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In order to become a property developer, you have to be an entrepreneur who understands the complete property development process as well as the financial and development related issues. Possess knowledge and skills to conduct financial feasibilities, due diligence, organise development finance, setup development entity structures, conduct market research and understand property economics, i.e. the demand and supply of stock surrounding the development.
Before we find out, about how to become a property developer, I think we should first understand...
Property Development, also known as Real Estate Development is a process that is both, a science and an art incorporating a large number of interrelated & interdependent parts that come together to respond to the demand and needs of the society by creating and utilising the factors of production.
Factors of production, as defined in property economics are four essential resources: land, labour, capital and entrepreneurship. A Property Development project can only come together when the entrepreneur i.e. the property developer uses his/hers entrepreneurial skills to bring together land, labour & capital in order to make a profit.
Property Development is an industry with high stakes where fortunes are made and lost every year, irrespective of the market cycles. Of all the property investment strategies I have studies, I believe that property development is the best property investment strategy under the sun. You can pursue property development around the year and through all market conditions - as long as you know how to change gears in your property development business.
Property development requires entrepreneurs i.e. the property developers who must be ready to put their skills to test and make hard and swift decisions. With no barriers to entry, property development is now accessible to amateurs, mums and dads and property investors who can use property development as part of their property investment strategy to exponentially grow their property portfolios.
Now let me spill the beans and lay it out for you, here are my…
Before you can even think about getting into property development, you as a property developer must determine your current financial position. Your property development financial position is the sum of cash that you have in your bank & your total borrowing capacity. To determine your borrowing capacity, you must answer the following questions:
For some, a more appropriate question could be, How much money do I need to start property development?
You can be part of a development with other property investors and in this scenario, you may only require $100,000 to $150,000 or even less in some scenarios, specially if you are part of a property syndicate and depending upon the financial compliance requirements in your country. However, if you are planning on doing your own developments, your equity or cash contribution will depend upon your borrowing capacity and the size of your development. A developers money requirement for a project depends upon the maximum amount they can borrow for the development, in other words the Loan to Value Ratio offered by your lender for your development. For example, let's say the total development cost of your project is $1000,000 and the maximum that your lender will borrow you is $700,000. This means that you will need $300,000 of your own money to get into your development project.
For more details, please read How to finance your property development project?
The above questions will help you determine the size of your development financially. It will help you determine, whether or not you can initiate a 2, 3 or 10 Townhouse / Apartment / Unit development. This will also be a deciding factor when selecting the location for your developments. The scale of your project constitutes the total costs which include land value. By determining the size and scale of your development depending on your financial position (total cash in bank + borrowing capacity), you will be able to determine whether you can develop in a low, medium or up market location.
Understand the difference between the value of a site that has a DA (Development Approval aka Town Planning Permit) and the site without one. You can increase your understanding by studying the local zoning maps. The development potential of property, whether its residential, commercial or industrial - will be determined based on its location or suburb, improvements made or potential for improvements, zoning and overlays, local employment and unemployment, and the availability (or lack of availability) of other similar properties i.e. supply and demand of competing stock.
Your next step is to determine the right suburb or location for your development. Will you be targeting a location for its capital growth potential or rental yield? To find out the best location or your property investment hot spots, get a list of suburbs with Capital Growth Potential and overlay it on a list of suburbs with high rental growth. You will find your Hot Spot, where you should be developing. Short list 2-4 suburbs and farm them. Farming a location means that you monitor these locations for price fluctuations, design intent, neighbourhood character, what's selling, what's not and the historical sold prices in the area.
Spend some time to study your local town planning and understand the zoning determined by your LGA (Local Government Area) or council. A good understanding of your local town plan will help you determine the highest best use for your development site and its potential.
Find out who are the agents, who sell development sites in your area. Get rental and market appraisals for similar kind of properties that you are planning to develop. This exercise will you give you a very good understanding of the potential sites available on the market as well as the end sale value of your developed stock.
You must attend the opens for the existing stock that on sale in the market. This will give you an understanding of what your target audience / potential clients are looking for. You can very easily determine the type of kitchen accessories liked by potential buyers as well as colour schemes, preferred streets, design and floor layouts.
When looking for potential sites, you can go with two options. First one being, the On-Market Strategies. These are potential development sites that are available on the market and are up for grabs publicly. The downside is that you will be competing with other people who also wish to become property developers and are looking for their first development. The upside is that although the site is publicly listed on property selling websites and with agents, more information about the property will be available publicly. You can approach buyers agents, real estate agents and check out the property listing websites in your area.
