How to create massive wealth through property development

Last month I explained how property development can be an effective strategy to achieve your financial freedom within seven to 10 years – or less. In part two, I want to share the numbers to show how you can do this for yourself and create a $6 million portfolio with $3 million equity. 

The table below sets out the property values, debt and equity position each year if you developed a four-townhouse (T/H) project every second year over a 10-year period (meaning five small projects). I assume that you sell two of your properties and retain two in each of these small projects. I’ve assumed a modest five per cent per annum long-term growth rate on the portfolio as historically most Australian markets have delivered at least this result.

The numbers also reflect the profits on the two townhouses sold each time.  So, in year one we had four townhouses worth $2 million of which we sold two for $1 million leaving us with $1 million-worth of townhouses (the value). The debt is also reduced by four x $100,000 (being the profit on each townhouse). As I think that being able to sell your own stock is a vital skill for developers, I’ve not factored in selling fees – although you can adjust the numbers for agents’ fees if you don’t choose to master this skill. (Agents are in the business of generating commissions, so they’re not necessarily going to get you the best price or terms for your project.)

DIY Small Development – How to create a $6 million portfolio in 10 years

Strategy: You do a 4-townhouse development every two years
You sell 2, and retain 2 in the years you develop.

Value of each townhouse = $500,000
Profit on each townhouse = $100,000
Assumes you sell your own stock so don’t have to pay agent’s fees
Assumes interest-only financing
Capital growth on porfolio each year = 5%

Numbers on your retained townhouses

If you assume your portfolio will generate an income of around 4.5 per cent after costs each year, you’re making an annual cash flow (in today’s dollars) of $135,000 on your $3 million equity. And as these are new properties, with your depreciation schedules you may find you’ll pay very little tax on this cash flow.

As an added bonus, the capital growth of your portfolio from the end of year nine onwards, at five per cent growth, will be around $306,778 each year. This means that instead of selling your properties for additional cash flow you can refinance your portfolio and take out some equity growth tax-free over time as needs be (e.g. to finance travel or renovations or other lifestyle expenses).

Ideally, you’ll have a day job while doing this strategy so you can obtain residential financing, as banks love to see evidence you can service your debt – even when you’re only borrowing at a 60 per cent loan-to-value ratio (LVR), as we are in this scenario. If you don’t have a day job, you can resort to low-doc loans but these are harder to get and come on less attractive terms generally. Alternatively you could explore a “done-for-you” strategy, where you put up some risk equity (generally around $150,000) but someone else does the developing. This is commonly referred to as “wholesaling” and is an increasingly popular way for ordinary people to break into developing without having the skills to complete a project.

Wholesale Investment – Turn $150,000 into $1 million+ in 10 years passively
(while an experienced developer does all the work for you)
Put up $150,000 investment to finance a development and share the developer’s profits

  • In year one you put up $150,000 and at the end of the year attain a townhouse at 20% below retail cost
  • The original $150,000 is refinanced at the end of the project and recycled every year into a new project
  • You invest in one wholesale deal every year for 7 years (using recycled $150K equity)

Value of each townhouse = $500,000
Profits on each townhouse = $100,000 (developer’s profit)
Assumes you are a passive money partner but share equally in the developer’s profits
Capital growth on your portfollio each year = 5%
Numbers on your retained townhouses

In the table above you can see how by using just one $150,000 capital injection you can be a money partner on small- to medium-sized developments and how that can generate a $4 million portfolio and more than $1 million in equity. All off one initial $150,000 investment that gets recycled each year (or 12 to 15 months on average) at the completion of each project.

The downside of “wholesaling” is that you’re reliant on the skill of the developer to generate your profits. So, the main consideration when considering this option is to do extensive due diligence on the experience and track record of your development partners.

By Margie Baldock

Margie is a property developer, entrepreneur and professional investor, who has undertaken $72 million worth of property projects including renovations, subdivisions, construction, options and project marketing in the past eight years. She is always looking for new projects and joint venture partners. and

Making money in development

The key to making money in property development, whatever the market does, is to carefully plan for a realistic rate of return and retain the flexibility to adapt to changing circumstances.

