Property development can totally change your life – it absolutely changed mine.
In 2005 I had a well-paying job and a great career path ahead of me. Around that time my wife began talking about having kids, and I remember thinking ‘How on earth are we going to afford that!?’. So, I started devouring books, articles, podcasts and anything else I could get my hands on that taught about wealth.
The one insight that stayed with me was diversified income. Most of us are familiar with the importance of diversifying an investment portfolio in order to reduce risk, but how about diversifying your income?! Diversifying how you make money is arguably more important than diversifying how you invest the money you make, because whose job is really secure in today’s economy? And, who can really get ahead working for someone else?
I recognised that I needed a second or even third income stream, and in a matter of 2 years, I completed my first townhouse development. The profit achieved was nearly twice my annual salary.
So, how do you become a property developer?
The first step is realising the benefits. Property development is a long process (about 2 years from purchase through to sale), but it doesn’t demand too much of your time. I completed my first 2 developments while working full time, mainly by committing 4-5 hours each week at the beginning and/or end of my work day. Each project returned about $200k profit, over and above my annual salary of $125k. So, property development is lucrative but not too time consuming. Seriously, I am forever shocked by how few people get into it.
The second step is saving up enough cash or equity. The harsh reality is that you’ll need to spend at least $1M on a Melbourne development site in order to make $200k+ in profit (the market has moved a long ways since I began, where I could purchase a good site for under $0.5m!). You’ll need at least $300k for purchase including fees, plus another $100k+ for all the professional fees, government charges and holding costs along the way. Because you’ll need to demonstrate an ability to service your loans, keeping your existing job and the income it provides is important.
The third step is learning your local market. Over time, and through experience, you’ll come to understand what suburbs net the best development profits, but most developers I know have started local. Keep track of all the development-friendly sites that sell in your local suburbs (e.g. larger blocks, advertised as having good development potential STCA), and build up a simple database. At the other end of the spectrum, study the sales of all newly built developments to understand the number of dwellings per original site, and their size, shape, quality, etc. By studying raw sites and finished products, you’ll begin to understand a few important things: the types of developments that Council supports in specific areas; rough $ per square meter costs of sites; and typical market $ values of completed developments. This knowledge is fundamental.
The fourth step is building relationships. You’ll only be able to establish a proper network of professionals once you start actually developing, but in the first instance, reach out to local agents who have experience in selling raw sites and new builds, and to builders who have constructed small townhouses in your community. Be open with them about your intention to start developing – some will brush you off, but others will share some time and knowledge with you over the phone. They, in turn, can point you towards experienced Surveyors, Town Planners, Draftsmen and other professionals that you’ll ultimately need on your team. Read more here about who you need and why.
The fifth step to becoming a developer is knowing your numbers. There’s a lot of Intellectual Property involved with Development Feasibilities, so naturally, I won’t go into too much detail, but most importantly, don’t simple trust the selling agent who says “You pay X for the site, build 3 townhouses for Y, and then sell for Z” as though these are all the important numbers. Educate yourself about all the associated costs: stamp duty, legal fees, application costs, council contributions, debt repayments, advertising and staging, GST and Capital Gains, etc, etc. Experienced developers target a total Return on Investment of 20%, but in my experience, new developers should shoot for 12-15%, while focussing mainly on attaining the much-needed practical experience required to create a long-term second income stream.
Sure, there’s a lot more to development then the 5 steps above, but work through 1-5 over the coming months, and you’ll be much further along the path. Read more on our blog, and search the web for useful articles, books, etc.
I reckon the main reasons people don’t get into development…
There are so many moving parts, the costs are massive, and knowledge is experience-based (i.e. you can only know how to develop by actually developing!). I was lucky to have grown up amongst my Dad’s and Grandpa’s renovations and new builds, so I had a background in real estate, but I can honestly say that I didn’t know much about development before I actually took the plunge and started my first project.
If you’re reading this, and you’re keen to become a property developer, I encourage you to call or email us. We specialise in finding quality sites for small developers of all experience levels, and in helping clients through all phases of property development. It can 100% change your life.