need to ensure that your development is in an area/suburb that will have significant capital growth. These suburbs tend to be up-and-coming areas near the city centre or the sea.
Micro-location: Once you have worked out which suburb to develop in, then you need to ensure that you are in the right street. Is it wide and lined with trees? Do the existing houses look appealing or will your new property be the best house in the street?
Whether you wish to keep or sell the properties, you need to ensure that you are close to schools, public transport and shops.
These location factors will help you attain the best price/rent for your property.
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?
- 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”.
In Part 2 of this series, we look at how to find development sites and select the best one.