Target a 15 to 20 per cent return on development costs

When planning your development project, the bottom line should be the return on your investment. That is, the profit you make after you’ve sold the property or refinanced the property before tax. This is typically called your net profit.

A 15 per cent return means your (net) profit was 15 per cent of the total development cost of your project:

Therefore, the return on the total development cost is 15 per cent ($300,000/$2,000,000) but the return on your invested funds, which may be only $400,000 (having borrowed the rest), could be up to 75 per cent.

Why do I target at least a 15 per cent return?

In the “good old days” I was able to achieve a better profit margin than this, but today I suggest this rate of return because I’ve learnt that property markets falter and there are even periods where prices fall! They always have and will continue to do.

However, a 15 per cent margin is a good compromise between providing a safety cushion in case of sudden changes in the market, and being an achievable and maintainable target.

If you work on a 15 per cent margin, you’ll simply:

  • Make good money in a good market.
  • Make sufficient money in a bad market.

Obviously, if you firmly believe the property market is about to slump, you won’t get involved in a development at all. However, if you stick to the 15 per cent rule you’ll learn to be highly disciplined and effective in your negotiations.  Crucially, you’ll learn to walk away from a deal when it’s too risky.

This means, be prepared to walk! If the market is overheating and the opportunity of a safe 15 per cent return is not available, walk away. Wait until the market is in a better condition before you purchase your property. There are just some stages of the property cycle where you’re better sitting it out.

How banks cover their risk

If you think about it, banks use 15 to 20 per cent of a property’s value as a buffer against their risk.

We can see this clearly in the terms for standard mortgages. In order for you to get a mortgage, a lender usually requires that you put up 15 to 20 per cent of the property’s value.

This is based on their assumption that the market is highly unlikely to drop more than 20 per cent, so that even if the mortgage holder (i.e. you) went bust, the lender would still get their money back by selling the property and keeping the deposit.
If financial institutions use 20 per cent as the level at which there’s no real risk, then so should you.

If you also apply this principle – aiming for a 15 to 20 per cent return – you’ll be drastically reducing your risk exposure.

The risk conscious approach

To minimise your risks, when doing your financial feasibility on a potential development site always look at the potential downside – when you’re calculating potential returns of your development always take a pessimistic view.

Test your ability to finance the property under the worst possible conditions. Assume that interest rates will rise substantially and that end values and rental values will hold or even drop. What will the end values be on completion of your project? What could these fall to if the market falters?

If you’re planning to develop and hold rather than sell your property, which is my preferred strategy, when you’re calculating potential returns from rentals take a similarly pessimistic view.

If after these realistic calculations you can still make a good return, you can go ahead with your development knowing that even in a worst-case scenario where the bottom falls out of the market, you won’t lose money.

The crucial thing is that this level of security will enable you to hold on to a property until the market corrects itself (as it always does). Essentially, holding the property as a long-term rental will buy you time.

By Michael Yardney

Michael is director of Metropole Property Investment Strategists, His books are available from

Dealing with the ups and downs of property development

If you’re planning to get involved in property development, it’s important to understand that you’re entering a very challenging adventure.

There’s no sugar coating it – you’ll face many ups and downs.

However, most successful developers have one feature that stands out above all else to get through these challenges ­– they’re tenacious.

I’ve found that tenacious people succeed because they’re driven by, and stay focused on, their goals.

After all, success doesn’t come instantly. It requires focus and determination.

Imagine the pride you have when you’ve found a way to get past obstacles like these.

  • You look at 50 potential development sites. They’re all too expensive or unsuitable and the only good one has been snapped up before you look at it.
  • You employ an architect who constantly wants to design his own thing and you have to take control of the situation.
  • You have difficulty obtaining finance because you’re an inexperienced property developer but you find the cash anyway.
  • When you start to pour the foundations for your property it rains continuously in the trenches and the foundations keep collapsing.

Stay positive and remain focused on your goals, even when everything seems to be going wrong. Your hard work and tenacity will have paid off when you finish and make a handsome profit.

Managing risk

Okay, so now you think you’ve got this property business rumbled, let’s just take a look at how the mighty tumble.

