Mercia | Taxation, Business & Finance Advisers

What does it take to become a successful property developer?

Property development is a currently a hot topic amongst investors. While some dream about making huge profits in a short space of time, others are simply looking to manufacture capital growth, putting them a step closer to achieving their long-term goals.

With many pockets in Perth and around Australia recently rezoned or in the process of being rezoned for higher density living, property development is now within the grasp of many everyday investors.

Despite what some people think, you don’t need to be a builder to be a successful property developer. Whether a development project involves building a few units or townhouses or something more substantial, there are always considerable risks involved.

While you can’t control everything, many risks can be minimised through having the right knowledge and skills. What does a developer need to know to succeed? Here are four critical knowledge areas.

1. Your Market

At its core, developing property involves producing a product for a particular market. Therefore, you need to have intimate knowledge of the market you are trying to serve. Who are the people that will buy or rent your property, and importantly, how much would they be willing to pay (when the time comes)? What specific features do these people expect and look for?

While it’s critical to understand your target market, it’s also important to be aware of the potential competition. What type of property would compete with yours and how much choice do buyers have?

One area where many developers falter is not matching the project to the site. In other words, they build a product that is either too expensive (overcapitalising) or not good enough (undercapitalising) for the specific location.

As a developer, you don’t want to be a trend-setter and try to break price records. This is a very risky strategy, as the market might not support your plan. It’s far safer to develop product that is already in demand and that is in line with market trends.

2. Money Matters

Property development is a aimed at making a profit sometime in the future and property developers need to be financially savvy.

Specifically, they need to be able to assess the financial viability of a potential project, taking into account the completed value of the project, transaction (buying and selling, if applicable), construction, holding and any other associated costs.

A key question when doing a feasibility analysis is whether the project provides an adequate level of return to justify the risk and investment of time and money.

Project financing also needs to be considered carefully, ideally with the help of a qualified finance broker. How will the project be funded? What level of deposit will be needed?

3. Project Management

Just because a project shows a potential profit on paper, it doesn’t mean this profit will come to fruition.

At the core of successful property development is project management. This is essentially the process of planning the project, developing appropriate budgets, procuring services and managing the project through to completion – hopefully on time and on budget.

Successful project management involves a detailed understanding of the various stages of the construction process, from excavation to the final fit out. Normally these stages are mapped out in a document, along with the associated timelines and costs.

In ensuring a project runs smoothly, an important role of the project manager is quality assurance, making sure every aspect is completed to the appropriate standard.

Project management also involves being aware of the roles played by each consultant, including architects, engineers, surveyors, accountants, and lawyers.

4. Council Regulations

A stumbling block for many inexperienced property developers is their lack of understanding regarding local council regulations and what it takes to obtain Development Approval (DA).

Many underestimate the amount of information that needs to be supplied and the seemingly endless conditions that must be met. Inevitably, the process takes far longer than expected, which often puts financial pressure on the project.

Understanding council requirements involves researching complicated and lengthy documents, and compounding the problem is the fact that every council operates differently.

Having this knowledge is not only relevant when assessing a potential project or trying to get a project off the ground, but also to ensure the project takes full advantage of the site. Often, subtle changes to a plan can dramatically increase a developer’s return.

Obtaining DA is a big step in any project and it is at this point that some developers choose to sell-on the project to another developer who wants assurance of having the DA in place.

Don’t know? Don’t worry

If you are genuinely interested in becoming a property developer and think your knowledge is lacking in any of the areas above, don’t be disheartened.

Many successful developers employ the services of a company, such as Momentum Wealth, that can manage the entire process for you. With the right team in place, even an armchair developer can achieve great success.

Next month we round up this discussion by outlining the characteristics and personal traits commonly shared by top property developers. Don’t miss it.

Selecting a mortgage broker

A few mortgage brokers in Australia have been behaving badly and the Australian Securities and Investments Commission (ASIC) isn’t happy about it, increasing efforts to stamp it out.

What sort of behaviour is being targeted? Misleading advertising is one. A number of brokers have recently been fined tens of thousands of dollars for making statements in their advertising that were deemed likely to mislead or deceive consumers.

