Advantages (and disadvantages) of Property Development

This article touches on a few advantages of Property Development

Is ROI the best way to assess a development project?

This is the list from the article:

1. Yield – higher yield is created through adding value, this leads to passive income
2. Strategy Flexibility – hold them, sell them, hold a few or sell a few
3. Equity creation – whilst waiting for capital growth, access the equity that has been created through the development process by refinancing/selling
4. Depreciation – create tax credits
5. Fast growth of portfolio – increase your collection of properties quickly
6. Experience – with each development, your experience widens
7. Fun & exciting – beats watching TV

Can you add other advantages ( or disadvantages ) to this list?

Other advantages I can think of:

1. Improve Serviceability - a strategy for growing a passive income stream
2. Attractive to tenants - newer properties if developed to suit the local market are more attractive to tenants
3. Fewer maintenance issues in the short-term - newer properties require less maintenance

As for disadvantages:

1. Complex and time-consuming to get started
2. Difficult to execute at high LVRs
3. Relatively significant equity/cash required to get started
4. Increased risk compared to other strategies such as buy+hold or reno+flip
5. Significant competition for good development sites
6. Neighbour / council opposition to development ( although this is more a risk if not carefully planned )
7. ...?

I'm looking at Development primarily to grow equity, yield and passive income quickly. Assuming I can fund a first development, plan is that the passive income from my first development will increase my ability to service future investment and grow my portfolio quickly.

 

Biggest advantage I see is its a highly viable strategy to build your wealth very quickly and create some serious profits along the way. No other property investment strategy can beat development in terms of building serious wealth asap, non reliant on market growth.

Needless to say the strategy needs to meet your risk tolerance, finance position and skill level to at least some degree.

I'll be honest, if i didn't do development I'd probably take some of my equity I have and invest in CF markets in the USA. I've looked into it a bit and the opportunities are staggering . But still doesn't rival development . Perhaps in the future when we get lazy to develop we'll invest some equity..maybe 5mil in USA with 10% net yields. So much opportunities available it's really exciting times .

 

7. Finance can be more difficult than a standard resi lend.

 

What sort of dollars would you need to get started? Yes lots of variables but throw some numbers out , obviously something basic to begin with and assume "average" income (only guesstimates accepted) . But something to get going, say a block with existing house knock down and two new

 

@bob shovel it depends where your looking at. A block in Adelaide to knock down and subdivide into 2 would need significantly less finance than say doing similar in many Melbourne or Sydney surburbs.

On resi developments you can borrow more than 80% of the TDC and for commercial size developments you can perhaps borrow upto 70% of the GRV, give or take a little here and there. Don't forget soft costs are generally extra.

 

You had to make it difficult!
I need to find a simpleton out there like me that knows what I'm talking about

Use adl cause syd and melb would be out obviously .....
Block 250k build etc 350k. So you'd need 20% $120k to come to the party?
How's that for rough

 

Would 90% be possible for a basic duplex build under resi?

 

You may be able to get away with even less if you can borrow more but then you have soft costs too.

The bigger issue is i don't think 1 into two devs stack up in Adelaide. Was recently looking with a friend and the numbers didn't make sense to buy, build and sell now . No profit margin . No expert on Adelaide though and we were only looking in the 250k home bracket areas.

 

yes plus soft costs . Need to speak to a finance broker to confirm for your situation though .

 

Leo, could you elaborate a bit more about the 80% of TDC? in particular the serviceability component.

Example

TDC = $1 million.
20% = $200K
80% = $800K (borrow from bank)

Assuming i have $200K cash and borrowed the $800K. Could you please tell me how does the bank work out the loan of the $800k? is it over the period of 30 years or 2 years for the build period?

just say

$800K @4% loan over 30 years is significantly less than 2 years period. There is no way i can service a loan of $800K over 2 years. the repayment will be massive.

How does the bank lend you the $800? how does the lending criteria and servicing component work?

 

Mate I could give my response but it would be sloppy as I'm not a finance person and wouldn't want to give you a poor answer. @York and a million other brokers on here would be able to answer you in 2 seconds.

 

@York. good be good to get your advice and possibly other brokers onboard.

 

@TML, from discussion with my broker, bank won't cover any soft costs. The bank will only cover costs associated with the construction contract.

For a project for 3 townhouses in QLD

• soft costs: $170k
  • design phase costs: $25k ( building design fees, town planning consultant, etc )
• • construction phase costs: $42k ( includes $25k demolition, engineering drawings, etc )
  • infrastructure contributions: $40k ( QLD - expensive!! )
  • post-construction phases costs: $13k ( linen plan, titles, legals, etc )
  • contingency: $50k

You can see for the numbers above I need $170k in addition to the deposit for the construction loan, so there are lots of other costs which blow-out the overall project costs.

Numbers above are ballpark for my situation as I am only in the feasibility stage.

 

@wombat777 if you can get the demolition fee in together with the contract then the bank will include it in the loan which is what we do. Also 50k contingency for the soft costs....a little much maybe?

 

Thanks. Was not aware demolition could be included in the contract. The $50k contingency is calculated across the total development cost.

 

If you become a property developer you pay tax at marginal rates on the project and GST kicks in. A lot of guys want to hold on to reduce the tax but the interest and debt load eventually becomes difficult. Also you only start to realise cash once the back end of the development settles.

 

@Ross. So how does one overcome that to pay less tax?

 

Most important factor when developing is to structure correctly and use a smart accountant. Buy in Trust and there are many other ways using SMSF.

 

SMSF in pension mode and deferral strategies basically. Also getting the asset as an "active asset" for small businesses cgt concessions depending on who is doing what

It is a really complex area but a bit of opportunity for those who are creative and have a bit if cashflow upfront to tweak stuff

It is hard for the first time punter who is stretched to begin with - the lack of cash crimps your flexibility

 

I am still trying to work out structures work in progress.
You learn as you move on and you certainly don't start big, this way you can reduce the risk with minimal cash outlay.

One of my first developments/adding value only required the purchase of the property in Melb at $597K and $20K to put together plans and permits.

Another in Perth required $550K purchase of property and $45K to demolish property and sub divide the property into 2 blocks

If you start developing can go for lower entry areas that are gentrifying and perhaps this budget may be around $1.1M? depending on the product/number on the block