If your ‘bread and butter’ comes from the building industry as a builder, tradie, or even architect, you would be considering getting your ‘cream’ from property development.
Being in the building industry, you would know or have worked with many people who have made their fortunes from property development. Now you have decided it’s time to ‘try your luck.’
It’s never as easy as just buying a cheap house in need of a renovation, knocking it down, and building two houses and then selling it at a huge profit! Doing it that way is usually the recipe for disaster.
This ‘tip sheet’ has been designed as a high level guide for making the decision to develop. The best way to go about it is to speak to my team and me for ideas, guidance and assistance.
Step 1. Choosing the site
Step 2. Negotiating the purchase
Step 3. Organising the finance
Step 1. Choosing the site:
The success or failure of your project is usually determined at this stage – the purchase of the future development property!
Get educated – attend relevant courses and surround yourself with people who have done it before and have succeeded in the areas you are considering. Chocolate Property is a real estate agency specifically designed to buy and sell development sites with or without plans and permits. This should be your first point of call whether you are looking to buy or sell.
Decide on who will buy your properties – an occupier or an investor. Then, build for this market.
Look for an area to develop which is in a growth phase and there is a huge demand for rental properties.
Consider proximity to schools, shops, public transport and the CBD when choosing.
Become familiar with councils, their plans, zoning and development restrictions, timelines for processing applications, their appetite for developments, etc.
Step 2. Negotiating the deal:
This is the part where your skill as a deal maker will be the difference between 20% profit or loss. This is also the time is when having a trusted Estate Agent can be handy.
Do your site analysis.
Work out your ‘end of project’ revenue (Gross Realisation Value)
Deduct all costs including interest, and 10% contingency.
Allow a 20% profit margin.
- Will the owner offer terms or a long settlement?
- Will the owner consider an option?
- Will the owners consider a joint venture?
Explore all the possibilities before you strike a deal.
Step 3. Organise the finance:
Adequate and suitable Funding misjudgments are common reasons developments fail.
Obtain access to as much credit as you possibly are entitled to – have lines of credit, overdrafts and any other types of funds available before you begin the development and ensure they are independent of the project.
Borrow as much as you can on the project – save your own money for emergencies and unforeseen circumstances. Even if it costs you more to borrow more, factor it into the project rather than using more of your own funds.
Understand the borrowing and building entities which will need to be involved for the banks to agree to lend the money and which suit your circumstances.
Do your numbers regarding purchase price, rental return and resale value – both for the lender and for your own needs stack up?
Some do’s and dont’s
Once you have your finance organised – both for the purchase, the construction and the ‘buffer’ then you are ready to find a suitable property.
When you have found the property, ensure you have made relevant checks on the title, interested parties, zoning, restrictions, covenants, drawn on surveyors knowledge of plans and have spoken to your accountant, valuers, engineers, quantity surveyors, broker and estate agents before you purchase.
Don’t get emotional about the price you pay – it should all be academic based on the calculations you have done. If it does not meet your analysis, walk away and keep searching.
Things to be mindful of:
Holding costs of the property – loan interest repayments, the various taxes, delays in getting the plans and permits through council, construction costs, delays and cost blow outs.
Cash flow is the most likely cause of a development failing – unforeseen delays could cost you more than money! They could cost you everything.
Strategy for the end. That is, will you sell them / will you keep them and contingency plans if you don’t get the price you want.
I welcome the opportunity of speaking with you regarding your next project – whether it’s a dual occupancy or a 100 unit development.
Director / Licensed Real Estate Agent
The Chocolate Group
0411 258 058
1300 137 539
Disclaimer: This article is not to be used as specific advice and has not taken the readers’ financial situation or objectives into consideration. The article is only general in nature.