This article will discuss why and how property development has the potential to be the fastest profit making process in the real estate game. The article will talk about the different strategies available to you and discuss the key profit drivers for infill property development. These are important things for you to understand; your ability to effectively address these key profit drivers and combine the various strategies to your advantage is what will allow you to maximise your profits in property development.
The fastest model for financial gain in property is the near-term focussed property development model where profits are crystallised though the sale of developed product.
While it is advantageous if capital growth is working hand in hand with the development strategy (so the market is doing some heavy lifting, compounding returns by developing in a rising market), property development can also affect returns independently of capital growth in a flat or slowly growing property market.
Developing property to sell end product certainly has the highest risk profile; however the returns are potentially much higher if successful, compared to passive investing or rent yield models.
To develop successfully and effectively in the infill space, you must employ a combination of strategies to add value to property in the near term. Typically, the time period for these projects is 6-18 months. The value-added property can then be on-sold to repeat the process. Property development is a repeat business model, with profits crystallised through sales transactions (selling the end products). This is different to buy and hold (capital growth and rental yield models).
Property development will combine the following strategies for near term value adding:
- Land development (subdividing).
- Dwelling construction (building).
- Refurbishing retained dwellings (renovating).
You can use a number of these strategies concurrently or staged, to extract maximum value from the development. The use of subdivision, building and renovation concurrently or staged will depend on your ability to fund the separate strategies at the same time. Of course, the uplift potential of the site in question (where can you add value and how?) will also determine which of these strategies are employed and in what order.
Your capital position (cash at bank, equity and borrowing capacity) will typically determine the best way forward in combining these strategies?
Also, it is useful to consider the opportunity cost of your resources against the risk and reward of the project. Where else can my money be invested? Is there better earning capability elsewhere?
Your job as a successful infill developer is to assess the time needed for the development against the ratio of debt and equity required, and find a balance. Consider what is the easiest way to optimise your return on investment for your personal circumstances. For example, will two smaller projects in 18 months pose less risk, be easier and more profitable than one large project in the same period? You will have to run the numbers and make a decision.
Design as a key profit driver
Profitable developments start with good design. What is good design? Good design is driven by the needs of the end user.
The ideal end user in residential development is an owner-occupier. By definition, an owner-occupier is a purchaser shopping for their primary place of residence. Their decision to purchase a property will primarily be emotionally driven (as opposed to an investor or speculator). This is perfect from a sales and marketing perspective as price will not be the only determinant considered by the purchaser. Provided you produce the right product that hits an owner occupier’s emotional hot points, a good price can be commanded for your product because of the perceived value in the product offering.
With the end user in mind, ask yourself:
- Can someone build a functional dwelling on the land I am creating (if you are only subdividing land to sell)?
- Will the dwellings I build meet the needs and expectations of the owner-occupier types active in the current market?
- Can the market segment (end user types) I am targeting afford to buy the product?
Your ability to produce the right designs and deliver a profitable development is through a process of coordinating statutory compliance and market research. Dwelling designs must comply with state and Local Government planning legislation, and be guided by end user driven market research (to find out what type of products with what respective features there is currently demand for in the market).
1 - Input drivers for profitable design
Investment drivers for strategic property development in Western Australia
As much as your ability to finance a deal will make or break it, so too will your target end buyers’ ability to purchase your product. The Key investment driver for strategic property developments therefore is affordability. This is because:
NO CUSTOMERS = NO SALES = NO PROFITS
You need to consider your target end buyer demography and their capacity to finance a purchase from you in the current economic climate. This is typically based on their equity and debt position, employment status and/or serviceability. Affordability doesn’t mean producing cheap product (unless that is what is required by your target market), it means ensuring there is a product type in demand from a market segment that can afford to purchase it. You need to have serious think about which type of owner-occupier this is at any given time.
To emphasise the point from a developers perspective: affordability means making sure there are enough buyers out there with financial capacity who want to and can buy your product. Which target end buyer groups fit this mould will change periodically, driven by lending policies and broader macroeconomic factors (such as employment trends, wage growth, cost of living etc.).
If learning more about property development strategy topics like how to combine subdivision, construction and renovation effectively, and what the profit engineering design process is in detail, the author of this article explains them in further detail in the publication listed below.
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The Author of this article, Anton Flynn, is a development manager and strategist for FLYNN Subdivision experts based in Perth, Western Australia. He has written a 225 page guidebook, The Infill Developer: a Concise Guide to Small Lot Subdivision and Development in Western Australia, and has also put together a correlating 14 module online course on infill property development in Western Australia.