Is Property Development really worth the Effort

Hi Is property Development really profitable or huge Gamble.

Im Interested to do projects but im worried about potential issues
Tax/Warrenty/Cost Blow Out/Market crash, high debt.

Propert Developement comes with so many huge risks that can bankrupt you.

Market risk cost blowout risk holding cost builder council issues agent selling fees, Huge government tax CGT and GST stampduty warranty issues.

And then when you finally decide to sell for profit over 50% goes to government as tax alone, Stamp Duty/Agent Selling Fees/Landtax/GST/CGT

Why would you do this you just making money for the government stamp duty/GST/CGT and buider, selling agent.

But you alone are taking on all the huge risks, warranty Risk.

Also profit margin very low e.g invest 1.5 million Duplex build to make 200k profit if possible - Tax alone is over 200k when you factor stamp duty CGT and GST

It Just seems too complicated is it really worth risk

Do you really want to put your life on the line so others can make more than you on the deal, why is this risk worth taking, potential risk include bankruptcy, enormous financial strain, emotional mental stress and pressure, huge pressure on the family unit, when things go wrong, is it worth taking on all this risk where you making the lowest profit , still does not add up for me.

Legal/Litigation/Warrenty Defects/what happens if you sued for warrenty/defects.


Also what about warranty issue potentially getting sued for building defects for 10 years

And your builder disappeared how do you factor for this unknown risk

How much profit put away for future legal defect matters

Is it still worth it.

As a builder developer i think risk is lower

As you make money on the build aswell as the sale may be the number can work

But if u just an average developer you will be in a lot of trouble when things go wrong and you may end up bankrupt



=> So how much of the profit do you need to put away for legal trouble into the future if you doing mutiple projects, again and again the numbers not adding up, you exposing your self to multiple legal defects issues if end up in court you done for legal costs, how do you protect against such huge exposer ????

 

Dont do it then if you dont think its worth it.

 

1. Start small. Why thinking about multiple projects when you're starting out?
2. If the numbers don't add up, just don't do it. Most of the risks you've listed are quite standard and quantifiable. Do a proper feasibility.

 

Wow that is a lot of angst in that post.

1. You only do it for acceptable profit
2. Your calculations that you'd give 50% of the profit to the ATO is incorrect
3. Who are the others who make more on the deal? You're doing it wrong if that's the case
4. You don't have to sell, you can develop and hold the project then use the equity to fund another development if you have the capacity/serviceability
5. The developer does not warrant the structure, only the builder is responsible for that.
6. Being the builder developer would increase the risk in my opinion
- you need a building license which takes time and money
- you are responsible for the warranty
- your ability to build might not be cheaper than hiring a builder who has better buying power than you do

 

It's like any other business. Other than what @Westminster has mentioned, I can say from experience that tax will only be 25% if you are doing development as company. On that of that, if you use margin scheme for GST, it will not be more than 2.5% for small projects.

 

It's actually 25% after all costs including margin scheme GST. I can't find how to edit earlier post.

 

That is a good summary of potential risks & issues, and there is plenty more on top of that. Don't forget the one when the market turns and construction costs increase and your nice 20% margin becomes 0%!

Lots of people assume it is a "linear" strategy where you follow a series of steps to get to a result but there are so many variables within the timeline of a project and pitfalls along the way. It is always hard work.

Having said all of that, a successful developer is able to navigate through by using the right structure, their knowledge/experience, skills, and network. And when done well, the rewards/upside can be huge.

 

@Westminster has hit the nail on the head - you're doing it wrong, if things were so bad then no-one would do it.

@Morgs highlights there are substantial risks - it's your job to manage those risks to maximise your profit margins & return and to minimise your costs. The key is to buy well which sets you on your way (you control that cost), holding costs, build price, time all need active management.

 

Property development is a business.

Regardless of what industry you choose to start a business in, be it health products, food, services, real estate, etc, they all carry higher levels of financial risk compared to most employee positions. They also carry greater levels of potential reward.

In Australia, approximately 60% of small businesses go bankrupt and close shop in the first 3 years.

If you're considering going into the real estate development business and already having this much concern then it's likely not the right business for you imo.

