As a property developer embarking on larger-scale projects, no two days are the same and everything can affect your ultimate outcome.
“That’s the journey, and that’s the mindset that you have to have,” says Damien Lee, head of acquisitions at Caifu Property.
“There are many things that come into play, and that’s what building your strategies, building your time frames, building your models is for; it’s also why development is so fun and why it’s a good thing to be involved in!”
A developer must be prepared to respond to the changes that can happen in the regulatory sphere in which they operate, from lending guidelines to tax law, as all of these things are cross-correlated and can affect a developer immediately, Lee adds.
A developer must be prepared to respond to the changes that can happen in the regulatory sphere in which they operate, from lending guidelines to tax law, as all of these things are cross-correlated and can affect a developer immediately, Lee adds.
“That’s where good full-time developers tend to stick with a model; forecast for a model that they are comfortable with, that doesn’t rock the boat too much,” he says.
With advanced projects that yield higher profits, the level of risk also becomes relative to how well the developer is prepared before commencing.
“If you have the cash and capacity to see a project through to completion, taking into consideration contingencies such as blowouts in construction and time blowouts, and servicing debt, then there are some massive profits that can be made out of massive deals,” says Brendan Kelly, director of Results Mentoring.
“For example, when you are getting to the multistorey apartment block constructions, you are talking profit in terms of $2m or $3m, up to $5m or $6m in boutique developments, and that’s a big amount of profit.
“And if the market moves and it moves against you, or if construction costs blow out, $6m of profit covers a lot of mistakes, so the risk of loss is not necessarily always great.”
The level of risk depends on the nature of the deal and the financial back-up that an investor or developer has prior to starting the deal.
Moving from an experienced developer to a professional full-time developer means taking on a higher volume of projects, Kelly says.
“When you have two or three simultaneous [projects], you are staggering income from properties over a year, and what you can do then is actually have $100k, $200k or $300k profit coming in every six months – and then you don’t have to be employed any more,” he explains.
But with some larger-scale deals having longer time frames than others, how can a financial buffer be sustained in the interim?
“Talking about a multi-apartment complex, 50 apartments on site, major subdivisions – they can take you five to 15 years to complete,” says Tony Nicolo, senior property investing mentor at Results Mentoring.
“It can take a very, very long time, so when you reach professional level you have got to ensure that you have the cash flow behind you to wait that long for the next pay cheque to come in, therefore you need to undertake a multitude of projects.”
A steady income
Projects that have the potential to be financial pillars of support while you undertake larger development deals can range from small-lot subdivisions to renovation projects.
“You can have these other income sources by undertaking these smaller projects to bankroll you through the larger projects,” Nicolo says.
Accessing finance to take on larger-scale projects also requires appropriate planning in the lead-up. A project that has four or more developments being constructed on one plot of land is recognised by most lenders as being a ‘commercial development’, and with this comes specific lending guidelines that differ from those for residential construction loans.
“Lenders are very, very particular about their projects and the experience associated with them as well,” Nicolo says. “Someone with experience, who can demonstrate their experience and certainly demonstrate the success of their experience, is more likely to get the funding.”
The commercial sector can also provide a steady stream of income, says Perpetual Projects director Peter Fanous.
“If you have a commercial property and have it leased out well, paying say 7% per annum – which should more than cover your costs – then that is something that the bank can contribute towards your income when you are going for a loan,” he explains.
“I find when I look at my peers around me that most of them at large are full-time developers, but they are also an auctioneer on the weekend, or they have a consulting company like me, or they have some property that supplements their income.”
Setting up a property development business
The end destination requires the right vehicle to get there, and this therefore determines how a developer or investor chooses to manoeuvre.
While a property developer will complete a project to generate a profit through the sale of the property, a property investor may hold the property for rental income and capital growth – and there are different tax outcomes for each, with income tax, capital gainst tax and GST all needing to be considered.
Brent McCartney, director of DFK Benjamin King Money, says there are three objectives he monitors for his clients when setting up a structure for their property project: tax minimisation, asset protection, and their ability to borrow.
“Developing or renovating a property for profit comes with risk, so you want to make sure that you structure it in the right way to minimise your personal risk,” McCartney says.
“In setting up the right structure, you need to take into account not just the structure that provides protection for your personal risk, but also tax minimisation and easy access to lending.”
The most opportune structure is based on what the client’s end goal is for their property project, which is ideally decided on and implemented from the very start of a deal.
McCartney says that under the correct structure an investor can hold the property as an investment for a minimum of 12 months, and when they decide to sell it they will have the potential to access the capital gains discount of 50%.
“Developing or renovating a property for profit comes with risk, so you want to make sure that you structure it in the right way to minimise your personal risk”
“If the purpose of the property project is more on a revenue account, where there is a profi t intention, a company is a good structure because you can access the small business company tax rate of 27.5%, which potentially is lower than the property developer or renovator’s marginal individual tax rate,” McCartney explains.
He believes that a mortgage broker, an accountant and a conveyancer or property lawyer are a great financial team to have on board.
“A financial planner is also important, and in some cases is essential if a client wants to look at investing in property through their own self-managed superannuation fund,” McCartney adds.
“The more preparation and the more assistance that you get from your team, the better result you’re going to get at the end of the day – and that’s in terms of being protected, in terms of minimising tax, and to make sure that you get the best profi t out of the deal that you are looking at doing.”
