Developing property from afar

Property development is all about identifying opportunities and maximising them in order to generate a financial return. But what do you do if there are no opportunities where you live, or if your local market is at the wrong stage of the property cycle? Should you consider looking elsewhere for a project?

In this Internet age, we have at our fingertips a torrent of information that can help us to locate distant investment hotspots and buy property all without leaving the comfort of our chairs. Sometimes you don’t even have to dig too deep. Take all the news about WA’s multi-billion dollar resources and infrastructure projects, which has made front page news around the country and triggered a lot of investors outside the state to take notice.

It’s true that if you have impeccable timing and choose to develop the right type of product, doing a development in a distant hotspot can have life-changing rewards. But property development is a risky game at the best of times, so is it really worth adding a whole new dimension of risk? Let’s discuss some of the added risks that arise when you are developing from afar.

Understanding the local market

Many investors and developers don’t fully realise how much local knowledge they actually have about the property market in their suburb, city or town. It is only when they start to look in other parts of the country that the reality strikes. Is this local market knowledge really that important? Absolutely. You need to understand what drives property values in the area, and how it is expected to perform. You need to know if there are there likely to be any changes in the supply or demand of property, which could severely impact your development.  You must also remember that local tastes and demands may be very different to what you are used to. Just because an extra bathroom may add value in your home area, it doesn’t necessarily mean it will for another.

What’s happening in the local economy

You must understand the economic and demographic factors that underlie that particular property market. What are the dominant industries? How strong is the population growth? Is there any urban renewal happening or big infrastructure plans that could impact on your development? Even if you are planning to sell your development, this understanding can be extremely valuable in helping you decide when and where to do your development, which markets to target and what type of product to develop. 

If you don’t have the local knowledge, can you systematically gain it? Yes you can. But be prepared to go beyond the normal armchair research and start talking directly to local agents, property advisers, town planners and other professionals in the local area. The knowledge you gain will be invaluable in making your decisions. 

Accurately estimating costs

When conducting a feasibility study or planning a development project, don’t assume that construction costs will be the same throughout the country. They can vary wildly depending on where your development is located because of local labour market pressures and transportation costs. The cost of labour and materials can also change dramatically over time, particularly during boom times so make sure you factor this in. Remember to always compare like for like. Don’t use your home town as a basis for comparison. If a particular building quote looks cheap, make sure you compare it to its local equivalent not your previous experience. Travel costs can also add up. Chances are if you are doing a development some distance from where you live, you will be visiting the site at numerous times throughout the project. Don’t ignore or underestimate these costs. Even if you decide to use your site visits to take a bit of a holiday or conduct other business, it doesn’t mean you shouldn’t factor them in to your analysis.

Keeping track of time

One area that often causes delays for developers is obtaining council approvals, the process for which can vary dramatically from place to place, even within the same state. What’s deemed acceptable in one place is frowned upon in other areas. If you don’t understand the local regulations and zoning laws for the area it can dramatically increase the time it takes to obtain all the necessary approvals and seriously impact on the time-frame of your project. There is also a risk that if the site is located some distance from where you live the project might not be properly supervised. Mistakes during the building process can be costly to correct, and the overall project may move slower than it should because you are not on site to make decisions. Hiring a project manager can go a long way to minimising this risk but it’s not foolproof.

Summary

Clearly you need to be much more thorough and organised when developing from afar. To make up for not having the local knowledge, you need to step up the research, ask for advice and build trusted relationships with local contacts. The major problem with developing property from afar is that because property development involves a great number of processes, the risks of making a mistake are greatly amplified. Even if you get each part of the process wrong by only 5%, you could easily find yourself wiping out 100% of your profit.

For more information on how Momentum Wealth can assist you with your property development, contact Emma Everett on 1-800-000-159 or email info@momentumwealth.com.au.

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