How to build your way to wealth – part 2
Property development is regarded by many investors as the Holy Grail because of the huge profits on offer. So what does it take to be a doyen of development?
In Part 1 of this article series we outlined the first 3 steps to becoming a successful property developer.
This included the necessity to know the intricacies of the property development industry, to hold a firm understanding of the property market and the essential considerations when searching for a development site.
In the second part of this three-part series we explain steps four to six – the need to complete a feasibility study, determining if you’re an investor or a developer (as this will impact your tax bill) and how to buy your site wisely.
- Complete a feasibility study
After you’ve located a potential site that you believe meets your criteria, you’ll need to complete a feasibility study to ensure it does. Unless you’ve done this before, you’ll need to engage professional assistance to compile a feasibility study. The aim of this is to determine the size of the profit, or loss, that you would make should you proceed with the development.
The following information should be detailed in a feasibility study:
- All easements or covenants on the land title and any impact on development
- Analysis of soil to determine engineering and drainage requirements
- Position of utilities and services, such as power poles and sewerage drains
- A calculation of building and subdivision costs
- A detailed timeframe of the project
At this stage you would have invested a considerable amount of time into the project, however if it doesn’t pass a feasibility study you’ll need to consider a different site.
5. What’s your tax status?
Whether you’re considered a developer or an investor can determine the amount of tax you’ll have to pay on the development.
For example, as an investor you will pay tax on any profits from your development but if you hold onto the property for more than 1 year you may be entitled to a 50% discount.
Conversely, as a developer you may not be eligible for a tax discount and you may have other tax obligations.
To provide peace of mind, you should seek advice from tax accountants to determine your likely tax status.
Your accountant should also be able to advise as to the best type of structure to acquire the development, whether it’s an individual name, joint ownership, as a company or in a trust. Each has its own financial and legal pros and cons.
- Be an intelligent buyer
The amount you pay for your development site is one of the few factors that is within your control and this will have a considerable impact on the profitability of your project.
It’s also important to secure favourable contract clauses. Ensure an adequate due diligence period is included in the contract so you can conduct thorough research into the site’s profitability as well as walk-away clauses that allow you to cancel the acquisition if you’re not fully satisfied.
Keep in mind, sales agents work for the seller so it can be wise to engage the services of a buyer’s agent to oversee negotiations and ensure contracts are weigh in your benefit. A buyer’s agent can also keep your identity and motives confidential.
The third and final part of this article series, to be published in the October edition of Property Wealth News, we will explain how to properly structure your finances, how to choose the best designers and builders and whether to sell or hold your final product.