The three top things to know when developing property Part 1 of a 3 Part Series

I had a call this week from a chap who was weighing up whether he should develop property or just go out and buy some new properties.  I explained that buying existing property is like buying at full retail prices or perhaps at sale prices if you are lucky. 

But by building your own properties, and I mean two or more not just one, is more like buying at cost prices as you can manufacture equity through the development process. 

I thought I’d share what I believe to be the main benefits of developing property over buying an existing today and give you my three top tips to get started on your development journey.  

Property development can encompass many activities including renovating an existing dwelling or building, demolition of buildings and/or building new and subdividing or changing the use of land.
By developing property you are adding value and will be creating or manufacturing equity through the development process rather than waiting for capital growth as you do when you purchase an existing dwelling.  Most the towns we develop in are growing at an annualized rate of over 10%. 
If you plan well and time your development so that you are adding value and manufacturing equity whilst the market is in an upswing, then you could make some good money as you’ll also benefit from the capital growth during the period you are developing, but if your timing and/or location is wrong and your plan is to sell on completion, then you may find it hard to sell or your margin has diminished if values are dropping.

Developing property can be risky and not for everyone, there are many things that can go wrong so it is important to really do your due diligence and understand the many facets involved.  

I’ve compiled what I think are the top three things to do first when embarking on a property development. 

Tip 1.

Select the right location for your property development 

Which region and then which town are you going to develop in?

You'll need to do lots of research, start with the local council's website which will give you information on:

-       Community profiles – who lives in the area?

-       Population estimates – very important to see if the area is growing

-       Migration figures – where is the community coming from?

-       Working population breakdown – is it mainly a retiree area or does it have a large working community, you will obviously be looking for the later for a strong rental market

-       An overview on the Economic Development of its community – what is planned for the future?

-       Recent development approvals will be listed so you can see what type of developments are currently being approved

-       Tourism – how much does the area rely on tourism as an industry?

-       Infrastructure investment/planning – very important, make sure there is considerable investment being made here

-       Development Control Plans (DCP) and Local Environment Plan (LEP).  Find the one that gives guidelines on the type of development you are planning to do, for instance and there should be a separate DCP for dual occupancy development, which is building an additional dwelling on land that would normally house just one.

-       Long Term Strategic Plans – this is a really important document to read as it will show housing & employment needs for the future and pinpoint the areas earmarked for growth

 When talking to a council town planner and ask questions like;

- How long their average DA takes to process?

- Are they open to new development in the area? 

- What is the minimum lot size?

- How many dwelling can you build on this particular lot and ask if they can see any issues that may
  impede developing this lot for instance is it in a flood zone?

The council website will usually include many valuable links to other websites in the area.

Speak to local agents to understand the average lot size and use Google Earth, it’s a fantastic tool for armchair street inspections.

Of course, you will need to visit the area and drive around, chat to the locals and take note of the type of housing currently available and what perhaps is missing. 

  

Look for an area that is currently undervalued and has huge potential to grow and whose population is actually growing and is supported by diversified industry.

This means it will probably have a strong rental demand. You can find out the vacancy rates by asking all the local agents how many properties they manage and how many they have available to rent. Add them all up and divide the available for rent properties by the total under management and you’ll get the vacancy rate percentage.  Areas with a consistent vacancy rate around 1% have a strong rental market.  

For example:

Total number of properties available to rent in X town:  29

Total number of properties under management: 1,397

Vacancy rate:  2%

You'll need an area that has affordable land with large lot sizes.  The more dwellings you can build on one block, the more equity you can create.

Also consider how far you want to travel, in order to manage your development you’ll need to do regular site visits.