Nearly all developers start with one small property, they have a stake, they invest in the property and they make a profit – looking for a margin in the order of 15 to 20 per cent.

Once this first project is finished, they take their original stake and their profits and buy a bigger property. They then take the profit from this property and the stake and buy two other projects and on and on it goes.

Ten years later they’re worth, say, $10 million and it’s all invested in property.

However, when they started they demanded a 15 to 20 per cent return but now they have to accept 10 per cent because the market is frantic and they can’t find projects that return 15 per cent.

The double-edged sword is that if they stop buying property they will realise their total profit but be out of business.

So in desperation they break their golden rule and get into projects that will yield smaller margins and if (and when) the market drops they lose everything.

To protect yourself, adopt this key principle of a successful property development:

Aim for a margin on development cost in the order of 15 to 20 per cent (depending on the size, risk and time frame of your project).

Your development must still work financially for both a sell-on and long-term hold and rental scenario if you can’t seal your project on completion because the market has turned against you.

What I’m suggesting is that if you’re primarily planning to buy, develop and sell on, then ask, “if the market crashed tomorrow, what rental income could I expect to achieve with this property, and will that cover my financial costs – even if interest rates worsen?”

What are the other risks related to developing real estate?

While we all like to look at the bright side of things, developers must also understand the potential risks associated with the process. These include:

  • Rising interest rates, which would result in increased holding expenses.
  • Increases in the cost of construction due to the rising cost of building materials or labour.
  • A downturn in the property market occurring (for reasons such as rising interest rates, cyclical movement in the real estate market and depressed or unstable general economic conditions) resulting in lower property values or increased holding costs until properties are sold or leased.
  • Variations occurring in the local real estate market between supply and demand causing adverse fluctuations in property prices.
  • Disputes with builders or other trade contractors.
  • Changes to the laws relating to property development, including laws relating to zoning and town planning, restrictions on land use, environmental controls, landlord and tenancy controls, user restrictions, stamp duty, land tax, income taxation and capital gains tax.
  • When town planning approval is required for a development, unexpected delays and increased holding costs may be encountered while the application is proceeding through the council maze. It’s even possible that approval won’t be granted or will be granted on unfavourable terms.
  • Unexpected structural defects or building deficiencies that may be encountered resulting in unexpected expenses being incurred for repairs or refurbishment.
  • Some inexperienced developers find that some of the improvements they’ve made to their properties don’t result in an increase in value. They learn the hard way that increases in value don’t necessarily occur in line with expenditure on improvements.

As you can see, many of these risks are outside the control of the developer.

I know this all too well having been involved in property development now for close to 30 years. In fact currently the team at Metropole are project-managing 45 medium-density development projects in Melbourne for clients.

Our experience makes us acutely aware of the risks involved in development projects and this helps us minimise them so that our clients don’t get any unpleasant surprises.

While our projects tend to be very successful, I have to admit that we also run into some of these issues.

The trick is to learn to be ‘risk conscious not risk adverse’. If you never take a risk, you’ll never make a gain.

The fact is one of the big differences between successful and unsuccessful people is the successful people take risks while constantly looking to minimise their risks.

Starting at the appropriate level

While property development can provide great long-term returns, if you’re new to development, you should start small and build up. As you grow in experience, and benefit from the profits of your early projects, you’ll be able to take on more ambitious challenges.

You’ll learn 80 per cent of what you need to know about property development in your first four or five projects and by aiming for a 15-plus per cent return on your development cost, you give yourself leeway to make a few mistakes and still make a reasonable return.

With proper planning and preparation, you can make great profits in the long-term and eventually move on to bigger projects.

By Michael Yardney

Property development pre-purchase checklist

1. Micro market demand

Most of us think we know which markets are in demand from an investor or owner-occupier point of view, but when choosing a small development site you need to take a microscopic view of the local market.

A great tool to use is REA Group’s Neighbourhoods. Enter the suburb name where your development site is located, and the profile gives you a wealth of free information on listing statistics and the overall average visits per property in comparison to the state average. This allows you to compare suburbs against each other as well as similarly priced development sites, which may be located in different suburbs.

