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The 6 R’s to Property Development
Property development or investment is a vehicle to live the lifestyle you want, on your terms. It can be extremely rewarding and if you’re anything like me, you’ll love the process along the way, taking pride watching your creation unfold.
Perhaps you want to build financial freedom, plan and enjoy your retirement, or never have to worry about providing for your family. Maybe you want to give your children the best opportunities in life?
And after 21 years living and experiencing real estate from all angles, I’m here to show you that you can make money developing property or investing in any market. The key is sticking to a proven formula and always making sure the math is applied the right way, relevant to the market.
What you are about to read is my personal property development philosophy. I call it the 6 R’s. These are:
- Research
- Risk
- Review
- Refinance
- Reward
- Re-Invest
1. Research
Before you dive into developing your first property, it is important you research broadly, overall the relevant areas, as there are many variables.
These areas include (but are not limited to) site and neighbourhood research, project funding, design, town planning, construction through to product end value estimate for rental and sale, and profit margins.
It is also worthy to mention that in the research phase that it would be wise to create good, strong relationships that will help you build your long term network.
Work out what you can afford to invest. It’s also essential to be clear about what outcomes you want from your development investment.
I suggest you start with the following:
- What’s the maximum price you can afford for site and will you be able to afford to build when ready?
- What suburbs you are considering to invest in and why?
- Are you investing through a partnership, or individually?
- Are you entering the deal through a purchase option or buying outright?
- Will you be seek money partners for the project?
Your property purchase needs to meet certain criteria before you make an offer, and it is suggested you also spend enough time on due diligence, and not rush into buying.
For example, every local council has different zones and density tolerances. If you are looking to create further value from your purchase, you need to understand these zoning requirements. They dictate what you can and can’t build.
It might seem overwhelming, but it’s also non-negotiable. The more you involve yourself in this process, the easier and more efficient it will become. Your research must be thorough if you want to minimise risk and maximise the reward.
2. Risk
When all the due diligence is complete, it’s time to invest your time and money!
There is a reason the second ‘R’ is for Risk.
It’s because things can go wrong that our outside our control. There’s always risk with property regardless, due to the many external factors you can’t control.
All investment, in any area carries risk Whether it’s stocks or bonds, a new business, or something of value that is speculated to increase in value over time.
A sound investment is made through the detailed analysis on what the investment is, what rate of return it will receive, how liquid it is (that is, when you can turn it into cold hard cash) and how long the investment for.
My personal opinion is nothing beats property, regardless of market conditions! It’s possible to create an increase in value, that is within your control, and is not solely reliable on the ups and downs of the market.
It’s during the research phase where you can focus on minimising risk as much as possible. It’s something every good developer or investor does.
One way of minimising risk, that is becoming more and more popular is through property options. This is where you can make an offer on the property that is desirable to the seller, pay a fee to the seller (usually 1% of the purchase price) for the option to proceed with the contract down the track, when you are confident the development will be or is approved and/or market conditions are favourable.
Here’s a list of common problems a developer may encounter:
- The development application is refused by the local council or local council adopts a new policy or makes decision based on proposed policy
- Neighbours object to the development and further costs are incurred to take the matter further
- Development approval refusal after an appeal is made to tribunal
- Construction and planning are delayed
- Subdivision hold-ups
- Unforeseen areas of non-compliance are brought up
- Bank policy changes or finance restrictions are implemented
- You discover undocumented easements or pipes underground. I have a great story about this!
If you follow the process correctly the chances of failure are very low but it’s always possible. If you are prepared, you are GOLDEN. And if you plan correctly you will reap the rewards.
3. Review
You have researched, acquired your site and have made allowances for the unexpected. The Review stage is the stage where you focus on maximising the return. Your project comes to life here and involves design, materials, specifications, colours and efficiencies.
Some common items needing review:
- Town planning drawings and potential amendments
- Working Drawings (electrical, cabinetry, building)
- Structural Drawings
- Energy Rating Report
- Drainage Drawings
- Landscape Drawings
- Soil Report
- Project Specifications
Other possible drawings or reports:
- Waste Management Plan
- Traffic Engineering Report
- Arborist Report
- Tree Management Plan
You also need to consider the suitability of the product to market, selection of builder and construction. The plans need to be reviewed to ensure best use of space and suitability to the target market.
Double-check your construction drawings and consult your engineers about use of materials. Obtain multiple quotes from builders as it is importance to obtain quotes for comparison. Interview real estate agents to ensure you are comfortable with their ability to sell and understand their professional fee for service. A comprehensive review of all these items will give you confidence moving to the next step.
4. Refinance
Once your property has the Development Approval in place and preparation of all construction documentation is complete, funding options should dramatically increase.
In the current market, the likelihood of a significant capital gain is not as favourable as others. Yet all attempts should be made toward improving the value of the site. If you have purchased well, this can be done. There has recently been an increase of projects being funded by 2nd and 3rd tier lenders, due to tightened banking policy and regulation through APRA (The Australian Prudential Regulation Authority).
Alternatively, you can consider bringing in money partners, who can look investing in the project for a return on investment.
It’s likely that six months have passed since the project commenced, which is plenty of time to re-evaluate the value of your property. It’s now where you have an opportunity to tap into an improved equity position.
This will also help in facilitating the construction process. You can also choose different options for project funding.
5. Reward
Congratulations. You have built your development and have also created wealth! Be proud of this and enjoy the moment! Regardless of whether you decide to sell or keep what you have created, you’ve succeeded. Not only that but you have hopefully created a network of reliable people and have gained practical experience that can serve you in the future.
To capitalise, make sure you:
- Obtain financial advice on how to minimise your tax obligations (this also should be assessed prior). Understand your tax obligations on profit, or your position holding the property (cost associated vs. rental income).
- Ensure the properties prior to hand over from builder and prior to occupancy permit issue.
- Ensure all work with the builder is complete, including the fixing of any defects, landscaping and handing over the property clean and tidy, ready to occupy.
- Obtain certified valuations and agent valuations in writing.
- Double check all council obligations are met and a certificate of compliance is issued.
- If retaining as investment properties, you may want to you obtain tax depreciation schedule.
- If properties are sold off the plan, ensuring buyers are happy with the end product before handover from the builder. Happy buyers creates strong credibility.
6. Re-invest
To continue to build wealth you should always be looking for your next project.
Having this mindset is your path to financial freedom. Rolling over a big part of your profit into the next project will be important to your wealth building. You have learnt so much through this process and it gets easier every time.
Stay on your path! Allow for expenses and never spend your money before you receive it.
And above all else: Enjoy the journey.
Want to get your hands on a FREE eBook?
GOOD NEWS! We’ve put this philosophy into an eBook so you can refer to my 6Rs any time you need them.
eBook DOWNLOAD – Click here!
If you’d like to know more about my Philosophy or simply want to chat through your property options, get in touch – let’s chat!
Thanks for keeping up to date on What’s Happening – speak soon!
Jerry Y