What does it cost to do a property development?

21 Aug 2019

The real cost of property development!

As a property buyers agent, I come across a lot of people interested in purchasing property suitable for development.

It seems that nearly everybody you speak to wants to be a property developer. They think it’s a life of fast cars, piles of money, overseas holidays, and that it’s the perfect get rich quick scheme through property and let me tell you, it’s just not the case.

In fact getting into property development can be a very risky endeavour and does not always guarantee a return on your investment. 

So, before going out and buying a property that you think can be developed, here are my top tips everyone should know before buying a development site!

Tip number one, knowing your limits.
Not everyone will have the financial capacity to purchase and develop property.

Finance pre-approval is crucial before you purchase any property, but furthermore you need to communicate to your broker or bank, that you intend on developing that property in the future. Assessing your capacity to fund construction is also very important.

There are two very different loans that need to be obtained as a property developer. Firstly, the loan to purchase the site itself and then the loan to actually start construction. Both of these loans will often require a 20% deposit.

Let’s look at a case study of what that means in real dollars. I have recently purchased a property for one of my clients for around $800,000 and it is suitable for subdivision. So in this instance my client requires around $160,000 of equity or cash plus any purchasing costs. Now that very same site will require approximately $1 million of construction finance in order to build two new premium homes which represents a further $200,000 in cash or equity that the client needs to come up with in order to progress with construction finance. We are now at $360,000 of deposit requirements and this does not include any buying costs such as buyers agent or stamp duty fees, legals or setting up an entity like a trust. This does not take into consideration the development approval costs which we will go into further shortly.

What this all means is that unless you have sufficient cash or equity, you could find yourself buying a site that you cannot afford to develop!
 
Tip number two, knowing the hidden costs.

When considering property development you need to be aware that there are costs every step of the way. One of the key things to consider is  that most of these costs will need to be paid for from either cash or equity you can draw down on in order to pay for these costs. To give you a very high level guide on what sort of costs you might be up for here are some just to name a few;

  • Town Planning Costs
  • Project Management Costs
  • Architect or Designer
  • Soil Test
  • Surveyor
  • Civil Engineer
  • Council Fees

In the example I mentioned earlier, the site is suitable for a one into two subdivision. On average we find within the Brisbane City Council area this type of development would incur around $100-$120,000 worth of costs to get you from the house on one block to 2 vacant blocks of buildable or saleable land.

So, if we reflect back to our previous cost estimates we were at $360,000 with the relevant deposits and now we have another $120,000. Thats $480,000 which we will round up to $500,000 in cash that needs to be outlaid in order to develop the site. (When developing property there always needs to be a contingency so this is why I have rounded up.) 

Please note that I have not taken into consideration interest or any other holding costs such as insurance Council Rates etc, and you should do your own research prior to embarking on developing property. 

Tip number three, knowing your end market.

When building a house you need to understand the area demographics, not only in todays market, but tomorrows as well. Projects don’t happen over night, so you need to understand the direction an area is trending so that you can meet the market correctly when you look to sell or rent your finished product. 

In my example mentioned above the suburb is Camp Hill, a blue chip suburb that has become a very affluent location. The market for the finished product demands certain levels of finish, and size in order to really make the most out of your project.

This means market research into recent sales of finished product is vital to ensure you build the correct dwelling on the site. This is where I often see developers come unstuck! They go cheap on the build which then means they don’t reach their premium end prices that are needed to make developments profitable. 

In summary, when looking at Property Development it is essential not only to have property market knowledge but also financial backing. As experienced Buyers Agents, the team at Hot Property Buyers Agency know the Brisbane market inside out and can provide assistance when you are looking for a good property development opportunity – just get in touch.

I hope this article has been informative and helps your on your next property purchase!

Author; 

Zoran Solano

Managing Director & Senior Buyers Agent


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