Always choose “high demand markets” above any other choices, if your feasibility stacks.



2. Vacancy rates

If you’re building a product aimed at investor buyers, you want your site to be in a market that will give them peace of mind with regards to one thing and one thing alone, “Am I going to have a long period of vacancy?”

Regional markets are notorious for high returns accompanied by higher vacancy rates. As profitable small developers, our goal is to minimise our own risk and pick an area that we are 100 per cent sure will sell and in a timely manner. A handy free tool I use on a daily basis is SQM Research’s Vacancy Graph. It’s important to look at two things on these graphs:

1) What is the current vacancy rate in the suburb?

2) What has the historical average vacancy rate been over the past few years?

The current vacancy rate isn’t always the be all and end all as the figure could be slightly skewed due to the time of year. Vacancies in Australia usually increase over December and January due to the summer holidays, so if checking a vacancy rate during this time of year, I’d look at what the average vacancy has been in the suburb for the past three years. An average vacancy rate of three per cent or less is considered low, so an average of approximately three per cent would be a safe bet that investors won’t be stressing about not having tenants.


Source: SQM Research

3. Planning regulations and precedents

Often the best opportunities are raw development sites with no approvals in place. But as with most things, the greater the opportunity, the greater the risk. However, there are a few things we can do to minimise this risk. There are two types of development scenarios with most councils – code assessable or impact assessable.

a) Code assessable development

Code assessable developments are scenarios that tick all of the council requirement boxes and are thus “by right”. The only thing that you need to be weary of is the actual size and dimensions of what you’re building, to ensure the plans comply with setbacks from boundaries and that you aren’t pushing your build envelope. A site that ticks the boxes for a code assessable development is usually safe to sign a contract with a minimal due diligence period.

b) Impact assessable development

When you’re trying to push the envelope with what council planning allows your application becomes impact assessable. Two things are important when purchasing an impact assessable site. Look for precedents set by previous developers. If the neighbouring site is carrying a larger project than what the local council allows, you have a precedent to do a development of similar size, though there’s still no guarantee that you’ll get approval from council.

Secondly, try and get a lengthy due diligence period in your contract on the land or better yet, try and make your contract subject to development approval. A subject to DA (development application) contract is safest but due to the timeframes involved, usually you’ll need to pay a premium for the land to secure it.

4. Flooding and bushfire overlay

You’ve found a site with a development approval in place, it’s been on the market a while, is discounted far below its actual value, ticks all of your boxes, has no easements or encumbrances and is flood free! If you ever find this site, please let me know as I can guarantee that it doesn’t exist.

With our climate and topography, our country is prone to flooding and bushfires. When you can secure a development-approved site in one of these zones, there isn’t usually an issue with going ahead with the development. The question is, will you be able to sell it?

Often there are raw blocks of land for sale with the correct zoning, at what would seem to be a reasonable price. In major cities, checking what overlays apply to a property can be quite simple. Brisbane has a negative stigma with historic floods but checking if a property flooded in 1974 or 2011 is easy, thanks to Brisbane City Council’s interactive Flood Awareness Map. Other councils have similar tools as well. Often searching for the term “PDOnline” and the local council name will provide you with this. The PDOnline mapping tools can be used to check the various overlays that may affect your potential purchase.


Source: Brisbane City Council

5. First in best dressed

First in best dressed is usually a positive term in life. With property, this isn’t always the case. Plenty of markets in Australia consist of older properties in need of renovation or detonation and in many instances the local councils are pro-development with their planning. One of the problems we can run into is a lack of comparable new stock. This can cause issues with development finance, valuations for buyers when they attempt to settle and benchmarking.

Benchmarking usually affects investor buyers the most as they argue they can buy an old house on a block of land for a similar price or less than your brand new stock which you’re trying to sell. If you’re the first in an older suburb, ensure that it’s a high owner-occupied suburb, as you might be able to attract local downsizers to purchase. Otherwise, it’s best to let someone else get in first, suffer all the hurdles you would’ve faced, and follow in their footsteps at a later date. Check on property listing sites to see if there are new or near new properties for sale in a similar price bracket as your stock for an indication.

