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.

Inspiration is All Around Us

What a special day it was yesterday...a real contrast for me.  

I attended my Uncle Phil’s funeral and saw two Aussie women win Gold at the Olympics. 

My morning started by watching the awesome efforts of both Sally Pearson and Anna Meares, who won Olympic Gold medals for Australia.

 I listened with a tear in my eye as Sally Pearson (100m hurdles) told the camera and everyone around the world, what she had said to herself before her race. 

“I want this, it has to be mine...it can’t go any other way...” 

These powerful words saw her take out the Gold. She had already won it in her mind.

Then I heard the story about Anna (sprint cyclist) who in 2008 fractured her neck, dislocated her shoulder and tore ligaments and tendons when she crashed her bike at 65kms per hour.  She was 2mm away from needing life support to breath for the rest of her life.  Here she was today winning Gold (beating the Brits too!).

What struck me about these two women was focus and determination.

Back to my morning...once I had the kids sorted, I headed off to Uncle Phil’s funeral in Sutherland in Sydney’s south.  I arrived to find the funeral parlour filled with lots of different people; old family friends, air force colleagues and Qantas pilots.  Uncle Phil had served his country in the RAAF then worked as a commercial pilot for many years.  The stories told at his funeral of his tough upbringing in Queensland, unwavering support for the Cronulla Sharks (that’s commitment!) and successful career and family life was touching. Uncle Phil had achieved a lot in his 90 years of life, the word they described him as was “Steadfast”.

The inspiration that I received today was amazing...the theme I was seeing for the day was;

Focus, Determination and Steadfastness.

In the morning, I was jumping up and down and full of pride as I watched our awesome Aussie women win Gold Medals at the Olympics.

Then, later in the day, I found myself reflecting on what has been an equally awesome achievement of my Uncle, who I most remember for being pretty hard nosed and strict on us kids, but he was obviously focused, determined and steadfast in order for him to achieve what he did in his life. 

My take out of today is:   

1.       We can really achieve great things in our life, no matter our circumstances.

2.       All we need to do is focus on our goals and commit to achieving them and stay steadfast. 

When I started investing in property 12 years ago, my motivation was my family’s future (and still is).  I was pregnant with my first son and realised after reading a life changing book, that if we didn’t take responsibility of our future then we’d end up at the mercy of others (government pensions). 

So instead of kicking back and relaxing whilst pregnant, I studied and sat in lecture halls whilst my ankles swelled. 

Then I worked two jobs so that I could be in a position to borrow enough money to invest and pay my half of our home mortgage. I purchased my first investment property at 7 months pregnant and sold it when my son was 3 months old, netting $120,000.  That was my first property investment experience and I was hooked.

Not long after my son was born, I also started my own business. My husband worked full time.  As we raised our son and then had another, I grew my business to what is now a very successful property development project management business.

This has not been easy by any means. I’ve stayed steadfast during times when it would have been easy to give up.  I’ve been determined to change our situation and thus our future as quickly as possible.  I knew I couldn’t afford to wait until the kids are older; I needed to increase the momentum, using the time during growth spurts and starting school to invest in property. 

I haven’t missed anything vitally important but I had vitally improved our retirement prospects. 

I’ve focussed on my goals and 12 years later, I’m achieving great things.  Maybe not as magnificent as those women who won Gold today, or my Uncle Phil’s but things I’m incredibly proud of.

http://www.propertybloom.com.au/  

Get the Location Right and Subdivision will Pay Off

Subdivision is one of the many ways you can develop property.  It involves converting one piece of land or existing dwellings into several. Raw land subdivision entails legally and physically converting raw, undeveloped land into developed land so that one or more buildings - residential, commercial or industrial - can be constructed.  As you will be changing the lands usage and appearance for example perhaps from a rural rezoned paddock into a residential land subdivision, you’ll also be building the infrastructure required such as roads, paths, drainage systems, water, sewerage and perhaps even public utilities such as a park. 

You can also subdivide developed land (much more easily) by simply splitting a block in half.

Subdivision of existing buildings is the conversion of a single title to multiple titles. For instance, a block of 10 units on a single s title - often referred to as units ‘in one line’ – can be converted into individual titles such a strata title. This is a great way to add value to the properties and allows you to sell them off individually.

Subdivision is a great development strategy for the current market conditions.  It gives you flexibility to play is safe and sell off a newly created piece of land to reduce your loan, or to hold and add value to the property by registering the new lots and holding or further developing them.

The objective here is to have a creative outlook while searching for potential subdivision sites as it is this creativity that can determine the success of the development.

So when would you subdivide?

