Know the full costs of a property development
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.
Here are the top 10 development 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 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.
Lawyer, Asset Protection Specialist and Property Educator
Dominique Grubisa is a practicing legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at firstname.lastname@example.org
This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.