You can also try off-market strategies to acquire a site by contacting architects in your area, flippers (people who acquire a site, add value and simply flip them), word of mouth and by doing a letter drop in your area. The biggest upside to this strategy is that you have the time to negotiate price and favourable terms.
Here you are, you have just acquired your first property development project and are now truly on the way to becoming a property developer. However, you now need to spend some time and invest in property development education. Property development is very similar to a business venture, only more lucrative. And we all know the success rate of most businesses. Since you are going to have a considerable amount exposure in terms of your money invested and the debt required to complete a development project, I would highly recommend, that you spend some time in learning everything about property development.
If you are merely starting out and are looking for a short course in property development, I would recommend my Quick-Start course. You can check out all my property development courses before deciding which one helps you the most now. However, if you think that you are ready and would like to know everything there is about doing small and medium size development, I would recommend my Property Development System course, which not just teaches you the complete property development process in detail, it also gives you the two financial feasibility tools that you need in order to become a property developer. This is a complete course in property development that simply makes you a property developer.
Property development is complicated and covers multiple disciplines. You can’t possibly have all the knowledge yourself. Even after you have become an experienced property developer, you will still rely on the skills and knowledge of qualified and experienced property development consultants.
As a bare minimum, your property development team will include the following consultants and professionals:
However, your property development team will vary depending upon the type of project you undertake. For example, a land development project could only utilise a land surveyor, a civil engineer and a town planner for example. Where as high rise apartment building in the city could attract heritage and windtech consultants, who are normally not required for smaller townhouse developments. In my article about the Property Development Team in detail and the roles and functions of your property development consultants.
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Property developers make a margin on the cost of the development called the Development Margin. It is no different than a manufacturer making a margin on the cost of producing “xyz” product. The Total Development Costs (TDCT) include the land, government taxes like stamp duty, GST or VAT as well as development and construction costs. When the developed units, townhouses or apartments are sold, all costs are deducted from total sales or the GRV (Gross Realisation Value) and what is left is the property development profit. Property development profit can then be expressed in a percentage, which is the Development Margin.
Typically for small to medium size developments the property development profit can range from $30,000 to $200,000 per unit. In the example below, the per unit profit is $100,451.40 with a development margin of 18.4%
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A good property developer can earn anywhere between $80,000 - $200,000 per annum doing smaller townhouse developments. If you are looking to for a career change and are looking to replace your income doing property development project part-time, you should get my Property Development System that not only shows you how I did it starting from zero, but also gives you a system that you can follow.
If someone ever asked me what is that “One thing” that has helped me become successful Property Developer, I would say it’s my property development mindset.
Property Development is the most lucrative and the fastest way to generate equity that I know. I have been to many seminars and completed various property development courses, studied many different property investment strategies & even obtained diplomas in the field of property. If there is that one strategy that gets me results, the quickest, it has to be Property Development.
However, because of its very nature, it requires a very strong mindset. Because it is full of problem solving, trouble shooting and managing risks. However, I can guarantee you that if you have the right mindset, you will be very successful in this industry.
If you already have the right mindset there is a very good chance, you may be underestimating the power it can bring to the table or the level at which it is required in property development.
Let’s find out whether or not you have the right mindset for property development. Ask yourself if you suffer from the following:
If you have answered yes to any of the above, my guess is that you self-sabotage yourself.
Your behaviour is said to be self-sabotaging when it creates problems and interferes with long-standing goals. Its when part of your personality acts in conflict with another part of your personality. So in order to get into property development, you must have a very strong mindset. There is an old African proverb, "If there is no enemy within, the enemy outside can do you no harm".
In property development, there are winners and there are losers and then there are people who haven’t learned how to win yet. All they need is the right system, the right course in property development for them to move forward. However, no amount of property development courses can help you, if you don’t have the right mindset.
There is an old African proverb, “if there is no enemy within, the enemy outside can do you no harm”.
So if you know that you have the right mindset, if you think you are ready to take the leap from being a property investor to a property developer, if you think that you are ready to learn the property development process and the strategies involved, then it’s time for you to move forward and take the next step. This means that you have the first “HOW” of How to get into property development. You start with working on your mind, you spend time listening to audiobooks or mindset programs, whatever rocks your boat and when you are faced with challenges, you push through them, you create a big enough WHY i.e. all the reasons of why you want to get into property development.
