10 Things To Consider When Developing Blog article
The Rise of The Mum & Dad Developer
When I think of the term ‘developer’, high-rise apartment blocks and Porsche convertibles come to mind. However, with the property boom of the past 5-10 years in Metro Melbourne, it seems every second person now wants to be a Property Developer.
While I certainly don’t consider myself a developer, my brother and I are nearing the completion of our second subdivision and build, this time of 3 townhouses in the suburbs of Melbourne so I thought I'd share some insight.
Several times in the mid 2000’s, I worked at the property and shares expo’s at Jeff’s Shed. Thousands of people would wander through all weekend and I found it interesting to witness that people would hear of a certain type of property investment, for example house and land packages, and automatically assume it would work for them. Simply because their brother-in-law recently broadcast at a BBQ that he’d made money doing it, then surely it would work for them too right? Yet every person has a different career, income, assets, liabilities and attitude to risk.
My point being, many people seem to buy into a type of property on the back of minimal information and without questioning what type of property suits them best.
- What are you buying?
- For what purpose or objective are you buying it?
- And how long do you plan to hold it?
Many people buy with the intention of sub-dividing and flipping, but if you have your heart set on building on the land too, it’s essential to consider as many aspects of the process as possible.
1. What to buy
It’s often said that you make money when you buy the property itself and not necessarily when you develop it, so keep in mind that your first step is one of, if not the most crucial. When searching for capital growth, land value is arguably more important than land size, but your options will depend on your funds to contribute and borrowing capacity.
Depending on the timing of your land purchase and your skill set, it may be 6 – 18 months before you turn soil. Do you have the time to commit to liaising with the parties involved? Drafts-person, Architect, potential builders, local council etc. Given you will still have work, family and social commitments, do you really have the time to allocate to such a project?
It’s also said that developing is finance with some buildings thrown into the mix. Lending conditions have tightened significantly in the last 12 – 18 months and construction finance is no different. We had been residential mortgage clients of a major Bank for over 10 years, but when building 3 townhouses on 1 title I knew they couldn’t have been less interested. Unless of course we obtained a pre-sale which we didn’t want to do. This was nothing against us, we just didn’t fit that particular bank’s credit policy and lending criteria. People often apply to multiple lenders and have no idea why they’re being knocked back, which in turn can effect their credit rating. This is where my background as a Broker saved time and stress as I knew which lenders would and wouldn’t be suitable to us from the outset.
4. Holding / Soft costs
Hopefully the existing dwelling that you’ve purchased is able to be leased so you can receive rent to assist with the ongoing costs. Unless you’re cashed up you’ll have a mortgage on the property plus the proposed construction finance that you’ll require. So when running the numbers, remember you’ll have the loan repayments, local council rates, land tax, drafts-person/architect and town planning costs. The beaten down weatherboard parked on our site didn’t exactly attract the best tenants! Be prepared to deal with complaints from neighbours, late or no rent being paid, trips to VCAT and sometimes calls from the local police - all part of the fun!
5. Contingency funds
As a general rule of thumb, having 5% of your building cost up your sleeve is a minimum.
With our development, the builders hit rock in the nature strip on their second day which equated to $12k of additional costs for us. The Northern and Eastern suburbs of Melbourne have plenty of rock to be found when you start digging!
Who are they? How long have they been operating? How reputable are they? Can you meet previous clients for testimonials? How solid is their crew of tradies? Do they just win your business and then outsource to subcontractors? What’s the probability of them going bust or disappearing and leaving you with a partially completed project? Worst case scenario, but it happens and must be taken into account.
7. Target market
Who is going to buy your end product? With our Architect we focused on parents with 2 children and / or downsizers. This meant non-negotiables such as master bedroom downstairs and the kids / grand-kids bedrooms upstairs. Our objective was to build owner occupied style properties i.e, they are investments for us, but built to attract owner occupiers.
8. Fixtures & Fittings
Get your target market right and your budget here can be kept under control!
Everyone has different taste, so it’s important to get second and even third opinions which builders and local real estate agents will be happy to provide. If they build and sell in the local area, take their advice on board and remember you can’t know everything. When buyers turn on a tap they expect water to come out of it, they don’t necessarily care that it’s been imported from Italy and cost you a small fortune. The key here is not to over-capitalise and ensure that you’re giving the majority of your target market what they want.
9. Exit strategy
If you’re buying with a family member or friend, what’s your exit strategy? What if one of you loses your job, falls ill, wants to travel overseas, or gets married and doesn’t want to do the project anymore? Be careful who you partner with. You may be left with a project you can’t start, a mortgage you can’t service on your own or worse yet - a damaged relationship!
10. Opportunity Cost
If you commit to sub-dividing and building it could be very financially successful for you, there’s no shortage of people achieving fantastic results across Melbourne. But for every story of success you hear, there’s plenty that nobody talks about. The brother-in-law at the BBQ won’t broadcast that they made a loss in a hurry will they?
So the question to ask yourself is, if you take your money and buy an established property and just sit on it, would the capital growth be just as good as opposed to doing all the work involved with the above process? In hindsight, if 10 years ago I decided to purchase one property 5 – 7 kms from the CBD as opposed to buying 2 properties 15 kms from the CBD, would I have been better off doing so? The land value on average is higher closer to the CBD, but it’s easier to buy larger blocks of land a little further out and then have the sub-divide/build option, so It’s hard to say. No one can be certain of the outcome, but that difference is known as your opportunity cost. Decisions, decisions…
If you, a friend, or your brother in law are thinking about subdividing, building or renovating this year, I'm more than happy to share my experience and explain how the finance works.
Dan Corran, Mortgage Broker