RISING house prices are tempting investors back into property after a few lean years, and many are considering taking the next step and chasing bigger bucks through property development.
It can promise more riches than simple investing but has more potential traps for beginners, and a whole new world of knowledge to master.
Author, property developer and university lecturer Peter Koulizos says there is a great opportunity to make money in property development, “but there is also a great opportunity to lose a lot of money, because the risks are higher”.
“Most capital city house prices are still below their peaks of three years ago and interest rates are very low, so it makes property development more affordable for the average mum-and-dad developer.”
Koulizos says research is the vital first step. “That starts with the council,” he says. Every council has a development approvals process and plans that outline minimum block size, minimum street frontage and other issues.
Developers need to research prices and know how much a property is worth. Koulizos says long-term investors may pay an inflated price for a property but are still winners if they hold it for 10-15 years, but a developer looking to turn it over faster does not have as much time to make up for their mistake.
“Get a fixed-price contract from a builder, and one where they guarantee the build time,” he says. “In development, time is money. The longer it takes, the more your holding costs. And avoid changing plans once you have signed off on them.”
Koulizos recommends writing down the worst-case, best-case and probable scenarios, and you should aim to make a gross profit of 20 per cent on the project.
Metropole Property Strategists chief executive Michael Yardney says now may not be the best time to start a new development, because house prices have already picked up and developments usually have long time frames – often a two-year process.
“A good way for the beginners to start is through renovations. It has much shorter time frames and you also learn budgeting, dealing with builders and dealing with banks,” he says.
Yardney says it is vital to start small. “You are going to learn most of what you will learn in the first two or three developments. It’s going to cost you more than you thought.” But property development is a great strategy because you are not just waiting for the market to rise – you buy assets at wholesale prices and are able to create capital growth, he says.
Yardney says it is vital to surround yourself with a good team of experts. “If you are the smartest person in your team, you are in trouble,” he says.
SOL Results property coach and developer Stan Kontos says his top rule is to ensure you make your money when you buy the property, not upon sale.
“Undertake a feasibility study for costs such as demolition, subdivision and so on, based on today’s price, not a projected future price,” he says.
“Don’t depend on it going up and, if and when it does, consider this a bonus.”
Kontos says people who do not like risks should not go into property development.
“Find a mentor, be teachable and get taught. Don’t make the mistake of learning as you go.”
Kontos says beginners need equity of about $50,000 to $100,000, plus a steady cash flow, and should only pick developments they can afford.
“Start by researching a specialist area,” he says. “The risk is reduced when you understand the area and the council zonings, as well as any future changes.”
EIGHT STEPS TO SUCCESS
1. Before looking at land, work out your finance and team of advisers including real estate agent, solicitor, architect and development manager.
2. Check the local council’s policy toward development and come up with a concept.
3. Buy land at a price that allows you to make a commercial profit.
4. Get development approval, which can take months.
5. Get working drawings prepared so you can then obtain a building permit.
6. Obtain quotes from builders and finalise finance for the construction period.
7. Next comes the building stage, lasting 7-12 months. Most developers never get their hands dirty, and are more like a producer of a movie.
8. At final completion, the project is refinanced and leased, or sold. Be sure to always have an exit strategy before you start.
Source: Metropole Property Strategists