Late last year, one of Australia’s largest broker franchise groups was hit with a $30,600 penalty following the airing of TV and online commercials that claimed the group had, on average, saved customers ‘$10,000 over five years’.

ASIC investigated the claim and found that no customer had actually saved $10,000 over five years (at the time of the advertisement being run). The figure was rather a projected saving based on calculations from a sample of around 300 refinancing customers over a six-month period. While the broker would save the clients’ money, it had not yet occurred to that extent.

In a serious example of bad behaviour, a few brokers have been singled out for submitting loan applications containing fraudulent documents. These renegades deliberately falsified documents to obtain loans, totalling hundreds of thousands of dollars, for themselves, clients and family members. Some of these brokers have rightly been criminally charged and convicted.

We welcome the moves to clamp down on dodgy behaviour and strengthen customer safeguards. Around half of all loans are done through a broker, so it’s extremely important to put protective measures in place.

As with any industry, there are always a few bad apples. Mortgage broking has around 10,000 people providing broking services, so there will be a few who don’t conform. Most brokers take great care and responsibility in their role and don’t step over the line.

Brokers have a far greater selection of products than going to a bank directly, so it makes sense to use one for your loan needs. When you do choose one, it pays to go with a reputable company that you can trust and a broker who understands your specific requirements.

How selling agents can influence you and make you pay more than you should

Part of the role of a selling agent is to handle enquiries and manage buyers on behalf of the seller.

The problem is that sometimes buyers forget that selling agents aren’t on their side because they are being so helpful. This misplaced trust can lead the buyer into paying more than they should. I’ve heard of cases where buyers have paid $30,000 more than was necessary to secure a property.  Great for the seller but not so good for the buyer.

It might sound obvious to some, but selling agents represent sellers. They are legally obliged to act in the best interest of their client, the one paying for the service.  Of course, when you are selling you expect the selling agent to represent your interests.

Many agents are highly trained and know how to influence buyers with subtle tactics of the trade. Here are some of the strategies used by selling agents to steer buyers in a direction that favours the seller.

Act now!

Selling agents are masters when it comes to creating a sense of urgency. They know that people will make faster decisions when a deadline is looming and that the less time you have to make a decision the less opportunity you have to think about it.

A classic ‘deadline scenario’ used by selling agents involves encouraging early-bird buyers (probably from their database) to make an offer or increase an existing offer before the property hits the market or before the first home open. Fearing they will lose out to another buyer, these buyers often oblige.  In some cases, it may make sense to get in early, but make sure you aren’t being influenced against your better judgement.

Lots of potential competition

Smart selling agents know that to secure the highest possible price for a property they need multiple buyers to compete for the same property. Sometimes, a property naturally attracts a number of genuine buyers who are prepared to compete.

How does a selling agent generate competition? It may simply involve organising multiple viewings at the same time to show potential buyers how ‘sought-after’ the property is. When you notice other buyers hovering around a property, you’re more inclined to move quickly to snap it up.

Luring you in

Selling agents know that potential buyers are more likely to fall in love with a property when they see it in person. This is why they will go to great lengths to get buyers to a property.

Ever visited a property and were surprised when rooms were far smaller than they seemed in the photos? Put this down to ‘clever’ photographic techniques.

Remember, the best ally a buyer can have is a buyer’s agent, who has experience working with selling agents and is focused on protecting the interests of the buyer.

The vacancy rate in some mining towns is skyrocketing, but why?

If you have been keeping an eye on vacancy rates in mining towns across Australia over the past 18 months, you would have probably seen some crazy numbers.

While each town’s rental market has unique dynamics, causing different results, the general trend has been a significant increase in the number of properties available for rent.

Many of the larger towns in Queensland and Western Australia’s Pilbara region have recorded large increases, with Port Hedland’s vacancy rate now sitting at around 8%.

In smaller towns, which often rely heavily on one mining operation, vacancy rates have even climbed as high as 18%.

