Know the full costs of a property development
Published 3:49 am 3 May 2019
Knowledge is power. Before you embark on your residential property development, make sure you’re across all the potential costs and have a plan to meet them, advises DG Institute Founder and CEO Dominique Grubisa.
Developing property can be a great way of building wealth and an exciting career choice. But, no one ever said it was cheap.
As a developer, you must cover a wide range of costs from acquisition through to marketing. One of the best ways to safeguard the success of your project is to be fully aware in advance of the various costs that can crop up and to plan for them.
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Property Development Cost Breakdown
Here are the top 10 property development holding costs to consider as you create your feasibility study and get moving towards your development.
The first major cost is your land purchase and acquisition costs. These include the price of the land/property you are buying, and also stamp duty, legal fees for things like conveyancing, council rates and tax adjustments. Stamp duty and council rates vary depending on the state and area in which you are buying and there are online calculators that can help estimate these costs.
Finance fees and charges
You will need to consider fees and charges associated with financing for both the site purchase and development. These may include application, establishment, valuation and legal fees. There are also the ongoing costs of interest being charged over the life of the loan.
You can negotiate with your financial institution on the way you may want to do secure finance. For example, you can settle for the development site first and secure a residential loan then decide later to undertake the development and apply for a construction loan.
This covers the property development team professional fees charged by consultants including architects, civil, hydraulic and structural engineers and building designers. The number of consultants will vary according to the size of the development as will the costs involved.
Not all consultants and professionals are used on every project. A single dwelling development may only require a designer and architect, whereas a multi-storey apartment block will require the services of an array of consultants.
These don’t just cover building materials and contractors. They also include things such as council charges, professional fees, application fees, planning submission and building permit fees. Depending on the type of development you are planning, there could also be costs for subdivision, strata titling or rezoning. In a nutshell, the development costs include everything that takes your development from its raw state to its marketable end product.
Rather than guess how much your construction costs may be, do your calculations on a square metre basis or better yet, use a quantity surveyor or building estimator. You’ll need these estimates to give your architect an idea of your budget and they are also used to get approval for finance. Formal finance is generally approved when building costs have been firmed up and a contract with a builder is signed.
Councils don’t just put their hand out for planning and development fees. As well as the development application, you’ll also have to pay for building permit fees and planning submission fees. Councils can also charge a council contribution fee known as development contribution which offset the extra load or new load on council infrastructure.
Utility connection fees
Without power, water and sewerage, you won’t get too far with your development. There is a fee involved when connecting utilities to the development site even before breaking ground for things like water, electricity, drainage, stormwater, telecommunication and gas.
You wouldn’t drive your car without insurance, so don’t start a property development without it either. There are always risks involved in construction from personal and public liability to building insurance. It’s important to also ensure that everyone involved in the project from consultants, builders and their contractors have insurance of their own to cover the project.
Marketing or selling costs
Once the development is complete, the costs don’t stop. You have to factor into your feasibility budget how much it’s going to cost to sell the project. A percentage of the sale will be eaten up in estate agent fees, but these can be negotiated.
Lastly, it’s advisable to factor into your overall costs, some extra cash for contingency. There are always cost overruns or challenges that are faced by developers so it’s a good idea to allow between 5-10 per cent extra in your costings to cover things for which you hadn’t planned.
Frequently Asked Questions
What are property development costs?
Developing property can be a great way of building wealth and an exciting career choice. But no one ever said it was cheap. Developers need to cover a wide range of property development costs as they transition their plan from a pipe dream to reality. The two largest single costs are likely to be acquisition – the price of acquiring the land for the development – and construction and development. Other common development costs include: finance fees and charges; professional fees; council contributions; utility connection fees; insurances; and marketing or selling costs. Don’t forget to factor in some money for contingency.
How much does a development application cost for rural property?
A development application (DA) is a formal request to the local council to undertake development on a property. While it is not required for smaller developments such as fences, decks and carports, a DA is needed for most larger projects. The process is similar across most council areas within Australian states, and costs typically include paying a development fee, a construction certificate fee and a compliance certificate fee. Because the exact price can vary between council areas, it’s best to visit the website of the relevant council to determine what you will be liable to pay.
What are the holding costs of property development?
The holding costs for property development are the costs incurred between the time you start a development and the time that you realise a profit on that investment by selling the dwellings you have developed. The longer the period between acquisition and sale, the higher the costs are likely to be due to interest accrued on borrowed money. Other holding costs include: land costs; construction and development costs; finance fees and charges; professional fees; council contributions; utility connection fees; insurances; and marketing or selling costs.
How to cost a property development?
If you are considering a property development, it is essential you carry out a thorough costing to ensure the project makes financial sense. You will be likely placing a significant amount of your own money and that of your investors into the project, and so you will want to make a profit that exceeds that offered in, say, a term deposit. Your costing will involve estimating the final sale price of the dwellings you are producing when they are eventually sold. From this revenue, you will need to subtract all your costs including the cost of the land, interest accrued on borrowed money, construction costs and so on. Don’t forget to consider the value of your own time in bringing the deal to fruition.
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