Putting all that aside, going into business certainty isn't for everybody. Best to know thyself quickly.

 

@Westminster

Lets do the numbers on a Typical Duplex Senario Costs

Buying typical Exisitng Knockdown 700K

Demolish Plus Turn Key Build Cost 850K Mimimum include all council costs.

Goverment Tax
Stam Duty = 28K
CGT/GST =
Company Tax Profit * 27%

Build Contengency ,Council issue, Build Issue 50K

Selling Agent fees : 40K

Intrest for 16 Months = @3% 50K

Total cost = 1.668 Million


Sell Price : 1million for each House
GST = 100K

Profit = (1millk*2) = 2 Million
minus total Cost =1.718

Proft = 282K

GST = 200K - GST paid for Build 85K = 125K

Total Company Profit = 282K - 125K GST = 157K
27% Company Tax = 43K Company Tax

Take home Profit = 114K

Also any income from company is taxed at 27%, so you will have to pay company tax
If you pay yourself a wage from the company you will also have income tax.

You need also need to Put away some money for future any Warrently/Legal/Liability Issue. i would say minimum 20%

Now if you do this as a business and you doing mutiple projects, How much profit are you making if you need to put away money for all the known and unknown risks.

So how is this businesss model profitable taking in to all the taxes/Risks/contengency/Insurances/Council fees and Selling agent fees charges

Biggest Risk is the unknow Warreny Claims/Litigation costs
What if builder is declared bankrupt/missing
Are you liable now for any defects for 10 Years since you developed this project

So who made what in this project

Goverment
Stamp Duty 27K
GST =200K

Goverment made on this deal = 227K
Coucil Costs/Contribution = 80K
Company/Individual tax = (43K company tax Plus 20k Indicidual tax) = 60K
Total Goverment made = 367K

Builder Profit margin minimum 20%*850K = 170K

And you who took on all the Risk made = 114K

You toook on all the Risk and you made the lowest profit

Goverment Made most of the profit 367K



Thanks

 

@Westminster, updated

Lets do the numbers on a Typical Duplex Senario Costs

Buying typical Exisitng Knockdown 700K

Demolish Plus Turn Key Build Cost 850K Mimimum include all council costs.

Goverment Tax
Stam Duty = 28K
CGT/GST =
Company Tax Profit * 27%

Build Contengency ,Council issue, Build Issue 50K

Selling Agent fees : 40K

Intrest for 16 Months = @3% 50K

Total cost = 1.718 Million


Sell Price : 1million for each House
GST = 100K

Profit = (1Million*2) = 2 Million
Minus total Cost =1.718

Proft = 282K

GST = 200K - GST paid for Build 85K = 125K

Total Company Profit = 282K - 125K GST = 157K
27% Company Tax = 43K Company Tax

Take home after Profit = 114K

Also any income from company is taxed at 27%, so you will have to pay company tax
If you pay yourself a wage from the company you will also have income tax.

You need also need to Put away some money for future any Warrently/Legal/Liability Issue. i would say minimum 20%

Now if you do this as a business and you doing mutiple projects, How much profit are you making if you need to put away money for all the known and unknown risks.

So how is this businesss model profitable taking in to all the taxes/Risks/contengency/Insurances/Council fees and Selling agent fees charges

Biggest Risk is the unknow Warreny Claims/Litigation costs
What if builder is declared bankrupt/missing
Are you liable now for any defects for 10 Years since you developed this project

So who made what in this project

Goverment
Stamp Duty 27K
GST =200K

Goverment made on this deal
GST = 200K
Coucil Costs/Contribution = 80K
Company/Individual tax = (43K company tax Plus 20k Individual tax) = 60K
Total Goverment made = 367K

Builder Profit margin minimum 20%*850K = 170K

And you who took on all the Risk made = 114K

You took on all the Risk and you made the lowest profit ????

Goverment Made most of the profit 367K

Doing this as a Buisiness does not make any sense.

Thanks

 

Then dont do it. Find another way to make money. Let other people take the risk.

why are you so hung up about this?