With more competition for tenants, rental prices have inevitably dropped, sometimes up to 20%. Places like Gladstone and Mackay have seen average weekly rents drop by more than $100 in 12 months.

So, what has happened?

In some areas, demand for accommodation has simply dropped as mining projects transition from a labour-intensive construction phase to an operational phase.

Over-inflated prices have also driven many potential tenants further out of town or to neighbouring towns. These workers prefer to commute some distance rather than pay exorbitant rents.

In some areas, the weak rental market is a result of an over-supply of property. During the last boom, developers responded to the strong demand by building more and more homes, which were sold to eager investors looking to cash in. This has dramatically increased the supply of rental properties.

Unfortunately, some areas have experienced both a drop in demand and an increase in supply.

Although it’s true that mining towns can deliver strong rental yields and capital growth, there are considerable risks. Market dynamics can quickly shift (for a variety of reasons) and leave unsuspecting investors in a cycle of falling rents and falling property values.

Proof of the high risks associated with mining towns is the fact that most of our largest lending institutions now carefully limit their exposure to these areas. Some have introduced a maximum rental yield of 8% when assessing applications for investment properties, believing that anything higher is unsustainable. Other won’t lend more than 80% of the property’s value.

While some mining towns will certainly bounce back in coming years, recent events will hopefully serve as a lesson to investors trying to strike it rich.

Two great opportunities to learn directly from Damian Collins

Later this month, people in Perth will have an excellent opportunity to learn new strategies directly from some of the country’s top experts, including our own Damian Collins.

And as a Momentum Wealth subscriber, you’ll receive a special deal on tickets.

The Home Buyer & Property Investor Show, which will be held on 22-23 March at the Perth Convention & Exhibition Centre, will provide a banquet of information for hungry investors of all levels of experience.

Attendees can choose from a host of free seminars, as well as in-depth workshops covering a variety of property investment topics.

Damian will be giving an insightful presentation explaining exactly where you should invest in order to profit. He’ll also explain why 97% of properties on the market are unsuitable for investors and how to find the 3% that can make you wealthy.

In what is a rare and exciting opportunity, Damian will also present a 1-hour in-depth workshop demonstrating exactly how experts find the best properties in the market. Plus, he will show you how to negotiate the best possible price and contract terms. If you are looking to buy a property soon you can’t afford to miss this. Bookings are strongly encouraged due to limited seating.

http://www.homebuyershow.com.au/perth/visitor

City of Armadale may be the next hot spot

City of Armadale – Amendment 72 (allowing of multi-density development)

At the City of Armadale’s August 2013 meeting, the Council initiated an amendment to the Zoning Table and Clauses 5.2.3 to 5.2.6 of TPS No. 4 to enable the consideration of “Multiple Dwellings” across the residential zone, in accordance with the Residential Design Codes. The amendment is presently before the Minister for Planning for final adoption. Currently “Multiple Dwellings’ are prohibited within areas coded R30 and below and the change proposed is to a discretionary land use in the Use Table, allowing for increased apartment-style living. The amendment also enables the consideration of “Multiple Dwellings” on all dual-coded residential lots, which currently have only been receiving the higher split coding for grouped dwellings developments.

Change of the Town Planning Scheme increases development potential for residential blocks. By allowing apartment-style construction, the City will increase its amount of dwellings. The newer apartment complexes will remove some dated housing stock which detracts from the streetscape and helps improve the area.

In terms of how this amendment will benefit investors, it’s simple. It creates greater residential development opportunities. Currently under the town planning scheme many properties are in a split-density zoned area and can only be developed into villas or townhouses. This amendment allows for an increase in housing density, meaning more dwellings may be created in the same space. This can make previously unfeasible development properties, feasible, leading to a more active development environment. A savvy investor will consider investing in these property types now, anticipating this amendment passing. Once passed, the number of properties with feasible development potential will increase and their associated land values. Of course, there is no guarantee the amendment will pass, so investors should do their homework. Momentum Wealth’s team of buyers’ agents have been working with our Research Department and in-house town planners to identify opportunities in the Perth market not widely known of. If you are thinking of developing, you should speak to one of our expert team today.