Property Development Process
Property development can be a great way to create wealth and like most investment strategies, it can come with some risk as well as substantial rewards.
The fact is that not all property development projects end up as great investments but by better understanding and calculating the “real” costs of completing your project, you can quickly identify whether a development is worthwhile and how much your potential return could be.
There are several key factors to consider when doing any development and if all associated costs are carefully considered and allowed for, the decision to push ahead with the project will be made much easier and help to reduce or eliminate potential risk.
Project objectives and goals
Before setting out on your next property development, it’s a good idea to understand what your key objectives and goals are for your project. It doesn’t necessarily have to be all about dollars and cents if you are holding onto the finished units. Each project will be different based on individual circumstances.
For example, someone looking to live in one of the units and rent out the others may not be as fixed on immediate profit but more focused on rental return and future capital growth. Others may only be interested on turning projects over quickly for profit or a combination of both.
Understanding your goals will help when looking at any project and should be considered when assessing your next property development. This could also influence what type of homes you build based on your location and individual circumstances.
Feasibility and due diligence
The next step is to begin calculating all the components for your development and work out how much it’s going to cost to complete the project. Some of them are easy to identify, while others may require further research or expert advice. The key here is to be well informed so you can make better decisions. Here are the key components to factor into your calculations:
Land acquisition costs
- Purchase price – This is the price you paid for the land or will be paying for the land.
- Stamp duty – This is a government charge that must be paid on all property purchases including vacant land.
- Settlement agent fees – This is the cost to transfer the ownership title into your name.
Building and finishing costs
- Construction costs – This is the cost to build the homes only.
- Finishing costs – This includes all the internal and external items to complete the homes ready for occupation, rental or resale, often referred to as “turnkey” items.
- Building and planning fees – All local councils charge a fee to assess new developments to ensure they comply with local council development policies and conditions.
- Footpath, kerb deposits and crossover fees – Some councils require these fees as part of their assessment and approval process.
- Ancillary building costs – This may include upgrades or improvements to any existing buildings like adding carports or storerooms if you plan on keeping the existing home.
- Consultants’ fees – Some new buildings may require specialist consultants to assess the compliancy of the new building to the BCA (Building Codes of Australia) or planning policies and conditions.
Site costs and ancillary services
- Earthworks, retaining and service connections – This is the cost to prepare the land to build on which may require the demolition of an existing old home on the land, installation of retaining walls if required and provide services to the new homes including water, power, gas and sewer connections.
- Water and sewer head works fees – This is required to be paid to the local Water Authority whenever carrying out any subdivision work. This fee is payable for each newly created dwelling and varies dependant on how many new units are created.
- Western Power fees – This includes an upfront payment to Western Power for the supply of underground power (Green power dome) and varies in cost based on the number of new units in the development.
- Other considerations – Every block of land is unique and the following items may need to be taken into consideration. Land orientation, proximity to coast, exposure to high wind velocity, power line locations, proximity to major roads, proximity to bush or parkland, low lying areas, special town planning scheme requirements. Any of these items may add additional costs to the project for compliance.
Subdivision and new title costs
- Subdivision cost – This will include the cost to survey the site, apply to WAPC (West Australian Planning Commission) for the subdivision and create separate titles for the newly created strata or green title lots with Landgate.
- Real Estate Agents fees – All real estate agents charge a commission on the sale of a property. It is usually charged as a percentage of the selling price plus the marketing costs.
- Settlement agent fees – This is the cost to settle any portion of unpaid rates and taxes and transfer the title of the new home to the new purchaser once it is sold. It will also include the distribution of real estate commissions and bank transfers.
Finance and tax
- Bank fees – This is the cost to set up loan to finance the project.
- Holding costs – Includes the total amount of repayments made from the start of the project (purchase date) to the finish (settlement date) of the finished project and all interest paid.
- Tax – This is an area that requires specialist advice as personal circumstances can differ for each project and each owner, however, GST (goods and services tax) and CGT (capital gains tax) may be applicable and should be factored into the “total project” cost calculation.
Property development can and should be a rewarding and worthwhile strategy to wealth creation and financial security. The key to successful property development is partnering with the right people and getting the very best advice.
An experienced Property Development Consultant will help you fill in the gaps with a “Development Budget Planner” and detailed “Development Appraisal” to provide peace of mind and help you make better investment decisions.
They can take the guesswork out of any project and provide market analysis and professional advice even before you take the first steps. This will substantially improve your potential for a successful project and increased financial returns.