How To Profit From Property Development
Let’s just talk about entry level property development, which is usually a house behind a house or a single block where somebody will build one house on that block.
The first thing you do is sales evidence – Undertaking an analysis of the profits you’re looking to gain on a potential development.
Let’s assume there is an R20 zoned, duplex development site that is a 900 plus square meter block that is in a suburb that is able to be sub divided.
The first thing you do is look at site itself.
• Take into consideration the land
• The soil type
• Work out what the overall costs for general works will be
From there you look at the costs to what will be common in the area in terms of accommodation – whether its four-bedroom, two storey, single storey etc.
Then you combine.
• Building work costs
• Add internal improvements (carpet, air conditioning)
• Add external finishings (ie fencing)
• The cost of interest during construction
• Agents commission
• Stamp duty on purchase price of initial property
Then, work out what the value of the existing property is if it was to remain.
After all those sums are done, if the development analysis shows profit potential, that’s a very good starting point.
So, what would be your fall back strategy, say if the market turned? Perhaps that expected value was no longer there.
If the market quietens down for some reason, what you want to determine, is what the rent yield will be.
If you’re left with a home you can’t sell, can I take a strategy of holding that property for a long time and generating a rental income?
Most investors and developers in property will find it’s actually going to be more sustainable to hold a property portfolio and hold the principle of capital growth to achieve a return on their investments
That’s good advice.
So then, let’s say somebody has a reasonably high income and access to enough deposits so they’re looking for a three or a four unit site, would your strategy differ?
My strategy wouldn’t differ at all.
I’d still take the same approach. That is, can I get my money back after expenses and turn a small profit and if not, once the when development is completed, could I keep those properties as investment properties.
Is it fair to say that the house behind a house or a duplex development will get you a higher yield compared to say a 15 site development, as a percentage?
Not necessarily, the higher the number of units built, the higher the potential yield, because there are not as many players in the market.
Look at the market as a pyramid, the smaller unit developments are more achievable and ‘turnable’ by a larger number of people – the difference is that if you’ve got a lot of players in an existing market its going to become competitive.
However, when you talk bigger developments there is less players involved and potentially higher yield, in my opinion
Having said that, if you are looking to undertake a single or duplex development, pick a particular area and build something funky.
Property Developers might be getting an above average yield because they found a niche in the market and people pay a premium for something different.
My opinion on that is that market is smaller, because if you develop in an inner-city area that means a bigger outlay on the land to start with, not to discount the potential development of something that is closer to the city, within a 10k radius of the CBD, because a lot of people are looking beyond that distance and the same principle.
More expensive, fewer players means higher potential yield. It’s not a rule, it’s a guide.
There are as many good opportunities close to the CBD as there is in the outer suburbs. It’s just a matter of watching the market, almost being an expert and knowing when a good opportunity comes up.
So, to give you an example, if you were to look at the development, where for instance the land component or the rent on an existing older home was something in the realms of say 280 dollars a week on an existing home.
Rather than just building house behind house, you decide to abolish the existing house and put two homes on the block, you’ll be looking potentially in the realms of $480 per week.
If you think going from $280 a week in a rent for an existing dwelling up to $480 dollars a week for a new dwelling, you’re getting a better yield on that additional $200,000 potentially your spending on the front home and then winding up with a brand new home.
So you’re getting more rent return for the additional 280 thousand out lay and also a depreciation allowance on the new dwelling you would not have gotten on the older existing home.
So talking about house behind house developing, I’d be looking at more often than not, as a preference, demolishing the older existing home and then building a new home on it.
Because someone has paid more for a new product than an older product and no maintenance issues down the track, but there’s a lot to be said for somebody to be looking at a division where there is more and more duplex opportunities being created by the big developing land companies, you can make the numbers on those work quite well.
What it boils down to is what someone considers to be a fair risk for the return of money they spent and really the key to making it a successful development is to have an exit strategy. If it doesn’t work and if you can afford to hold the product, if you have to – if you can do that then really there’s little risk in it.
It’s not in your end returns to, not in the rental market too that’s about relationships and knowing local professionals that can give you information when it comes to doing the assessment.
It’s never too late to start, if your someone starting off your working career or in the middle or towards the end of your working career, if you buy the right property and do your research, you’re in a better position if you do the numbers correctly, get sound advice, you can make profit as well in developing your properties.
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