How to get into Property Development – No risk, No money
By Adam Grocke (7 min Read | Advanced)
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 to get started. Many of the world’s richest people have made their billions from developing a property, both commercial and residential. Let’s break it down to what would be applicable to you.
First of all, you need to understand the concept. Let me explain by using a simple scenario, but please keep in mind, there are other more complex ways that will be explained in future articles.
It’s quite simple, you purchase a large parcel of land, sub-divide it into 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, given you would get council approval to subdivide, you could 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 lot 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 for the subdivided blocks.
Now it’s not really that simple because you need to go through the long council approval process, which means understanding what councils deem to be minimum block sizes, zoning rules and regulations etc.
You also have a lot of upfront costs in developing 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?
1. Firstly, the old saying applies – 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 built). 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.
2. Once you have enough money, GET ADVICE. Developing property is a complex process and if you don’t get the process right from the start, you’re almost guaranteed to lose money. Remember this is a higher risk strategy, but you can get support. Our clients are being walked through the whole process by independent property development consultants, who provide support in finding the development sites, subdivision, building dwellings to then selling them. I highly recommend using a development consultant, because any kind of delays can cost you thousands of dollars! Development Consultants are experts who know the rules, regulations and processes when dealing with councils.
3. GET TAX ADVICE. Developing property is more of a business strategy than straightforward property investment. You’ll need to consider ownership structure, asset protection, GST, CGT, sale times, holding costs, distribution of profits etc. Therefore, you need to make sure your accountant has property development experience!
4. GET CORRECT LOAN STRUCTURING ADVICE. You’d be amazed 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 that 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.
Three key pitfalls to property development
Experience teaches you a lot more than you can ever learn in school. Here are just a few things I’ve either learnt myself or have learnt 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 three good players for your team. Imagine you were the centre-forward,
a. A good property development consultant is your right forward pocket – worth their weight in gold
b. A professional mortgage broker is you left forward pocket – you won’t get anywhere without money. A professional broker will mitigate some risks and make the process as stress-free as possible
c. A charted accountant is your full-back – will save you tens of thousands of dollars and protect your assets
GET ADVICE – don’t ever underestimate advice. Pay for it because the professional advisors have seen others pay out money through mistakes without the advice and it’s a lot more expensive.
If you would like to discuss your property development aspirations with me personally, please feel free to drop me a line at Adam@jgg.com.au
published November 15th, 2017