When I came to the realisation that I wanted to be a property developer many years ago I had no idea where to begin. Luckily, my partner worked closely with many of Melbourne’s best property developers so my first step down my career path was to speak to as many of the successful developers I could to plan a path for my future.
The following points are what I noted as the reoccurring themes with my development mentors:
The best way to learn about developing property is to read about it, enrol in a course (or two) and most importantly, speak to successful property developers. There are many articles, magazines and books that cover property development but be aware of the authors who are trying sell you a product or service in the process that doesn’t relate to your development objectives.
When looking to do courses, select reputable courses. Beware of property spruikers who promise the world and deliver very little.
Talk to developers
Reading and studying property development is great if you want to learn about the theory but if you want to speed up your knowledge process, there is nothing better than speaking to a successful property developer.
I know it can be hard to approach people you don’t know but you should take up the opportunity to meet and mix with like minded property investors/developers through online forums, chats and networking functions.
You may also wish to consider becoming a member of the Urban Development Institute of Australia, the industry body for residential property developers.
Where to build
Once you’ve gained some knowledge, it is time to start looking at where to buy land. It’s very risky to be a trend-setter in property development. The safest option is to develop where others have already built new homes.
Once you have settled on the suburb (macro-location), consider the micro-location. Is the block of land in a nice street? Is it close to shops and transport? If you’re building for families, is it close to schools?
Before you purchase the land, you need to become familiar with the local council’s rules and regulations as they will generally be the body that will grant or refuse your Development Approval (DA).
You need to consider the zoning regulations. These are all set out in a document but you need to be aware that every council has a different set of documents and some of them are quite lengthy – 500 to 600 pages! Settle down with a cuppa or three.
You’ll need a lot more of your own money (or equity) towards a development versus a property you wish to buy and hold.
Borrowing money to fund a development is quite different to borrowing money to buy and hold an investment property. Firstly, the interest rate is higher – commonly 1% to 2% higher than a typical home loan.
Secondly, the Loan Value Ratio (LVR) is not as generous as it is when buying welllocated residential property. Banks will often lend up to 95% of the value of the property you wish to purchase. When it comes to property development, the bank will only lend you approximately 60%-70% of the value of the land and 60%-70% of the value of the construction costs. Therefore, you’ll need a lot more of your own money (or equity) toward a development versus to a property you wish to buy and hold for the long term.
There are a number of tax issues when developing property but one of the most important ones is GST.
Generally residential property investors don’t need to concern themselves with GST but as soon as you get involved in developing property, GST may be payable. However, you may be able to minimise your GST by utilising the “margin scheme”. Speak to your accountant about this for further insight.
Don’t give up
If this all sounds too hard, don’t give up.
As a beginner, you should consider employing the required consultants to help you. An architect will shape the concept design to ensure it maximises the sites potential and a great architect will provide an aesthetically attractive design. A town planner can deal with the Council for you, which can be the most difficult part of the property development process.
If you plan to do a number of developments, you can learn from the architect and town planner and possibly take on more of the tasks in future projects. However, make sure that you understand your limitations and work with your development team for the best outcome.