How to build your way to wealth – part 3
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 2 of this article series we outlined steps four to six to becoming a successful property developer.
This included the necessity to complete a feasibility study, identifying your tax status and buying your development site wisely.
In the final part of this three-part series we explain steps seven to 10 – the need to structure your finances correctly, choosing the right designer and builder and deciding whether to hold or sell your development.
- Adequately structure your finances
Just about every developer will have to take out a loan to finance their project. For development loans, it’s best to engage a finance broker who specialises in this segment as the terms and conditions can vary significantly, compared to a normal home loan. Loan-to-value ratios, term periods, interest rates and others important issues are vastly different for development finance so it’s best to utilise a broker that has a firm understanding and proven track record of securing loans for development projects.
- Choosing the right designer
Typically, it’s best to engage a building designer or architect as opposed to a builder direct. Using a builder direct will mean they own the copyright to the plans and if, for any reason, you don’t want to use that company, you’ll have to restart the planning process, or pay a hefty fee for the copyright. By engaging a building designer or architect, you’ll own the copyright and will be able to tender the plans to builders and choose the company that offers the best deal. Ensure you designer or architect has completed similar projects in the past. Designing a duplex in a middle-class area on a tight budget is significantly different to designing a boutique apartment complex with premium features in an upper class location. Make sure to see examples of the previous work they’ve completed.
- Picking the correct builder
With your plans complete you can tender your project to various building companies. Approach builders who have a proven track record of delivering similar projects. When it comes time to selecting a builder, it’s not always best to select the one with the cheapest quote. Also consider the builders quality, reliability and construction time. It’s important to thoroughly compare quotes as some may include items which other builders consider optional extras. It can also be useful to include penalty clauses in the contract, which means the builder will receive a smaller fee if they don’t finish the project in the agreed timeframe.
- Develop and hold or develop and sell
Generally it’s best to hold your property and use the equity to finance your next project. By holding, you’ll avoid having to pay income tax, selling agents fees and services tax, which reduce your profit margin. If you decide to sell, make sure the timing is right and there is sufficient demand from buyers.
It’s evident that property development can deliver massive financial windfalls, however there are a myriad of risks that have to be considered and mitigated.
To optimise returns and minimise risks, it’s wise to engage independent professional help, such as development finance specialists, buyer’s agent and project manager.