Developing Land Not Always the Best Option

Since I started developing I now know that there are times where developing is not necessarily the best option. Other options are to either just on sell the land to a builder/developer or put together a DA (plans and permits).

My 3 villa development in Perth was a perfect example of this. When I purchased the land, it was rising relatively quickly by the time I was ready to build I could have on sold the property/land and made around $200,000, instead I chose to build.

The build time was around 12 months and by the time I sold the 3 villas I made a similar amount of profit, after taking out all the taxes.

So why build? My accountant asked me the same question. I guess I wanted to learn, to get my hands dirty and this was a relatively small project.

I also have found similar scenario with my Thomastown project in Melbourne, today I could have sold this site and probably made similar profits as the completed build. However with this project I had already gone to far and had no choice but to continue.

Another 3 sites I purchased in Perth I was planning to develop within a 12 month period was waiting for rezoning. At the time the land was rising rapidly and in this instance I decided to sold the lot and made around 25-30% gains. The interesting thing here is now that the market has fallen back in Perth, none of these 3 projects would be profitable because the end values are fallen back. I think I dodged a bullet.

I expect where markets have been very hot, for example Sydney, where land has soared many developers will be offloading the land and not develop, especially if close to peak, for the reasons I mention above. Sometimes it just makes sense to move on and take some money off the table.

I think opportunities to turn over money and ROI is something to consider when developing.

MTR

 

Hello MTR ,

We are all operating in different environments and areas of the country.
I would never have come close to being able to achieve the returns from reselling any of my sites before building the homes on them over the past 10 yrs.
Our current project is a 3 unit development where we purchased the land at a bargain value of 210k around 2 yrs ago. If we resold the block now it would likely be worth around 350 - 400k so this is a very healthy rise in value no doubt. However our total project costs will be below 900k including land + holding costs. The final value of the 3 units are expected to be over 1.4m with a capital gain of +500k. Gross rental return will be 70k pa. We plan to hold the 3 units for the long term.
Cheers, Rocky

 

Hi Rocky

I am buying/developing in major capital cities.

I think the only reason I could sell the land and make a quick profit is because the market was booming and the demand by developers was pushing prices up very quickly.

Have a similar scenario now, where I could sell the land and make 200k, however if I build I will make 500k gross, too much of a gap so I plan to build.

if I see the market turning and I can offload prior to peak and make a profit on the land it helps reduce risk. I guess also dependent on many factors ie rental returns vs debt etc as to which way to go

I get your point, I like your numbers.



mtr

 

let me throw another scenario at you:

you have 200k profit from the undeveloped land, if it's sold in the open market.
you done the numbers to build, you have the certainty to anther 100k profit if it was completed this year.
say property is in melbourne.

would you build or sell of undeveloped property/plan?

 

I would probably sell due to - GST 10%, and save 9-12 months building time

 

This question cannot be answered since it depends on the circumstances.

These would include:
Current limits on access to finance
Ability to take on multiple projects
How much involvement is required from you in the build
Return on invested money from land vs land and build
Ones capacity and experience to carry out development projects
Complexity of the project
Projected market conditions
Whether selling or investing long term
Personal goals and ambitions - short and long term

 

And I like your posts - when I get time to read them.

It is very true that timing can be critical if it is a build and sell venture. I have been fortunate enough to avoid buying at the peak for most of my projects so both land + house values are climbing simultaneously during and after construction. Also, it is common in my area that people will pay a premium for a new home so we have benefited from this factor when we have had to sell to move onto new projects.

 

Sounds like you have a nice niche market

 

I recall reading few of your past post and you have done well on a number of these projects. I loved your numbers too, especially under a $1m for a 3 unit site... that each unit be sold in mid 400k...

 

I better research this on SS, I need to find this market

 

Rockstar was a duplex addict in SS...but probably recently embarked on MUD.

 

I'm with Rockstar so many variables, have you done and excel spreadsheet to see what the gains would have been over 10yrs ish / held for another cycle ? but if that's not your time frame then it's not worth developing. While holding Rental increases and depreciation on new assets certainly add up.

 

But I don't just sell land, I also develop and that is precisely what I am saying it's important to review all options, sometimes it is a better option to sell the land than build and sometimes building makes more money, and everything needs to be considered, ie tax, strategy, profit, market conditions, yields etc

 

Yes and then you start a build and 12 months later you made the wrong decision ha ha, but that's hindsight and another story.

 

..but the rent covers interest and you have depreciation ? and you got your hands dirty

 

@MTR agreed, sometimes it is good to take some money off the table. When is a difficult question. Currently facing this scenario at present in a tale of 2 markets. Residential market is slowing but development sites are super hot and developers can't get enough. Thinking to offload the house as is, or put in 6 townhouse plans with permits and sell in a years time. Already getting offers thrown at me, it's doin my head in, but in an exciting way.

 

I recently did a development where I made the same money building that I would have made if I had of just held it and sold after 9/12 months.....

 

Yeah positively geared, leased pretty quickly to good tenants as well which is important. So just getting vals done now. I was always going to be build and hold anyway might have to do a another quick sub division before I can do another triplex and I want a nice PPOR though so first world problems !