Five Things You Need To Know To Get Started In Property Development
Published 3:09 am 3 Sep 2019
Going into property development without fully understanding the industry may be a recipe for disaster. In this article, DG Institute founder and CEO Dominique Grubisa shares the top 5 tips for property development for beginners.
How to get started in property development?
- Become an area expert
- Build to the market
- Understand local zoning
- Negotiating the terms
- Run your numbers meticulously
There’s a clear reason why you’re considering property development as an option.
“Profit margins in the real estate sector are at record highs and Australia’s richest individuals are increasingly listing property as their sole source of wealth.”
The article goes on to discuss how this may cause issues with certain areas of the Australian economy.
The key takeaway for you is that property development offers opportunities and you can’t start your journey with no information.
This beginners guide to property development includes five things you’ll need to know before getting started with property developments or click here to learn how to get into flipping houses.
Item #1 – Become an Area Expert
Many new property developers look far and wide for property development opportunities when they really need to get granular. Yes, there is potential for successful property development all over the country. However, the secret to success lies in focus.
That’s why it’s so important to choose an area before you start looking at development opportunities. This is the best way to learn how to start out in property development.
When you do this, you create that all-important focus. You’re able to devote your time to learning about the council and the local zoning laws. You’ll learn about what the people in that area actually want and be able to adjust your plans accordingly.
If you’re not focused on one area, you’re constantly distracted by whatever opportunities come along. Furthermore, you end up wasting time researching potential developments that won’t bear fruit.
There are plenty of resources available that will help you to find a good area. For example, CoreLogic’s ResiTrends reports pull data from all over the country and present it to you at the granular level.
They show you which suburbs have gone up in value and what their median prices are. Furthermore, they show you which areas have thriving markets and which are in a period of stagnation or decline.
Use that data to find the right location. Then, reverse engineer your strategy to create a real estate development to suit that choice.
Item #2 – Property Market Analysis
If you’ve found an opportunity, it’s often because the local council wants redevelopment in that area. For example, they may have changing demographics in that location who prefer a certain property type.
This is another place where your market reports will come into play. They’ll show you what types of properties people in the location bought and what they snubbed.
For example, you may find out that the demand in a location is for three-bedroom properties that have two bathrooms. If that’s the case, you don’t want to build single-bedroom properties in that location.
They simply won’t sell because the market demand isn’t there.
The same goes for building a seven-bedroom mansion in a location that has a lot of single professionals. While the property may look amazing, it’s not the property on demand for what the people in the location want or need.
Identify the area’s key population demographics and build according to what they want.
Item #3 – Understand Zoning Of Property
Ideally, you’ll have created relationships with the local council already. This will provide you with some idea of what you can build in your chosen location.
There are two types of zoning to consider. Spot zoning is the first. This is when the council decides to change the zoning of a single location to allow for a specific development. For example, they may choose to change the zoning for a patch of land so that they can build a television tower.
The second is strategic development zone. This is when the council changes zoning with an eye towards long-term development.
For example, the council may see an influx of new people into the location. To account for this, they’ll allow high-density building in certain locations. Or, they may rezone rural land to account for urban sprawl.
The important thing is that you understand the council’s zoning restrictions and abide by them. There are several tools that can help you with this. Blockbrief is a good example. This essentially acts like Google for zoning. The tool alerts you to zoning changes and helps you find out what’s allowed in your chosen location.
Item #4 – Negotiating The Property Development Terms
Time is money in the property development sector.
Your goal is to avoid a situation where you buy a property and then have to keep paying for maintenance while developing.
You want to have control over the property without having to part with money. The longer you can put off the purchase, the better it is for your bank balance.
For example, you may use a long settlement to control a parcel of land without owning it immediately. With this arrangement, you sign a contract in which you agree upon a price. However, you’ll also agree to settle the contract at a later date. This provides you with the time needed to get development approval and prepare for the work.
You could also leverage an option agreement. This arrangement allows you to secure the exclusive right to buy the property. Typically, you’ll agree to pay the chosen fee over a set time period.
Either way, you shorten the length of time that you spend out of pocket. You won’t have to pay holding costs but you still have control of the property as you prepare for the development.
Item #5 – Accurately Run Your Property Development Cost Breakdown
Most failed property developers reach that point because they made an error with their numbers.
It’s crucial that you check and recheck all of the numbers to ensure they add up. It’s also wise to maintain a contingency fund to protect yourself if something unexpected comes up.
For example, you could start digging and hit bedrock unexpectedly. Clearing that bedrock will require additional time and money, which your contingency fund can supply.
Beyond this, make sure that the property development profit margin is worth your time. You have to be able to pay yourself appropriately. Don’t rush into any deal. There’s no shortage of development deals available, which means there’s always something else around the corner.
What the market will pay for your end product has to be higher than what you spent to produce it. If it isn’t, walk away from the deal and look for opportunities elsewhere.
Develop With Confidence
Property development involves much more than buying a site and working on it. You need to identify the right location, understand the restrictions, and build based on market demand.
Through it all, you need to keep your own budget in mind. Negotiate terms that favour you, be it through an option or a long settlement. Finally, leave the deal on the table if the numbers don’t add up. Remember that this is a business and you need to treat it as such.
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