I get a lot of emails everyday and from experience I can conclude that the one thing every developer absolutely must master is, their ability to find lucrative property development deals on a consistent basis. This is the number 1 skill that you need in order to stay ahead of the competition. And if you haven’t got it packaged into a system that you can follow every time, you will either get frustrated, because you will spend numerous hours looking for deals that don’t stack or you will end up paying too much for the site and shoot yourself in the foot.
This is a very important video for anyone starting out in property development and you must pay attention if you would like to become a master at finding deals.
Because Bad deals = No Profit
Have you ever noticed a newbie say, “Everyone is developing here, so should I”. Or “Everyone is buying here and so should I”. That’s how novice property developers make decisions. It’s the heard mentality and it only works in the short term, only for as long as the property market is in an upward trend. This approach, however does not work over a long period of time or in other words, if you wish to be able to continually keep developing as your source of income, you need to take this to the next level and have a system behind it.
If you don’t have a replicable system behind your systematic property research, you will never know where to start in property development.
Why do you plan on developing in Melbourne, Sydney or Brisbane and why aren’t you developing in Perth, Adelaide and so on. The answer to this question shouldn’t simply be, “because I live here”.
For example, I am from Melbourne, however, my first development was in Brisbane and it was based purely on my market research and nothing else.
You have to dig deep on the macro level, chose the state first, then zoom in further to suburb level, and then finally to street level. Most, novice developers cannot back their answers with market research and facts. And over the years in my property development career, the more I have based my decisions on research and numbers, the more successful my projects have been and the more detached I have been from the projects I undertook. So everything I did during the project contributed straight towards the bottom line of the project.
Mistake 2: Listening to Negative Media
The second mistake, novice developers make, when getting into property development, is to listen to negative media. There are two things that you must always remember, 1st only “Bad news sells” – so everyone talks down the property market. 2nd you must not pay attention to the news sites who hire content writers to spin negative stories. Their job is to amplify the negativity. Because, I assume, you are going to be into property development for a long time, you need to have a property research system that you can fall back on to so you are making decision based on facts not just negative media.
Mistake 3: Blindly Believing the economists
Here are two more articles that I would recommend that you read:
So what is it that the Property Developer knows that an economist doesn’t?
Property developers know the rules of property development and property economics and take action by following a replicable system of research and property development. They do their research and understand the difference between the demand and supply of various suburbs. They understand the various factors that play a role in determining house prices. They know exactly where to start and they maximise their up side and cover their downside.
To be exact, they have a working knowledge of Property Economics. In a nutshell, they understand that a deal is a deal – no matter where it is, what suburb it is in. If it stacks up, it stacks up.
They understand the important concepts that you need to understand in order to find your first lucrative property development project.
So before you get into property development, here is what you need to get proficient in. Don’t worry, if you don’t know what these are or how they work, check out one of my property development courses to get started in property development.
Important Concepts for Property Developers
Property Economics – A working understanding of New Govt Policies, Unemployment Rate, Impact of Interest & inflation rate, population growth, house price index, Australian dollar and the over all state of the economy are essential for any property developer starting out.
Property clock & market cycles – an understanding of property clock and the ability to read signals for Maturity, Decline, Bottom & Recovery
Listening for Signals – The ability to separate the Gossip & the Hype from what exactly is happening in the market, is another important skills every novice starting out in property must understand. Another complimentary skills required to efficiently listen for signals involves, leveraging the internet to hear for side kicks and other important announcements that impact property prices.
Understanding Statistics – new developers do not need to be statisticians to read market signals, but they must understand the 8 most important stats to get the pulse of the market.
Understanding Capital Growth – An understanding of capital growth, how it impacts property prices, how it is related to other forces in the market helps in identifying Suburbs with greatest growth potential. There are 6 important metrics that determine a capital growth trend. An understanding of these metrics will help you with suburb selection.
Demographics - Why do people move and how to find out where are they moving now is a very important insight for any property developer. Understanding, this not only helps developers refine what they are you going to develop, but also determine the expected demand for a certain kind of design. And the ability to forecast demographic movement sets them apart from “wanna be” property developers.
Validating Signals – know all of the above signals is not enough. The ability for novice developers to find proof for market indicators is another important skill that you need to know before starting out in property development.
Auto Alerts – And on top of all of the above, automating the entire process using web and technology will give you an edge over any developer in the market.
Invest time to understand the following important concepts and develop a property development research system:
Getting started in property development requires a lot of things, Due Diligence is one of the most important skills that you need, when you are embarking on your property development journey.
Following a due diligence system that you can REPLICATE, over and over again.
This article discusses, the Property Development Due Diligence process that you must following when getting started in property development.
