What kind of property development suits you?
Does your property development career lie in lining up deals for builders? In subdivision? Or in creating large residential complexes? DG Institute Founder and CEO Dominique Grubisa explains the different approaches.
If you’re relatively new to the field, you might assume all property developers do more or less the same thing. They buy property, add value, and then sell for a profit. While in essence that’s true, there are a range of different ways in which this can be done. Some developers never get involved in the construction process preferring to bring projects together for others to build. Others see projects through from the initial vision to selling units to customers.
Check out the three broad categories of residential property development below. Examine the differences and try to work which might suit your skill set best.
Turning a block of land into return on investment doesn’t have to take years waiting for the property cycle to reach its peak. With a little paperwork, a bare block can provide you with a simple and easy windfall without having to swing a hammer or hire a builder.
Builders need ongoing projects to keep their workers employed and are on the constant lookout for ready-to-build sites to save time and holding costs. If you have vacant land, you may be able to turn a profit by obtaining a development approval (DA) and on-selling it to someone who wants to take on the hard labour of bringing a vision to fruition.
DA Uplift is like pimping your block – adding a bit of bling to an otherwise blank slate by taking care of some of the more mundane paperwork councils require to get a development off the ground. It’s seen as desirable by some developers because the construction route can be full of risk. If you do develop, you’re subject to market forces or you may run out of money. The potential profit from a DA Uplift is less, but then the risk is much lower, too.
Subdivision is another effective way of generating profit and, like DA Uplift, you are not obliged to get involved in the construction process if you don’t want to.
Subdivision involves taking a large block of land, taking into account the requirement of the local council in terms of block size and zoning requirements, and dividing the land up into smaller parcels of land. When you subdivide one property into many, you can add significant value in the process. You then have the option to hold the lots and wait for more uplift, build on the vacant lots and/or sell one of the properties to pay down your debt and increase your equity and rental yields. This approach is simple and low risk when you understand the process and what to look out for.
There are two main approaches to residential subdivision: demolish and build, and retain and build. There are many benefits to just demolishing and subdividing including a potentially much quicker sale, not having the stress of having to go through the construction process as well as increased flexibility in the way in which the land is eventually used. If you take the option of retaining an existing building and just subdividing the remaining block, you generate a profit without the extra building costs. If you do decide to subdivide, discuss the advantages and disadvantages of all options with a professional who understands all the complexities of these types of projects.
Residential Unit Development
Residential unit development has a potentially lower financial requirement compared to commercial, industrial or retail development. Many residential unit developers sell some of their units after completion to pay down their debt, effectively allowing them to own the remaining units outright. You can repeat this process to acquire several million dollars in property and hundreds of thousands in positive cash flow to effectively retire on.
However, there are many pitfalls to watch for with this type of development particularly if you don’t have a lot of experience behind you. It can be a mistake to take on too much too soon. Supply and demand can determine price, so an increased supply can cause prices to go down. If there are many new dwellings being built in an area, all due to be completed within a similar time frame, there could be an oversupply which would mean the final sale price would be below expectations. If you’re a first-time property developer taking on a multi-residential development, don’t overstretch your finances or over-estimate your experience. Rather than build a five-storey apartment block, try something more modest. A mistake on a four-apartment development will be easier to manage than one on a 20-apartment development.
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 email@example.com
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.