Source: Wealth Creator Magazine March/April 2006

If you want a fast track in subdivision, consider redevelopment of existing residential property.

enewsletter signup:
Why subscribe?View archive

How To Safely Generate Equity & Cash Flow Through Property Development

Source: Wealth Creator Magazine March/April 2006

How to safely generate equity and cash flow through property development.

Are you a person who is interested in investing in property? Have you already purchased a couple of investment properties? If the answer is yes, you may need to consider a ‘property development’ strategy should you want to continue to invest in a market that appears to have plateaued over the past few years.

Put simply, ‘property development’ increases the value of a property. Several ways of doing this are (1) Renovation. Renovation is a simple way to maximise the value for a low cost. It is advisable that one does not go overboard with it as you may over capitalise. (2) Extension. Many believe they are massively going to increase the value of their property by building a second storey or adding onto the back. Although this is true, like the renovation strategy, you may fall into the danger of over capitalising your property. Rather, look for creative extensions, for instance, putting bungalows in the backyard to increase the yield by commanding extra rental income for more than one dwelling. This will reflect a greater value on the property. (3) Subdivision. This is the most significant way to increase value. Generally, there are two schools of thought about this strategy: it either helps you make or lose a fortune. So, let us demystify the process of subdivision.

Creating subdivision development opportunities is where the best profits are made.

If an opportunity is created, it can be put together in a package and sold to a builder developer instead of completing the whole project on your own. With every development, there are profits to be made at each point along the way. The key is to source great opportunities, turn them into real development application approvals and then on-sell the project to make your profit and move on to the next deal. There are a whole host of ways of securing and taking control of the property, enabling you to create development opportunities, such as Options and Joint Ventures with the owner.

Land subdivision.

This could be for instance, changing the land from rural use to residential or to commercial use etc. With residential development, single or multi-dwellings and multi-level apartment type buildings may be constructed which may be very profitable yet at the same time, risky.

Residential redevelopment

If you want a fast track in subdivision, consider redevelopment of existing residential property, perhaps a block of units. In my early experience as a developer, I learned about the power of the ‘multiplier effect’. Using redevelopment strategies, one can profit from them much quicker as he or she does not have to wait too long to receive permits or a development application (DA). There is also commercial development and redevelopment. With Land Subdivision for residential properties, you may estimate to gain 50% profit if there is no DA and 30% profit if the DA was already approved. A person who saw a potential development opportunity where they could subdivide land for residential homes, or some sort of commercial development would be prepared to pay you considerably more for the property if you could create the DA that was required to get that land subdivision approved. This way, the profit margin is ‘up for grabs’ as the risk of hiring a developer is diminished.

Residential subdivision of existing already zoned residential land

Creating and building small lot subdivisions has been my key strategy as a builder developer. This strategy has worked well in major and regional cities and towns all over Australia. This type of infill development will continue because there is demand. It is advisable to do research to ensure profitability of at least 20% may be made when you purchase a development site. Proving this profit by realistic estimation is essential for success as many attempt to complete unviable redevelopments.

There are all sorts of other development strategies for residential properties such as Multi-level or High Rise. Although the risks with this type of development strategies are much higher, larger profit margins are attainable. Some examples are Q1 on the Gold Coast by the Sunland Group and Eureka by Grocon in Melbourne. These two developers have made massive profits without taking extreme risks due to their experience and advanced knowledge.

Residential redevelopment

An example of residential redevelopment is when one may buy an existing block of eight units on one title and then separate the title by selling them as stratas to create separate titles which increases the value. The key thing about residential redevelopment is that you can do it ‘now’. What is meant by that is that one of the biggest frustrations in property development is delays created due to the involvement of Local Councils. This is due to the length of time Councils generally take to process the applications, making the whole process frustratingly slow. With residential redevelopment however, the initial permit application is by-passed.

Commercial development projects, on the other hand, include anything from a factory, service station childcare centre and the like. The success of a commercial development also depends on the end user who may be prepared to take on or lease the project from you, otherwise you may sell it to him or her as well. Although it is different from the former, it is also a great way of profiting in development.

Steps in the development process

It is easier when broken down into simple steps.

Step One: Source the project

Step Two: Assess the project.

Step Three: Weigh up the financial feasibility

Step Four: Apply for the planning permit

Step Five: Obtain financing

Step Six: Manage the project.

Ensure that the product is either on-sold or that you have created it adding to part of your investment portfolio. As well as applying to get the development approved, it is equally important to lodge an application to the Council to get the new subdivision approved. You might have to get a Change of Use Permit first. The last and final step is marketing. Once an understanding of these skills is acquired, you are well on your way to becoming a property developer.

Written by:

Melbourne based developer. Peter Comben has been a successful developer for over 16 years. He now spends a portion of his time guiding investors in the tricky business of property development. www.smartpropertydevelopment.com.au