An investor might buy a dwelling that is on a large piece of land, where they can renovate a house and then subdivide or perhaps you are a homeowner living on a potential development site where subdivision may be permissible. The site will however, need to adhere to the council regulations.  The first question you need to ask council is ‘what is the minimum lot size?’  You can find this out from your council’s Development Control Plan for Subdivision and their guidelines.  The minimum lot size will vary from council to council and from different zonings. For instance, the residential minimum lot size will be smaller than the rural zoned land size.  One council I work with has a residential minimum lot size is 450sqm.  So we can subdivide a 900sqm corner block into two lots. However, if we had a 900sqm piece of land that was not on a corner, then we could not subdivide this, as we also need to allow for a driveway to access the back lot and the area needed for the driveway is in addition to the minimum 450sqm.  So we would need a block of land approximately 1100sqm in size to be able to subdivide and allow for our access handle.   Another type of property to look for is land with two street frontages, so if it is 900sqm in size and the minimum lot size is 450sqm you can literally cut it in half and each lot will have its own street frontage.

Different types of Subdivision

When looking to develop with subdivision, it’s important you understand the different types of subdivisions. Getting professional advice will help you to make the best decision for your site and also which potential purchase will make the process through council the smoothest.

Strata Subdivision – Dividing a property into separate units, apartments or villas.  Strata is land title based on the horizontal division of air space and may involve common areas shared by each title holder and usually managed by a strata manager.

Torrens Subdivision – Dividing one land lot into two or more separate land titles. This form of subdivision gives the owner complete autonomy with their land as they don’t have to answer to the strata manager or adhere to certain strata rules and regulations.

Community Subdivision – A development with common property such as roads may be used by all residents.

The Figures

When budgeting for your subdivision you’ll need to start with a realistic target for how much the completed development will be worth, and then subtract costs to calculate profitability. It’s important to run a feasibility analysis on the subdivision (covered in detail in last weeks article) including possible costs for stamp duty, legal fees, surveyor services, council application and developer charges, civil works and service connections such as gas electricity and water.

Make sure you also discuss your subdivision strategy with an accountant and understand the possible tax and GST implications if you are planning to sell.  You will also need to estimate your holding costs such as interest on your loan and rates. Remember, if it’s a straight land subdivision you won’t have an income from the property to help offset your holding costs, so time is literally money in this type of development.

Location

Getting the location right can either make or break your development success. Research is crucial here to ensure you are building a property where people in that area want to live. You have to totally remove yourself from the development as you won’t be living in it, your target market will be.

Inner cities are limited with the availability of land so in this case strata division is being created through developments.  Looking up to two hours outside the city allows you to be more creative in your development plus you can usually create a Torrens subdivision. There may also be more room for growth in the outskirts especially if there is some infrastructure taking place in that area.

Choosing the Right Property

-          The first item you need to properly assess a potential subdivision site is a survey. It’s amazing how many sales contracts I review that do not have a survey.  So you may need to pay for this before exchanging as you need to be sure of the land size and whether there are any easements affecting it.  

-          The next item I always ask for is the sewer diagram. You need to know where the sewer is located and if it is actually feasible based on the slope of the land, to cost effectively extend it to service a new lot.

-          You need to check the slope of the site for drainage issues.

-          Check the aspect of the site and think ahead of where any new dwellings will sit to take advantage of the aspect.

-           Research the zoning regulations and read council’s subdivision guidelines.

-          Compare market value – is vacant land in demand?

-          Check service connections – is there sewer available in the area, is there an electricity source close by?

-          Corner blocks are good for your first subdivision

-          Structure of Property – this is important if you are developing a strata division as the building will need to be structurally sound to handle the requirements such as firewalls between units.

-          Have your solicitor check for restrictive covenants or easements. You may find land in a new estate has a covenant over it that does not allow for further subdivision.

DA Approval

Getting a surveyor to manage your subdivision DA can save you a lot of time.  If you’re researching a new area, the first place to start would be the local surveyor. They can give you advice on the subdivision process and cost indications. You need to use a surveyor to prepare your subdivision plan.

Once you have abided by the councils regulations, it is then the residents you may need to win over. Generally if the land you’re subdividing meets zoning requirements and you comply to the subdivision Development Control Plan then there should be little your neighbours can do about your subdivision, however it is always a nice gesture to talk to them personally about your plans.  

I always look at the best way to subdivide as part of our development process, the way that will be most cost effective and not hold up the development process and we have found in many instances it may not be the most obvious way.  What may look like a simple subdivision can turn into months and months of complicated work.  The plumbing and civil works alone can really blow out a budget, so it’s important to understand the entire process before you embark on your first subdivision.  

There are many more things to consider when planning a subdivision, so make sure you engage professionals to assist you if you’re a beginner. A development project manager will be able to work with you on every stage of the process and you’ll be amazed at how much you learn along the way.