How to make money from property development
By Adam Grocke
So let’s be frank, property development is hands down the quickest and most profitable way to make money from property. Ok ok .... yes there’s always a but... BUT it’s considered the highest risk strategy and requires the largest amount of capital (money) to get started. Many of the world’s richest people have made their squilliions from developing property both commercial and residential. Let’s break it down to what many ‘real’ Australians can afford to do.
First of all you need to understand the concept. To help explain, I’ll use a simple scenario but please understand there are other more complex ways that will be explained in future blogs so look out for them in coming weeks!
It’s quite simple really, you purchase a large parcel of land, sub-divide it to several blocks and then sell them for a higher price per square metre. In many circumstances the larger the block the cheaper the price per square metre. This means, if you can get council approval to subdivide, you can increase the price per sqm by creating smaller size blocks of land that more people can afford. Not everyone can afford to purchase a 1000sqm block for $800,000 but a much larger group of people can and are willing to pay $300,000 for a 200sqm block. Using this example, you’ve just created 5 blocks worth $300,000 each which means you’ve turned your $800,000 single block into $1,500,000 . The size of the land hasn’t changed, just the target market to sell the blocks.
Now it’s not really that simple, you need to go through the long council approval process and need to understand what councils minimum block sizes are, zoning rules and regulations etc. You also have a lot of upfront costs to develop the land before the value is created. For example, to develop the 1 block into 5, you’ll have to fork out approx. $150,000 not including holding costs before new titles are issued. This is the main hurdle for people to get into property development and also the main reason people fail.
So how can you get started?
- Firstly, it’s the old saying - you need money to make money. A rule of thumb is you’ll need 25% deposit and approx. $30,000 per block you want to create (this is a highly variable figure depending on what infrastructure needs to be build). If you don’t have that money or equity, plus a buffer then property development isn’t for you at this stage. One option if you can’t get enough money is to pair up with a friend or family member for the development and both pitch in funding.
- Once you have enough money, GET ADVICE. Developing property is a complex process and if you don’t get the process right, you’re almost guaranteed to lose money. Remember this is a higher risk strategy. There are independent property development consultants we use who walk our clients through the whole process from finding the development sites, subdivision, building dwellings and selling them. I highly recommend using a development consultant as delays can cost you $1000’s, they know the rules and regulations as well as the process. I used one myself as I don’t have the time to keep the process on track and deal with council.
- GET TAX ADVICE. Developing property is more of a business strategy than straight forward property investment. You’ll need to consider ownership structure, asset protection, GST, CGT, Sale times, holding costs, distribution of profits etc. Make sure your accountant has property development experience!
- GET CORRECT LOAN STRUCTURING ADVICE. You’d be amazing at how many times we’ve seen clients who have approached the banks and other brokers who have said we can’t do that because it’s too hard. Experience is everything as your broker will need to know what strengthens the finance application and which banks have an appetite for development finance.
Another key tip is there isn’t much margin in developments of 1 block into 2. So make sure you look for 1 into 3 or 1 into 4. Generally speaking, once you get to 1 into 4, the finance will be classified as ‘commercial’ so you’ll need more money upfront and have to meet tighter lending criteria.
The key pitfalls to property development
Experience teaches you a lot more than you can ever learn in school. Here’s just a few things I’ve either learnt myself or learn through the eyes of clients.
- Always have a large buffer (cash reserve) in case something goes wrong. This is hands down the biggest issue developers face
- Don’t bite off more than you can chew. You don’t need to do the biggest development to make the most money. Often it’s better to do several smaller developments to spread your risk.
- GET ADVICE from professionals who have done this before. You’ll need
- A property development consultant – worth their weight in gold
- Charted accountant – will save you tens of thousands of dollars and protect your assets
- Professional mortgage broker – you won’t get anywhere without money. A professional broker will mitigate some risks and make the process stress free
GET ADVICE – don’t ever underestimate advice. Pay for it because the professional advisors have seen others pay for it through mistakes without advice and it’s a lot more costly.