So you want to be a property developer?
So you'd like to be a property developer? As The Block returns for another season, it's worth remembering that property development isn't always as simple as the silver screen suggests.
It's no surprise Australians love renovation reality shows.
All the ingredients are there - conflict, suspense, and plenty of drama. Add in the potential to make big profits on a property development, and there's plenty to keep viewers tuning in.
The reality is, real-life development projects can be just as drama-packed.
That's not always a good thing when you're talking about a project involving hundreds of thousands, or even millions, of dollars.
And in my experience, it's when people without property development experience undertake a project unaware of the risks involved that the sparks can really start to fly.
Quite simply, many Australians have discovered that it's a lot harder to pull off a successful development than TV shows suggest.
Shows like The Block have fueled an interest in property redevelopment. At the same time, pockets of land across our cities are being rezoned for higher density living, putting development opportunities within reach of everyday investors.
However, nailing a successful property development does call for skills and experience, particularly across three key areas:
1. Know your target market
Developing property involves producing a product for a particular market.
You need an intimate knowledge of the market you plan to sell to, how much buyers would be willing to pay, and the specific property features these people expect and look for.
One area where would-be developers often hit a snag is not matching the project to the site. They either build a product that is too expensive (overcapitalising) or not good enough (undercapitalising) for the specific location and market.
2. Understand your finances
There's a running gag on renovation shows that no one ever completes a project on time or on budget. Great for TV audiences, not so good for profitability.
Property development is about making a return that justifies the risk, and investment of your time and money.
To do this, you need to assess the financial viability of a project, taking into account the completed value of the dwellings, transaction costs, construction costs, and other associated fees and expenses.
3. Be familiar with council regulations
One glaring omission from most renovation shows is the work required to obtain formal Development Approval (DA).
This can be a real stumbling block for inexperienced investors. It's easy to underestimate the information that needs to be supplied, the seemingly endless conditions that must be met to gain approval, and the labyrinth of building regulations that apply to different states, local government areas and even streets.
Yet understanding council requirements is critical to help a developer take full advantage of a site. Subtle changes to a plan can dramatically increase or decrease a project's return.
How to invest in property development
If shows like The Block have inspired your inner property developer, it is possible to reap the financial rewards of a development without the inevitable stresses, mishaps and dramas of a DIY project.
There are essentially two main options available to enjoy a smoother path.
1. Engaging a project management team
Partnering with a team of experts to oversee your project can make good financial sense, especially if you're new to property development.
Some companies will provide end-to-end project management, from site acquisition through to project design, completion and sale of the finished dwellings.
Options like this can significantly reduce the stress of undertaking a development project yourself while maximising the likelihood of strong returns.
Just be sure to look for a reputable, experienced firm so you know your project is in good hands.
2. Investing in a residential property fund
Hands-on involvement in property development isn't for everyone. Plenty of investors just want to tap into the financial rewards of a development project.
If that sounds like you, a property development fund can be an option to consider.
At an overarching level these funds give investors several advantages:
- A bigger pool of capital to fund larger scale projects;
- The expertise of professionals to locate parcels of land packed with potential including blocks that may be sourced off-market;
- Diversification - due to their lower entry cost, investing through a fund enables investors to spread their capital across multiple projects as opposed to putting all their funds into a single development. As a guide, the minimum investment for our residential property funds at Westbridge Funds Management is $100,000.
A noteworthy drawback of development funds is that they can have strict eligibility requirements, putting them out of reach of some investors. Residential development funds are often only available to wholesale investors, which includes investors who meet specific income thresholds, own a certain value of assets, or are willing to invest a larger amount of capital into a fund.
The key is planning
No matter which option you choose - engaging a project team, investing via a property development fund, or deciding that you really do want to have a go at completing your own property development, the key to success is planning, research and execution.
If you've done the sums and addressed all the potential risks, you should be able to sit back and enjoy season 19 of The Block, confident that your own development project has the potential to be as much of a blockbuster as the show itself.
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