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October 14, 2014

Property development 101: Part 3

By PETER KOULIZOS

From finding a site to selecting the builder, financing the deal, building and selling, you can become very rich or unfortunately you can become very poor. The more you have planned and thought about your project, the more likely you are to succeed. It always pays to remember the old saying, “A failure to plan is just a plan to fail.”

This Property Development 101 series won’t be able to teach you everything there is to know about property development. For this, you’d need to read many editions of this magazine as well as books, enrol in courses and potentially have years of experience. However, if you read each instalment, you’ll learn about the fundamentals of property development and it’ll also make you aware of what questions you need to ask so you can make an educated and informed decision.

Over the next few months, I’ll be outlining the major steps involved in property development. These include:

  • Setting your goals.
  • Research.
  • How to find development sites.
  • Choosing the best site.
  • Drawings.
  • Feasibility studies.
  • Working with council.
  • Selecting a builder.
  • Finance.
  • Project management.
  • Real estate agent/property manager.
  • Tax.

In the first instalment, I outlined some strategies in relation to goal setting and research.

In the second instalment, I detailed some methods on searching for developing sites and then some considerations when selecting the best site to develop.

This month, I provide an insight into the design and drawings for a development.

Design and drawings

Once you’ve found a suitable site, you’ll need to get some plans drawn up. This can be done by a draftsperson or architect.

You might like to use an architect to design your dream home but when it comes to investment property, the cost of construction due to the design of the property is very important. Make sure you tell the draftsperson/architect that the properties being designed are for selling/renting purposes and the design needs need to be uncomplicated.

It’s critical that the dwellings are designed appropriately. It’s fine to be creative and include expensive features such as swimming pools, theatre rooms and a cellar when designing your own home but when it comes to building properties for sale or to rent, you need to ensure you don’t overcapitalise and only include features the buyer or renter will appreciate and is prepared to pay for.

Don’t try and squeeze too many dwellings on the site. If the choice is between six tiny two-bedroom townhouses or five townhouses, some with three-bedrooms and some with two-bedrooms, I’d select the five townhouse option as it provides choice and minimises risk.

Unless your market research shows that your target market is only interested in tiny two-bedroom townhouses, I’d provide a mixture of two- and three-bedroom townhouses. Your development will appeal to a broader market and will probably sell quicker and easier, thus keeping your holding costs down and helping you sleep better at night.

Find out what the ideal sized building is. What do I mean? Consider the following scenario:

130-square-metre townhouses – $375,000
140-square-metre townhouses – $390,000
150-square-metre townhouses – $400,000
180-square-metre townhouses – $405,000
200-square-metre townhouses – $410,000

If 150-square-metre townhouses sell for $400,000, why would you bother building townhouses that are larger for just an extra $5000 or $10,000? The market might prefer smaller townhouses and isn’t prepared to pay much more than $400,000, no matter how large or spectacular the design, construction or size.

So, how do you know what are good designs and what the ideal size for your properties is? It’s all about research.

Find out what other developers have designed and constructed in the suburb(s) you’re interested in by attending home opens or searching property data providers such as RP Data. Find the floor plans and search for features they’ve included. Is an ensuite essential? If the property is two storeys, is there at least one bedroom and one bathroom on the ground floor? Has ducted air-conditioning been included or is a split system sufficient? Is a double garage critical?

Be careful! Just because a developer has built a spectacular townhouse that includes four bedrooms, three bathrooms, granite tops in the kitchen and Italian tiles in the bathroom, doesn’t mean it was a profitable development. To get an idea of how much profit (if any) was made, find out how much they paid for the land, calculate building costs, subdivision and holding costs, and determine what the properties sold for. Just because you spent a lot of money building, doesn’t mean anyone will pay you a lot of money to buy it.

If you’re not sure how to calculate these costs, be sure to read my next instalment in which I’ll discuss feasibility studies.

About Peter Koulizos

Peter Koulizos is a lecturer and the author of “Top Australian Suburbs”.