The first step to being a successful property developer is choosing your team that will support you throughout the process and securing your financing. Once this prep work is done, you can start digging into the actual development itself.
First in that process is choosing a development site. It might be tempting to pick a relatively inexpensive site in a good location, but there's a lot more that goes into a good development than the sale price and location.
Ron Forlee goes over some of the red (or green) flags in selecting a development site.
Broadly, we can divide his analysis into four categories:
property market trends;
general economic characteristics;
specific physical characteristics about the site (e.g., location, traffic flow and public transport); and
potential legal limitations unique to the property.
Property Market Trends
In property development, you're ideally buying below the market price to create a greater profit margin for your investment. Naturally, that means looking into the property market trends of the suburb you're interested in, as that will give you an idea of how much income your development can procure for you.
For example, rental rates.
Knowing rental rates of the area can help you calculate your net rental income after all costs are factored in. Information on rental rates is pretty accessible too; just a quick look on RealEstate and Domain can give you a general idea of what to expect. When comparing rental rates, using the rental rates of similar properties is, of course, ideal.
Vacancy levels and recent sales are also good indicators to work with. These elements can inform you about the demand you are likely to see in the area. Asking local real estate agents is also a good way to glean some insight into future trends as well.
Don't forget to consider the absorption rate. How long have listings in the area been up? Do properties in this area sell quickly, or do many of them remain vacant for extended periods? If the latter, find out why. Best case scenario (for you), it's down to architectural design; worst case, the market just isn't in good shape.
If demand in the area is low and looks to be low for the foreseeable future, rethinking the development site might be a good idea; it might be difficult to sell or rent out your development, which means you'll be holding onto a property without any income from it for a longer time than you might like.
Look not only at the region's property market trends but also at the state of its broader economy. Here are some questions you can ask yourself when investigating this:
What's the general economic trend in the property industry?
What's the economy's growth rate like?
Is unemployment trending upward or downward?
How is building activity, particularly that of properties of the same type as yours, in the region? If it's high, that could indicate competition.
What is the structure of state and local governments?
Does the local government have policies that encourage development?
What is the local government's history of building applications for various property types?
Are the services available in the area adequate?
These details build a picture of the people and lifestyles within the region—if unemployment is trending high, this might mean that there is a low demand for sales and rental properties within the region.
More than that, they also reveal what kind of institutional obstacles or support you might see from local governments. Finding out the history of building applications in the area creates a more concrete timeline that your development project will likely see. Not to mention, it helps you figure out if you're likely to see additional hassle that sets you back by weeks, if not months, due to paperwork being approved at a snail's place.
You can get much of the information you need for these questions through the Department of Labour, the local Chamber of Commerce and the Australian Bureau of Statistics. Outside of that, researching local banks, newspapers, and querying local accountants can be helpful.
This is where a good chunk of the nitty-gritty details is. Some of these details may be difficult to review without the help of an expert in the field, such as topography, soil conditions, vegetation, etc.
Zoning is critical. The site must have the appropriate zoning or else be able to be rezoned to your requirements. Check the following regulations:
Consider the size and shape of the site—legally, you may build a 10-unit development, but does the physical area of the site allow for that? Furthermore, if the site has a steep slope, that will accordingly require designs with more complex supporting structures and foundations, bumping up the costs associated with the project.
A neat, rectangular site is also more efficient for planning and design. An irregularly-shaped size requires a bit more thought and maneuvering to get around—this can mean an increased amount of planning or making structural changes to the development, which can be costly.
Having a trained lawyer to look through the title of the property is another crucial step. You want a development with a clean, marketable title, without any unpleasant surprises waiting for you down the road.
Some key points that should be considered when examining the title are:
The current owner of the property
Caveats or liens by third parties
Easements and encroachments
Arrear rates and taxes
Poor legal descriptions
Improperly executed deeds or other instruments
Boundary line agreements/party wall agreements
Information in this article was obtained from AYR International, 'How to identify a profitable development site'.