Property development is a currently a hot topic amongst investors. While some dream about making large profits in a short space of time, others are simply looking to manufacture capital growth, putting them a step closer to achieving their long-term goals.
With many pockets in Perth and around Australia recently rezoned or in the process of being rezoned for higher density living, property development is now within the grasp of many everyday investors.
Despite what some people think, you don’t need to be a builder to be a successful property developer. Whether a development project involves building a few units or townhouses or something more substantial, there are always considerable risks involved.
While you can’t control everything, many risks can be minimised through having the right knowledge and skills. What does a developer need to know to succeed? Here are four critical knowledge areas.
1. Your Market
At its core, developing property involves producing a product for a particular market. Therefore, you need to have intimate knowledge of the market you are trying to serve. Who are the people that will buy or rent your property, and importantly, how much would they be willing to pay (when the time comes)? What specific features do these people expect and look for?
While it’s critical to understand your target market, it’s also important to be aware of the potential competition. What type of property would compete with yours and how much choice do buyers have?
One area where many developers falter is not matching the project to the site. In other words, they build a product that is either too expensive (overcapitalising) or not good enough (undercapitalising) for the specific location.
As a developer, you don’t want to be a trend-setter and try to break price records. This is a very risky strategy, as the market might not support your plan. It’s far safer to develop product that is already in demand and that is in line with market trends.
2. Money Matters
Property development is a aimed at making a profit sometime in the future and property developers need to be financially savvy.
Specifically, they need to be able to assess the financial viability of a potential project, taking into account the completed value of the project, transaction (buying and selling, if applicable), construction, holding and any other associated costs.
A key question when doing a feasibility analysis is whether the project provides an adequate level of return to justify the risk and investment of time and money.
Project financing also needs to be considered carefully, ideally with the help of a qualified finance broker. How will the project be funded? What level of deposit will be needed?
3. Project Management
Just because a project shows a potential profit on paper, it doesn’t mean this profit will come to fruition.
At the core of successful property development is project management. This is essentially the process of planning the project, developing appropriate budgets, procuring services and managing the project through to completion – hopefully on time and on budget.
Successful project management involves a detailed understanding of the various stages of the construction process, from excavation to the final fit out. Normally these stages are mapped out in a document, along with the associated timelines and costs.
In ensuring a project runs smoothly, an important role of the project manager is quality assurance, making sure every aspect is completed to the appropriate standard.
Project management also involves being aware of the roles played by each consultant, including architects, engineers, surveyors, accountants, and lawyers.
4. Council Regulations
A stumbling block for many inexperienced property developers is their lack of understanding regarding local council regulations and what it takes to obtain Development Approval (DA).
Many underestimate the amount of information that needs to be supplied and the seemingly endless conditions that must be met. Inevitably, the process takes far longer than expected, which often puts financial pressure on the project.
Understanding council requirements involves researching complicated and lengthy documents, and compounding the problem is the fact that every council operates differently.
Having this knowledge is not only relevant when assessing a potential project or trying to get a project off the ground, but also to ensure the project takes full advantage of the site. Often, subtle changes to a plan can dramatically increase a developer’s return.
Obtaining DA is a big step in any project and it is at this point that some developers choose to sell-on the project to another developer who wants assurance of having the DA in place.
Don’t know? Don’t worry
If you are genuinely interested in becoming a property developer and think your knowledge is lacking in any of the areas above, don’t be disheartened.
Many successful developers employ the services of a company, such as Momentum Wealth, that can manage the entire process for you. With the right team in place, even an armchair developer can achieve great success.
Next month we round up this discussion by outlining the characteristics and personal traits commonly shared by top property developers. Don’t miss it.