Small property development

I'm interested in doing a small development project, i.e. buy a site, build a duplex, and sell for profit. I'd like to sell straight away for profit, no holding. I've done some research and basic feasibility analysis. When I look at certain sample projects around the $1m mark, even when the gross profit is say $200k, once you factor in selling costs, GST and income tax, profit reduces significantly to less than half, and that's assuming everything goes according to plan. Is it worth the risk? Does successful small property development even exist? Or would you actually need a much larger budget (say a few $mils) to make it profitable? Interested in your thoughts, experiences, or even recommendations of buyers agents/project managers that have achieved this for their clients. TIA

 

Plenty of developers go bankrupt, but many succeed - many also do both, in that order.

 

There's a few operators who will hold you hand for a tidy sum, but you won't know unless you give it a crack. ymmv

 

Some also start off with the intention to hold if there is no profit.

 

I am onto number 6 development, largest was 4 townhouses, so smaller development projects

Its all about the numbers and understanding how to reduce risk

One way of reducing the risk is to stick to end values .....the FHB territory, $500,000-600,000 range. Larger pool of buyers if you need to sell.

Market conditions play a big part of course, but markets can change in the middle of a build. Been here done this, sold the lot because the specs were high and market did not deter demand

Important to target areas where its not saturated with developments. You reduce the risk if you know a particular product is always in demand, even if markets turn. Understand demand and what to build. As part of your DD...RE agents can be very helpful

Also if you have to hold, make sure it is cash flowing or at least covers interest payments. Work out every scenario possible and stress test it..... numbers

The best way to learn is to get your hands dirty, start small ie buy house, build new at rear

 

Thank you for some good advice there. What are your thoughts on a duplex build in the Central Coast / Newcastle areas? And do you always make sure you don't buy from an enterprise so you can claim on the GST margin scheme when selling?

 

In most cases I have sourced my own sites

I am not an expert on central coast/Newcastle, however lots of threads on PC on this area. This is where you need to put the hard yards in and network

I expect there may be some upside with many finding Sydney too expensive. ??

I would be identifying areas where there is high demand. Start with RE agents, find out what is selling, what areas and product.

 

There are plenty of people that do small developments and it’s good to see you looking at it holistically to determine if the risk is worth the reward for you.
Generally it is recommended to aim for 20% profit excluding tax (CGT/income tax/company tax/GST) and yes the lower the budget the lower amount that is in dollar terms but it is the best price point to learn your skills and reduce your risk.
Get great advice so that you can ensure you know how tax and entity structure effect your plans and how to minimise tax.
Consider not selling straight away - the easiest way to not pay that money to the ATO is to not sell yet and if you want to do a second project instead access equity in the project for your next deposit.

 

A little off topic, but when considering or doing a development is there a checklist or list of procedures / tasks that people follow?

I have a 1,000 sqm block in Bendigo with a small 1940's house on it with street frontage front & back. Thinking of developing to put 2 duplex's on it.

 

I'd say the first thing you could do is do the feasibility, i.e. work out the numbers to get an idea of profit. Also, have a good chat with an accountant about the tax side of things. I've read some ATO examples of your situation. You need to be careful around your intention (i.e. build to sell, build to keep, keep some/sell some etc). This all needs to be planned ahead with a good accountant so you can minimise your GST/income tax and develop using the correct structure.

 

Its hard to make a profit on a duplex. Ideally consider what that area wants to buy too. 2 bed townhouses for new first home buyers are easier to sell and get concessions than a duplex in a area where people want free standing etc. There are suburbs beter suited to duplexes. eg Dundas where lots are large and replacing ex housing comm property. Some streets would be 50% duplexes built in the past 5 years and more ever week

If you cant run the numbers you shouldnt do a dev. Failure to plan is a paln to fail. Many people think developing means profit. Any developer I know says its hard work and knowledge. Scale assists but too much scale and its just a bigger problem. Paying for knowledge will erode profit. eg Paying a BA to find a site is a warning sign IMO. $10K here and there and there is no scope to make a profit.

 

Thanks Paul. Couldn't agree more. Some excellent insights there. And your Developer's Toolkit is extremely useful. It helps a lot of feasibility and strategy.

 

When it comes to basic developments (straight forward) $1 million is not a large enough budget to make decent profit. This is due to the construction costs in the country.

There are ways but have to be innovative about it and find your own niche

 

Yep agree. What would you say is the minimum budget for a profitable small development? Is there a sweet spot?

 

It would totally depend on the area and target demographic. For a duplex (land and construction) i'd say $3.5m in the Inner West or $7m in the Eastern Suburbs (of Sydney). I don't have enough experience in other areas.

 

Just don't try and polish a turd to be crude. See far too many try and make something work that just doesn't. I have clients making small amounts in speccie houses. Only 20-$30k but doing it consistently, building in new estate and selling at completion. Either to SMSF who can't borrow or to those that can't be bothered.

 

No sweet spot but for a basic knockdown rebuild duplex I would say areas where the medium > $1 million and each duplex unit would also sell >1 million

 

I see. I suppose if they do it consistently, ATO will treat them as property developers instead of investors, which means a lot more tax. They must be doing a lot of it to make it worthwhile which probably means giving up your day job!

 

It really depends on the state and what your minimum return is. You can make 20% on a $700k development but it won't be a lot of money or you can make 15% on a $1.4m development and it will be more money but less percentage return.
In WA we see some good retain and build or duplex options around the $1-1.2m range but I imagine that sort of budget goes nowhere in Sydney/Melbourne.
In lean (or banking restrictive) times we often look outside the box and are more creative than a standard duplex or triplex and look at retain, renovate and builds; knockdown and build smaller dwellings; duplexes on small lots in affordable areas etc
PS I'm not spruiking my services as my books are full, just answering the question with my viewpoint from my area.