 

• Contingency - either it's part of your build cost or you haven't spent it
• Separate out gst in your expenses (construction, agency, design, legals, etc)
• The business entity is separate from your person
• Disregard your personal income tax, it's irrelevant to the project, you would pay tax regardless of where you work
• You haven't applied to margin scheme to reduce your gst liability (that's possibly $70k in poor tax planning/advice)
• GST calculations is 1/11 of your sales price if you aren't using the margin scheme or adding it to the sales price)

 

Personally its quite tricky in Sydney at the moment. We're onto our 10th site now inside the last couple years, have assessed 100s of sites now (we walk away from a dozen or so before one finally ticks the boxes). Buying is tricky and the hardest part IMO, its where most deals are made or lost. The rest, depending on the nature of the project, is largely process and completing the process (with a few curveballs to address).

My observations: so many people buy at such low margins. Makes it tricky. We have sold a few of our sites approved (costs around 25-30k + transactions and 3-4 months), and buyers are generally paying 5% GP's based on current end value projections + builder margins.

On non-approved duplex sites, we are seeing pretty similar margins too, well under <10% based on quite high end values.

Thats quite skinny.

This is mass market buying, without much skill or know-how. Either beginners, not so good with numbers, who have money and want in (lack of alternatives, 10% is good if everything else is worse!), those that are holding the properties and don't care about resale risks so much, underestimate rising build costs, etc.

If you know what you're doing though, its quite lucrative as opportunities do come up. Generally I find its because other buyers are not aware of what's actually possible and can't extract the full yield out of a site, hence undervalue them.

 

Well, the glass is half full or half empty? Your choice.

 

Atm If you can get a killer reno deal, I think it mitigates much of the development risk, specifically for Sydney.

 

As an aside, Sydney is a development playground for small development projects (for those that know what they're doing). I think

The actual ease of opportunity from planning changes has been great. We're finding approval risks low (with strong DD of course), time to build and get slabs down much faster, and opportunities fairly abundant. Planning changes are driving this. Of course margins are tricky to work with, so that's a challenge in a bullish market.

Of course, 18 months on from planning changes, more and more have caught on and there's more competition, etc etc. Also market risks are higher now than say 12 months ago.

 

Very interesting...I am seeing this too....

For example...my accountant bought a site a Riverstone to build a Duplex. It has an existing house. She got quoted 750k initially for a duplex. She made a few changes and the building came back with 1.05m. needless to say she will keep the house and rent and revisit.

Another one in Caringbah....a builder paid 2.5m just for the site. A upmarket build would cost 1.2m minimum. The margin is after all costs is 10% max if GST is included. Wow?

However, I know a person who bought houses in Blacktown, Bankstown, Chester Hill areas under $1m in late 2019, early 2020. Has got DAs for duplexes...he worked the numbers and has already started flipping them for 300-500k profit. Seems the way to go in the current market. The building costs in Sydney are next level..and with start times delayed it is just not worth....the bloke I know is chuffed as he is going repurpose this into Brissie next.

 

IMO these are examples of what I mentioned the market is doing and most are buying. The opportunity is there though.

Our buys & sales in Sydney west development:

• early 700s setts in Nov 2020, sold mid 1300s in June 2021 (quad)
• ~800 setts Oct 2020, sold mid 1300s June 2021 (tri)
• sub 900 setts in Oct 2021, sold early 1300s Nov 2021(quad)
• A client we worked with for, 1060 setts in Oct 2021, sold high 1300s Nov 2021 (quad)

A lot of this is 'beta' - Sydney having its most bullish year in 30, but much of it is 'alpha' too, i.e. buying well (esp the last one/two).

On the reverse side of selling these opportunities, there have been buyers willing to pay those prices. Many buyers too in and around these figures (we have ~14 bidders at one of these auctions).

IMO observing this market very closely across Sydney, and being beaten on many many development deals (we don't buy if the numbers don't stack), 90%+ of buyers are operating at these buying margins, 5-10% GPs.

 

Yes sounds very similar to deals the guys I know. His last deal was not as good.

How many of these have you done like this?

I remembers a couple of weeks ago an Asian couple paid over $2m for a duplex side in Rydalmere does not make sense. Crazy.

Are you getting DAs and moving them along...the time period seems very short....on some of your sales.