Factors to think about when developing property
If you’re considering developing property as part of an investment strategy, there are a number of factors to think about. The Property Professor, Peter Koulizos, delves into the details.
Education
The best ways to learn about developing property are to read about it, enrol in a course (or two) and, very importantly, speak to successful property developers.
There are many articles, magazines and books that cover property development but I would highly recommend two books written by Australian author Ron Forlee. The books, titled Australian Residential Property Development: A Step by Step Guide and An Intelligent Guide to Australian Property Development, are very easy to read and full of useful tips.
When looking to do courses, select reputable ones. Beware of property spruikers who promise the world and deliver very little.
Reading and studying property development is great if you want to learn about the theory but if you want to speed up your knowledge process, there’s nothing better than speaking to a successful property developer. I know it can be hard to approach people you don’t know but you should take the opportunity to meet and mix with like minded property investors/developers through online forums, chats and networking functions. You may also consider becoming a member of the Urban Development Institute of Australia, the industry body for residential property developers.
Location
Once you’ve gained some knowledge about developing property, it’s time to start looking at where to buy land. It’s very risky to be a trend-setter in property development. The safest option is to develop where others have already built new homes. Once you have settled on the suburb (macro-location), consider the micro-location: the street; the transport; the schools.
Council
Before you purchase the land, you need to become familiar with the local council’s rules and regulations as they will generally be the body that will grant or refuse your Development Approval (DA).
You need to consider the zoning regulations. These are all set out in a document, but you need to be aware that every council has a different set of documents and some of them are quite lengthy – 500 to 600 pages!
Finance
Borrowing money to fund a development is quite different to borrowing money to buy and hold an investment property. Firstly, the interest rate is higher. It is commonly 1% to 2% higher than a typical home loan.
Secondly, the Loan to Value Ratio (LVR) is not as generous as it is when buying well-located residential property. Banks will often lend up to 95% of the value of the property you wish to purchase. When it comes to property development, the bank will lend you approximately 70% of the value of the land and 70% of the value of the construction costs. In other words, you will need a lot more of your own money (or equity) towards a property development as compared to a property that you wish to buy and hold for the long term.
Tax
There are a number of tax issues when developing property but the most important one is GST. Generally property investors don’t need to concern themselves with GST but as soon as you get involved in developing property, GST may be payable. However, you may be able to minimise your GST by utilizing the “margin scheme”. Speak to your accountant about this.
Help and support
If this all sounds too hard, don’t give up. As a beginner, you might wish to employ a town planner to help you. They can deal with the Council for you, which can be the most difficult part of the property development process. If you plan to do a number of developments, you can learn from the town planner and possibly take on more of the tasks in future projects.