Location Analysis covers more than just the site. It is everything about how your site is located relative to amenities that your prospective buyers perceive as desirable. Let me explain, for instance, everyone needs to travel for work, so if your site is located near a train station or public transport, it is perceived as desirable by the end buyer. Another example would be, proximity to schools, shopping centers, shopping streets, groceries, infrastructure and various other activity centers desired by investors and or first homebuyers.
Determining the demand and supply in the area is paramount for location analysis. You can do so by contacting the local council’s website to find out the development pipeline.
As a thumb rule, I have always developed projects within a 200m radius of activity centers. In fact, I have filters in place to flag prospective sites that fall in my selection criteria. This leads into a discussion about Supply and Demand. The more desirable the location of your property development project will be, the higher the demand for the units you can expect. In other words, when getting started in property development you must have the skill to conduct a rock solid location analysis.
Here are some projects that I have developed and their proximity to amenities:
Has everything to with the actual site. Making sure that the site is not on a slope is the first thing that I look for in a site. A sloping site for me means more costs in retaining walls, which means lesser profit. A sloping site may also attract various other costs that you should avoid when starting out in property development. The second thing that I look for in site analysis is the tree(s) on the site. More trees could mean either of three things for me and I like to avoid them as much as I can, if not completely.
Two other important things that I am always wary of are the width of the site and the depth of the site. The reason being that they both directly impact the ability to maximize the site.
Zoning and Overlays
Zoning defines the permitted and prohibited use of land. Zoning determines whether a block of land can have High, medium or low density design. In simpler terms, it stipulates the FAR or Floor area ratio. It is important, because it tells us whether we can put townhouses on a block or a we allowed to develop apartments, just increasing the population density on that block of land.
It is imperative for any property developer to find out the zoning for a potential site, as this information forms the basis of calculating a sites’ yield. All financial feasibilities are then based on the yield.
Overlays are mapped within local planning schemes and they provide more information about the land. There are various kinds of overlays, like Design and Development Overlay, Vegetation Protection Overlay, Heritage Overlay etc. if your site falls within an overlay, you will be required to meet other planning requirements for your site.
Highest best Possible Use
This is all about gathering all the above information first, and then maximising the foot print and the height of your development to accommodate the maximum number of saleable units, apartments or townhouses that meet the planning scheme requirements. This is a vital skill that you must know when getting started in property development. If you don’t know what how to do this, you must engage and town planner and architect who work together to maximize the land utilisation so you can get the best possible returns. In my property development course, I discuss various examples of maximising the land so you are not leaving dollars on the table.
Now you may ask why do I need that?
Well, this is so you can determine the end sale value of what you are planning to develop. That value is then used in your financial feasibility to find out whether or not your project works on paper. This data collection would include collecting sales history within 500m-1km of your site for last six months, it would include the ON SALE data for similar units around your site and it would also include a list of properties that are available for rent around your site to determine what you could rent them for or use the same data in your marketing efforts to show prospective buyers a list of comparable sales in the area.
Spatial Analysis is optional, but a solid property development system, would not leave any stone unturned. So I take the extra step to plot all the data that I have collected on a map to figure out where my site is at in relation to the comparable sales around it. This helps me to ascertain visually what I can approximately hope to achieve for my development.
Two-Minute Financial Feasibility
I have developed various financial feasibility calculators to run numbers on my potential property development sites. My financial feasibility applications are included in my property development course. There are two different versions of financial feasibilities that I do for any project.
If you are in property development, it is simply unavoidable to have no risk at all. Let me put it this way, there are inherent risks when driving on the road. However, we all take those risks everyday, to the point we don’t even think about the bad the stuff that can happen on the road when leaving our house. We do that because, we follow a system, we that because we are going to follow rules. Property Development is no different. There are rules and systems to follow at each step to manage risks. In fact, everything that I have discussed in this article is to manage risk, avoid it, minimize it or contain it. But above all, you must always have an exit strategy from your project at hand. Following is a list of various types of risks that everyone should be aware of when getting started in property development. Not all of them apply to all developments and it is your responsibility as a property developer to identify them and mitigate them for each project.
Decline in Property Values
Obtaining Planning Permit
Economic and Political Risks
Legal, Tax and Regulatory Risks
Risk of counter parties
Force majeure risks
So before you get started in property development, make sure that you understand the Due Diligence process in it’s entirety. Watch the video above to understand these concepts in detail.
If you would like to learn more and get a better understanding of the complete Due Diligence process, I would highly recommend that you checkout one of my property development courses that can help you get started in property development.
So to conclude this post, here is what is important to get into property development: