We’re two years into this property cycle, which is now entering a mature phase where capital growth will be slower, leading many investors to consider how they can become more actively involved in growing the value of their property portfolio.
Simply sitting back and waiting for your equity to snowball is no longer an option, so proactive property investors are contemplating donning the developer’s hat and physically adding value to their assets in a bid to increase their profits.
Over the years, I’ve seen many developer-investors succeed in their endeavours, but unfortunately I’ve also seen many fail. Generally they all start out with the best of intentions, but some never make it beyond the starting line while others fail to reap any rewards at the completion of their project.
There’s no doubt that the risks of undertaking a development can be great, but if done correctly the rewards can be even greater.
So what is property development?
One definition of property development is “the continual reconfiguration of the built environment to meet society’s needs”.
Infrastructure that we take for granted, like roads, sewers, houses, office buildings and shopping complexes don’t just magically appear. Somebody must motivate and manage the creation, maintenance and eventual recreation of the spaces in which we live, work and play.
Clearly the focus of PSD is on a specific classification of development that’s achievable for the “average” investor contemplating getting their hands dirty.
Rather than get into the complex world of high-rise apartments and major developments, in my regular column I’ll look at how to succeed with small to medium projects.
I always suggest investors “cut their teeth” on smaller projects when starting down the road of property development. Ideally, your first foray will be something as basic as renovating an existing property in your portfolio that could use a bit of updating. After one or two of these you might progress to a duplex or small townhouse development.
In my mind, in order to be successful at property development you have to crawl before you walk. Most mistakes are made with the first few projects you undertake, so it’s best to learn from these so you can survive and move on to larger projects.
Ambition is a crucial asset for any property developer, as is the ability to think big, but over-confidence can be your worst enemy. So remember to start out small and learn about the development process with a few initial projects that won’t make or break your entire investment career.
It’s also important to note that any project involving the construction of three or more dwellings on the one site will be considered a commercial endeavour by the banks and can therefore be more complex to fund.
Is property development for you?
Property development is an extremely creative process, therefore property developers must be creators by nature. As a developer, your role is to take a project from the conception of an idea, right through all the stages of design and approval, financing, construction and marketing and eventually the leasing or sale of the project.
Successful property developers are a bit like movie producers.
They assemble a highly talented team of people and skillfully lead them to develop a profitable outcome. Developers need to be proactive and make things happen. They must also be creative, flexible and adaptive to take their project through the development maze, not to mention all of the bureaucratic red tape that’s involved with council applications, zoning restrictions and the like.
As a developer, you need to work hard, have patience, remain focused, and have a burning determination to succeed. There are a few key basics you are going to have to undertake as you move along the path towards becoming a successful developer.
- Educate yourself.
- Take your time.
- Do the research.
Developers are investors who commit their equity, expertise and talents to convert land from its current use to a higher and better use. They require a good understanding of the town planning and construction process and marketing of real estate projects.
The developer carries the financial risks of the project but stands to reap the rewards if it’s a success. In other words, the buck literally stops with you!
To become a successful property developer you need to be a good coordinator, because you must assemble a team of talented people and proficiently lead them to deliver a profitable outcome.
Developers are more than just property traders who buy low and sell high; they are knowledgeable in their field, have good negotiation and people skills and understand how to optimise profits while managing risks.
As a developer, it’s your responsibility to make sure the risk you’re taking on is equal to the potential reward at the end. That is, the higher the risk, the greater reward you should aim to achieve.
Why should I consider property development?
With our population growing at around 400,000 people a year there’s a strong demand for new properties.
Sure there’s an oversupply of dwellings in some parts of Australia, but there’s also a dire need for accommodation in others and with Australia’s population likely to grow by 10 per cent in the next five years alone, someone is going to have to create all the new housing stock.
But in my mind property development shouldn’t be seen as a way of making trading income. I prefer it as a way of buying my investment at “wholesale” and not paying retail for the properties in my investment portfolio.
Property development is all about creating your own equity
My preferred investment strategy is to buy an old house past its “use by date” in a good location and with development potential. Then add value by developing two, three or four townhouses that are becoming the preferred style of accommodation for a growing demographic of Australians.
But rather than making a quick trading profit, I keep these properties as I aquire them at “wholesale prices”, because I’ve added substantial value, thereby creating significant equity. I then use that equity to refinance and borrow more, giving me the opportunity to undertake further developments to add to my portfolio.
By Michael Yardney