The biggest budget killers for property developers
Property development is often seen as the “sexier” side of property investment, with many investors associating the strategy with high returns and faster profit. Whilst this can be the case for those who get it right, there’s also a lot of potential for property developments to go wrong.
Making mistakes in the initial planning process or failing to mitigate potential risks could have huge financial implications on the profit you make from a project, leaving you with cash flow issues or even leading to capital loss. Here are some of the common property development mistakes that can blow your budget as an aspiring developer.
Getting the feasibility analysis wrong
Regardless of whether the construction process itself runs smoothly, getting your estimated costs wrong at the beginning of a development project could have a huge impact on your end profit. At best, this will reduce the money you make from the development. At worst, however, it could put you under significant financial stress, or even prevent you from completing the project altogether. In addition to the costs of building the dwelling itself, developers need to consider additional expenses such as town planning costs, taxes, headworks, council contributions and civil works. In some cases, these costs can accumulate into hundreds of thousands of dollars, so failure to account for these in initial feasibility checks could leave you considerably out-of-pocket.
When it comes to crunching the numbers for your property development, make sure you liaise with builders and other development consultants to form an accurate estimation of the overall costs you’re facing. If you’re not left with a significant profit margin after all expenses are accounted for, you may need to re-consider your development strategy or search for an alternative site that sits within your budget.
Cutting costs in the wrong places
It’s natural for your expenses to be a key consideration when planning a property development – after all, your costs will play a fundamental role in determining your final profit. However, one of the biggest property development mistakes you can make is cutting costs in the wrong places and compromising on quality (and therefore profitability) as a result.
This is especially the case for developers opting to take the DIY approach. Whilst many developers see this as a more cost effective option, it’s important to be realistic about what you can do yourself and which aspects of your development require the input of a professional. Just remember – it can be a lot more expensive to fix a mistake than to set aside the additional budget to get the development right in the first place, so know your limits and identify the areas that are best left to the experts.
Choosing the wrong builder
Whilst it’s important to know when to bring in the experts as an investor, a mistake that can set developers back considerably when it comes to the profitability of their project is hiring the wrong professionals to assist with their development. When it comes to choosing a builder, it’s vital to carry out your own due diligence to ensure they are the best fit for the project. For instance, have they worked on similar developments in the past? What type of constructions do they specialise in? You may even want to visit some of their recently completed developments to get an idea of the level of finishing they can produce.
If time frames need to be extended due to mistakes in construction or lack of planning on the part of the builder, this could set you back significantly when you consider holding costs such as interest rates and land tax, all of which accumulate the longer a project is delayed. Whilst surrounding yourself by a trusted team of advisors and experienced tradespeople is a great place to start, it’s also crucial to have the right contracts in place to ensure you’re protected if anything does go wrong during construction.
Not preparing for the unexpected
No matter how much preparation you do, there’s always the potential of time delays when it comes to property development, some of which are simply unforeseeable. Whilst thorough due diligence can help minimise this risk, you can’t always predict every issue that could arise. Situations such as delays in receiving development approval, unforeseeable site work issues, and the extension of construction timeframes could all delay the completion of your development. To ensure these issues don’t impact your projected profit, it’s important to allow for these contingencies in your budget. By giving yourself a cash buffer to cover unexpected costs, you can avoid financial stress and ensure you have the cash flow you need to see the project through to completion.
If you’re new to property development or don’t have the time to plan and oversee your project, you may need to consider enlisting the help of an experienced development team to manage the project on your behalf. As well as assisting in the planning, due diligence and feasibility stages of your project, professional developers can be fundamental in helping you mitigate the financial and logistical risks associated with property development strategies.
If you are planning a property development or seeking professional advice on your next project, our experienced property development team would be happy to discuss your needs in an obligation-free consultation.