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5 Golden Rules For Property Development

Published 23/03/2017, 02:11 pm
Updated 09/07/2023, 08:32 pm

Originally published by Park Edge Capital

As we know, we currently live in a very low interest rate environment here in Australia and abroad. For investors this cheap money can open up asset classes that have been overlooked or left alone for many. With rising property markets in many major cities along with steady, low interest rates it is the perfect storm to get into property development and plenty are. It must be said however that just because interest rates are low and property prices are on the increase it doesn’t guarantee a profit at the end of the project.

At Parkedge Capital we have witnessed a huge increase in the amount of proposals coming through, some great but many are downright terrifying. It is for this very reason we want to provide 5 considerations for anyone looking to go into property development. Think of these 5 considerations as a basic guide before you decide to jump in and have a go at property development.

  • Are you experienced? Seriously, what are your credentials in property development? Just because your neighbour, friend or another family member did well doesn’t mean you will. If you don’t have experience then get it either by getting a joint venture partner that has experience or get the education through a mentor or someone who has a track record.

  • Risk. Weigh up the risks that a development would put you under. In most cases you will be required to use equity in your home or use other assets to secure finance for your project so if it goes wrong are you willing to live with those consequences?

  • Reward. What kind of a return are you looking to make from this investment is an important question to know. You shouldn’t fall in love with a project that doesn’t hit your minimum profit target just because it’s there and you like it. Decisions need to be made by numbers and numbers only. Just because you like Noosa doesn’t mean it’s a good place to do a project. Projects with a return of 20% should be the minimum because things do go wrong and you may need to give up some of your profit along the way.

  • Feasibility studies. This is where all the work is done before the work starts. Your feasibility study will provide you with the checklist to complete to understand if the numbers stack up prior to engaging professionals and spending money. Your “feaso” should cover everything from build to interest repayments over the duration of the project and will let you know if the project is going to meet your mark or not.

  • Finance. This is the stumbling block for many. There isn’t a developer I know that doesn’t finance their deals, even if they have $700 million they will finance the project. So you need to speak with a broker/bank or investor about finance. It is a crucial partner in your development future. Just because you have $2 million in equity in your home and investment property doesn’t mean you will get to do your project. For example let’s say that you require $1 million for land acquisition, build, sales, interest and all that is in your feaso for costs. Your finance partner may say they will lend you 75% of the total which means $750k, this leave you with $250k cash to cover the other 25%. What if you don’t have that? Well you will need an equity partner.

Even if you have the experience, understand the risks, have a project that is offering 20% or more ROI, your feasibility is precise and you have a finance partner and equity partner in place you must understand that property development can still throw up surprises. The aim of the game is to factor in as much as possible and then add 10% to the cost base. If the project still works then you have done as much as you can to minimise your risks. If you can get everything to line up then now is a good time to get into the development world. It’s a great business that can yield strong gains or be used to build property portfolios, instead of taking the profits take a unit or two. Either way, it’s a viable option well worth considering.

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