How to avoid monumental blunders on your next build

November 2, 2014 Sam Saggers

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How to avoid monumental blunders on your next build

Did you know that the Sydney Opera House – finished in 1973 – was $763,214,800 (1,357%) OVER budget and 10 years OVER its deadline?

It was such a debacle that the architect, Jorn Utzon, quit the project because of disputes.

He never returned to see its completion.

The builders of this iconic structure were tasked with many of the same things that smaller builders – such as property investors – must do:

  1. Find the right finance
  2. Deal with council
  3. Obtain the right permits

And much more – only on a massive scale.

While you probably won’t be building an opera house, the concept is still the same – how do you complete your build on time and on budget?

Builds

As you may know there are many different types of builds. Property investors will typically encounter the following throughout their investing career:

  1. Strata title
  2. Duplex
  3. House and land
  4. Subdivide
  5. Granny flats

Although as property investors we have limited impact on market conditions, how you manage your build WILL have a direct impact on the profit you’re able to achieve.

Choose the Right Property

Find the right property at the right price to maximise your investment:

  • What are the price ranges for the type of build you’re considering? Look at historical values, not asking prices.
  • When searching through properties online, rather than sift through thousands of locations, narrow down your search to your target price range according to your individual financial capacity.
  • When doing a renovation and/or strata development look for blocks of units that are 5 to 20 years old and that look like they need just a bit of polish, such as landscaping or external/internal painting.
  • Is there good access? If not, how difficult will it be to ensure that every resident gains access?
  • Look at properties similar to the one you’re considering renovating or building, comparing its features to those of neighbouring properties.
  • Keep in mind that the top end of the market is just that – the top end of what you can expect your property to reach. Go over this figure and you can pretty much guarantee your profits will suffer.
  • Study market drivers in the area. Is there a high demand for your build? Look for other properties that have recently been constructed and/or renovated to gain an idea of the demand.
  • What is the minimum lot size set by the Development Control Plan for Subdivision and what are council’s guidelines in connection with zoning and building criteria in the area?
  • Any newly renovated and/or constructed properties (benchmarks) will help your valuation, as they will be the comparables used when the valuer looks at your development.
  • Find land estates that have above average to median long-term growth.

Complete a feasibility study

Avoid overcapitalising by only choosing properties that need small renovations – not large structural changes.

The costings for your initial feasibility study will be sketchy, however over time the numbers will become firmer. You will need this when you apply for finance.

Just some of the costs will include:

  • Stamp duty
  • Council application fees
  • Developer fees
  • Surveyor fees
  • Headworks (if applicable)
  • Connection fees
  • Legal fees
  • Valuation costs

A good return would deliver a 20% after cost profit therefore look for a 30% to 40% gross margin before deductions.

If your property is in a more rural area where construction costs are greater and/or the lender’s criteria are stiffer, add a larger margin to ensure you make a profit.

Also, if selling the property is part of your exit strategy speak with your accountant about any GST and other taxes you will incur, adding these to your calculations.

Development Tips

  1. Choose a surveyor who is well acquainted with subdivision who can easily manage your development application (DA). The stress reduction alone is well worth the effort!
  2. The surveyor will also supply the council with the subdivision plans, navigating the process of council approval on your behalf.
  3. Although it’s not necessary, it’s smart to contact your future neighbours once council has approved your plans; it fosters good will if they’re clued in to the changes.
  4. Buying new will maximise depreciation, tax and gross rental returns.
  5. Choose only areas where the owner-occupier to investor rate is at 70% or above.
  6. When developing be sure that it will appeal to both renters and owner-occupiers.
  7. Build within 5 minutes of infrastructure (e.g. hospitals, entertainment precincts, universities, schools).
  8. Don’t build if you cannot get at least a 5.0% gross rental yield.
  9. Choose only proven, middle of the road developers.
  10. Keep your build or renovation in line with what the market can bear. (e.g. don’t put a mansion with all of the bells and whistles in a blue collar neighbourhood).
  11. Build a buffer into your calculations of at least 10%. You want your renovations to return at minimum $2 for every $1 you spend.

Interested in Land & Construction? Want to know more about investing for profit? Register for one of our FREE Property Investor Nights by completing the form below. You’ll learn exclusive tips about the hottest Australian markets, how to find positive cash flow property and buy for capital gains! Register now.

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