By Sam Saggers

Sam Saggers is the chief executive officer of Positive Real Estate

Is property development right for you?

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.

You must:

  • 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

Michael is director of Metropole Property Investment Strategists, His books are available from

Five vital keys to a profitable development site selection

The most important step in selecting a profitable development site is knowing your target market. In particular, you want to know who’s going to buy your stock and why they’ll want to buy it.

While some developers target the top end luxury market I prefer to focus on the affordable segment of the market. This is because there are only a few wealthy people, and generally these people have very discerning and particular tastes that can be difficult to predict.

1. Affordability

There are vast numbers of working and middle class people. So I try to create product that’s suitable for first-timers, down-scalers and investors. This means I’m always looking to develop product that’s around the median price, or even slightly below the median, in a targeted area. This has proven to be a very stable niche because even during crises like the GFC, people still wanted housing and so the affordable segment didn’t go backwards, unlike the top end, which took a beating.

2. Location, location, location

The second vital key to site selection relates to that age-old adage of “location, location, location”. You simply can’t go wrong by starting with an in-demand location. This means knowing where the property cycle is at and targeting general regions that are due for a run on capital growth. Over the past eight years I’ve developed in Perth and Sydney, as they were the hotspots at the time.

However for the time being I’ve turned my attention firmly on southeast Queensland as it’s clear this region is due for a strong run for the next few years as it plays catch up with the rest of the nation. Where else can investors get a three-bedroom, two-bathroom brand new townhouse just 17km from a major Aussie CBD for $339,000? It’s just outstanding value for money and so selling it is a breeze. The stock that we’re currently creating for our clients is positive cash flow from day one ($54 per week cash flow for a person on $55,000 a year income and more for those on higher incomes).

3. Research

Once you’ve made your target region selection, the third key is narrowing the field of selections to find the best site you can for your buyers. In my case as I’m creating stock with investors in mind, I’m always looking for sites that have superior capital growth prospects, and which also will be neutrally or positively geared. So how do I go about doing that?

I use a free app that anyone can download off the internet. You simply type in an area you wish to research and the app will tell you how your area compares with 15,000 other suburbs and 30,000 markets (as it does units and houses). The creator of the app says the tool can allow investors (and presumably us developers too) to select the top one per cent of all property investment hotspots. My latest project is a 33-townhouse development at Doolandella in southeast Queensland. It was selected in part because it got a really great ranking in the app.

Behind the summary number, which is a predictor of the capital growth potential of a suburb, you can also drill into the statistics for your chosen area and look at things like gaps in supply and demand; vacancy rates; days on market; auction clearance rates; vendor discounting and so on. This data is critical in determining that area is about to outperform.

4. Infrastructure

My fourth vital key to selecting a great site is to ensure the area you’re targeting has great infrastructure investment going on that will attract new people to the area over the long term. This means that it needs to have great transport, ideally rail, bus and road.

It needs access to great schools and shops as first-timers and tenants are going to demand this. You also need to ensure your particular piece of land has access to the various services your properties will need. This includes things like sewer, water, electricity and so on. Generally a call to your local council can kick-start that process and give you the relevant utilities you need to connect with to confirm access points for what you want to achieve at your site. If the site already had a development approval all the service access points and limitations will generally be detailed in the development conditions.

5. Healthy profit projections

The final part of your research is ensuring the particular site is going to yield a sufficient profit that the banks will fund your project. Remember banks only lend to viable projects and developers with a track record of successful delivery, therefore you’re going to need to demonstrate that you know your numbers in great detail. Getting fixed price quotes from civil contractors and builders will go a long way to demonstrating to the bank that you’ve done adequate research and that you’re able to deliver a successful project.

If you’d like to see an example of a detailed research report that’s going to make the banks love you, and have buyers knocking down your door, then feel free to drop me an email at with the subject: “SEQ Research Report” and I’ll happily show you the depth of research that we put into our projects before we go unconditional on any development site.

Margie is a property developer, entrepreneur and professional investor, who has completed $60 million worth of property projects including renovations, subdivisions, construction, options and project marketing in the past eight years. She is always looking for new projects and joint venture partners.

By Margie Baldock