selling a site for capital gains vs. developing it yourself

Having no development experience beyond ballpark quotes from builders and rough feaso studies, whenever I assess a site i tend to come out relatively even for either selling a development site to take advantage of capital gains, or develop it.

I understand that a project should target 20-30% gross profit, but have yet to see how this is possible on any site i see. It seems that if such a margin does exist, the land ends up selling for the difference anyway.

So my question is two-fold;

1. In general, when is it better to sell a site for CG profit vs. do the development?
2. is it just a case that there are few sites in Australia that are stacking up, or is it always this cut-throat to find a decent project?

 

Generally when you make more cash after tax by doing so

Yes. Most dev sites, especially at low values, are not worth it. Massive competition.

The benefit of a nil profit of job is getting a bit of experience for the bigger stuff. Better to lose big on a small job than to lose big on a big job.

 

Buying ANY property with an intention to resell in any manner is NOT a CGT issue. Its ordinary income even if you change your mind and rent it and sell 10 years later. there are cases like that the ATO have won. Property when acquired for profit making at the time of contract is never a CGT asset so a CGT can never occur. Its like you cant marry a second time and be a virgin. Just accept it.

Merely being concerned with this question address your likely purposes.

IMO its better to run the numbers and get advice than to stuff it all up and lose money. I see a lot of that. Too many assume developments mean profit. After duty, land tax, interest, time and taxes the odds arent in your favour unless you leverage to produce multiple properties. At the moment way too many mugs think its like mining gold and have no idea what they are doing. If you saw how many people a week ask me about how to make $ from developing AFTER they bought land you would be stunned. I can tell in 5 mins if they will lose money. BUT.. there are some smart opportunities out there. I wont share as I know those who do these things are clients Just as I dont sell property I dont teach either. Lacks integrity IMO. I am NOT a developer and would not try.

 

1. My advice is to never sell dev sites, always develop or hold. PPOR-ish properties' a different story though.
2. Builders/developers will always bid prices of dev site up to their minimum margin. So no, if you're not a builder or well-connected developer.

 

So bit of an obvious one, but the value in developing relies on your ability to really leverage connections and experience to drive costs under typical build costs?

If so, then my concern for the number of people who are "having a crack" at developing has just increased hugely.

I'm putting together my strategy for the next 10-15 years and wondering if i should factor the potential to develop into it, but I know i won't be building a development network in that time. Could really be best off steering clear of it all together.

 

its better to make a profit in a way you are comfortable and confident with.

Of the 3 plans we have had.
1) Sold with plans and permits, the numbers were not amazing for us compared to the outlay and delay in getting more profit. It also meant we had some cash.
2) Developed 2 and retained existing, the numbers looked great for us and we had enough cash to get the loan.
3) Sold with plans and permits, we didn't intend to we ideally wanted to follow through with the build and retain as much as possible however an agent we deal with came to the table and sold quickly for almost the same forecasted profit if we went through with the build. While we wanted to go through with it the cash has let us buy what we hope will be our 4 planning exercise.

Really we are wanting to build an asset base and rent it, selling is just something that we need to do sometimes to move forward, not our primary plan.

 

Yes. If you are a developer you are running a business. And a complex business at that.

Different business owners generate different outcomes.

Most do not add value. They simply ride the growth in the value of the land.

Look at the annual report for Mirvac to see what a professional well run developer, with large cash reserves, can generate.

 

Development sites do not always go up. When there is an oversupply of sites, numbers no longer stack up prices will in turn fall

Best time to develop and buy land is when it is rising, early stages you will make money on the land, if you develop or if you sell DA as long as you understand what product is required.

Developing is all about timing and the numbers. I would never develop when markets are close to peak, much higher risk.

At the moment Developers can not sell stock in Perth due to too much stock, see what I mean about timing

 

developing is investing on steroids if you get it right. Start slow and small ie buy a house build new property at rear. Build your team of experts along the way, learn from mistakes and get your hands dirty

 

This is exactly what I am doing now. Huge learning curve.

 

ahhh - dont be a pussy. Bite off more than you can chew and chew like fck!

Well, thats what I did, and it damn nearly brought me unstuck...so probably not the best advice.

I kicked things off with about a $2.mil triplex development. Not exactally a small start for a 20something year old whos never developed.

Generally I find 95% of sites I look at will struggle to make money. But you keep looking and keep learning and keep searching. Watch sites which you find, and see what they develop and and what they sell them for down the track - ok, you dont know what their cost were, but you can look at your estimates and see if you were close.

If you are competing against builders who are developing it is tough, as they can develop for a lower cost. Find that neiche.

Blacky

 

I am thinking about buying land (600 - 1000 sqm block) in Sydney and doing a knockdown rebuild into a duplex site or a triplex, if possible. Modest, nothing super fancy. Mid range finishes.

Do you think this is too much to bite off in one go?

I'm thinking about buying the house/land and holding for at least a year while I research this to the nth degree. If I change my mind about proceeding, I can just sell. Thoughts?

 

If you change your mind any profit (???) or loss would be on revenue account and cant offset other income. If you KD and sell the land GST may hurt too. GST applies to land sales ! Failed developement ideas can be VERY expensive dreams when tax law operates

 

I am sure there has to be a 2nd marriage virgin out there somewhere Then again if they are a virgin on the first marriage, they probably not a keen believer in divorce.

Yes it is all about intention, hence keep intentions close to heart. By strict law I agree, the reality is somewhat different.

 

My advice is to never have hard and inflexible broad rules with something as complex and constantly changing as the property market

There are lots of times where it is better to develop than to sell and lots where it makes sense to flog it off

Someone who say had owned a property (be it PPOR or IP in Perth that had been rezoned would have likely been better off flogging it off to people who had no idea what they were doing and paying too much for sites (arguably over half the small inner development site purchasers from 2013-2015) and being taxed significantly lower, being exposed to no risk or needing to come up with the capital etc involved etc than if they developed.


Inflexible rules like the above are dangerous IMO, just like "never sell" etc.