Without the right strategy, property development can be a high-risk undertaking.
Whilst an investment strategy with high potential for profit, property development also carries inherent risks, especially if you’re new to the processes involved. Getting your strategy wrong can cost you considerably, but these risks can also be mitigated with the right research and preparation in place.
Here are some of the key mistakes to avoid when developing an investment property.
Overlooking key costs
One of the biggest mistakes you can make when developing an investment property, and one that a surprising number of developers make, is not understanding all the costs involved.
Whilst the majority of investors will know to factor in expenses such as building permits, application fees and construction works, it’s the additional costs that often catch aspiring developers out.
In WA, for example, Western Power and Water Corporation will often charge a fee (known as head works) for upgrading existing infrastructure to support the increased demand for their services created by development projects. Similarly, depending on the number of lots being created, your local council may also ask for a contribution to support the increased demand for amenity and community services generated by the development.
These costs can vary from a few thousand dollars to hundreds of thousands of dollars, so failure to crunch these numbers at the beginning of the project could considerably reduce your expected profit.
Not understanding zoning and planning requirements
As a prospective developer, one of the first things you will need to do in the research stages of your property development is to get to grips with your planning framework. These planning requirements are key to determining the scope and size of a project, and failure to understand them could have a serious impact on your ability to complete your development, or even lead you to miss out on additional opportunities for profit.
In addition to the planning policies and zoning regulations within each state, lots of lands in Australia are also subject to local council policies which vary considerably between different localities. These often include site-specific restrictions that can impact how you complete the development.
For instance, one of the common clauses included in several local planning policies relates to the number of crossovers per parcel of land. If crossovers are limited, this could impact or restrict the way you have to construct the development (i.e. the layout of the final properties), which is something you may need to factor into the profitability of the site upon sale.
As little as one clause can significantly change the potential or profitability of your development, so it’s important to go through these policies with a fine toothcomb to ensure the project is still worth your while.
Not identifying red flags early on
Successful property development isn’t just about locating a profitable site, it’s also about identifying when a site isn’t suitable for development. Failure to pick up on problems in the early stages of a project could have incredibly costly implications further down the line, or even hinder the development altogether.
For instance, “hidden” issues such as rock in the construction site, sewerage systems, or easements could change the way you need to plan the project and impact your ability to build in certain areas, leading to additional construction costs or even hindering the feasibility of the project altogether.
To avoid being confronted with these problems, it’s important to do your due diligence before finalising any offer on the site. If you are searching for a property with the intention to develop, you may want to consider enlisting the help of a local buyer’s agent to negotiate and carry out due diligence on your behalf.
Getting the end-product wrong
Ensuring your development project is practically possible is crucial, but one of the key strategic mistakes a lot of investors make when developing an investment property is getting the end-product wrong. At the end of the day, you can build a great property, but your development can also be destined to fail from the start if the final product doesn’t align with your target market.
Market demands can vary considerably between different suburbs depending on the local demographic and existing supply, so careful research into the market is crucial. For instance, you wouldn’t build a townhouse in a lower socio-economic area where buyers are seeking more affordable products. Similarly, you wouldn’t build an apartment in an area that is oversupplied with apartment developments, as the profitability of the project would be vastly limited due to lack of demand.
When choosing where and what to develop, you will need to assess whether there is enough demand for that type of property in that location, as this will be key to ensuring you get the final product right, and ultimately to ensuring you achieve your desired profit margin.
Amongst many other factors, a successful property development requires careful planning, knowledge of the property market, and a strong development strategy. If you’re developing property for the first time, or don’t have the time to commit to the research and planning required, you should strongly consider enlisting the help of a professional property development team to oversee the project on your behalf and give your development a higher chance of success.