Property development is one of the most profitable ways to make money from property – but it can also be risky business without the right advice. Here, our property experts share five valuable lessons every new developer should know.
Property development is hands down the quickest and most profitable way to make money from property. It’s also 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 billions from developing property – but we’ve broken it down to what many ‘real’ Australians can afford to do.
What is property development?
In simple terms, it’s the process of purchasing a large parcel of land, subdividing the land into several blocks and then selling those blocks for a higher price per square metre. In many circumstances, the larger the block, the cheaper the price per square metre. This means that 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 five 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 long council approval processes and have a solid understanding of what the council’s minimum block sizes are, zoning rules and regulations. You’ll also need to fork out upfront costs to develop the land before the value is created. For example, to develop the block into five blocks, you’ll have to pay approximately $150,000, not including holding costs before new titles are issued. This is the main hurdle for people getting started in property development, and also the main reason that people fail.
Five steps to get started in property development
- You need money to make money. A good rule of thumb is that you’ll need 25% deposit and approximately $30,000 per block you want to create (this is a highly variable figure depending on what infrastructure needs to be built). You’ll also need a large buffer in case something goes wrong. If you don’t have that money or equity (plus a buffer!), then property development isn’t for you at this stage. An alternative could be pairing up with a friend or family member to raise the capital together, although we recommend you only do this with people you trust implicitly. The bottom line is: you can’t get into property development without money.
- Get advice. Developing property is a complex process and a high risk strategy, so if you don’t get the process right, you’re almost guaranteed to lose money. We can organise for an independent property development consultant to walk you through the entire process, including finding the development sites, planning the subdivision, building the dwellings and selling. We highly recommend using a development consultant, as they know the rules and regulations as well as the processes, and delays could set you back in the thousands.
- Get tax advice. Making money off property is more of a business strategy than a straight forward property investment. You’ll need to consider ownership structure, asset protection, GST, CGT, sale times, holding costs, distribution of profits, and more. Make sure your accountant has property development experience (such as our accounting team at Johnston Grocke).
- Get correct loan structuring advice. Too often, we see clients who have been refused loans by banks and other brokers because it’s ‘too hard’. Choose your broker wisely, as they’ll need to know what strengthens the finance application and which banks have an appetite for development finance. Experience is everything.
- Choose your land wisely. There’s a very low margin in developments of one block into two, so make sure you look for a block that can be turned into a minimum of three or four properties. Generally speaking, once you get to the latter, the finance will be classified as ‘commercial’, so you’ll need more money upfront and have to meet tighter lending criteria. Remember, 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.