This article will explain why and how real estate development has the potential to be the fastest profit process in the real estate game. The article will talk about the different strategies available to you and discuss the main profit drivers for infill real estate development. These are important things that you need to understand; your ability to effectively address these major profit drivers and combine the different strategies to your advantage is what will allow you to maximize your profits in real estate development.
The fastest model of financial gain in real estate is the short-term real estate development model where profits are crystallized by the sale of developed products.
While it is beneficial for capital growth to work hand in hand with the development strategy (the market therefore makes great efforts, worsening returns by growing in a rising market), real estate development can also affect returns regardless of growth in a flat or slow growing property market.
The development of a property to sell a final product certainly presents the highest risk profile; however, returns are potentially much higher if successful, compared to passive investment or return on rent models.
To successfully and efficiently grow in infill space, you need to use a combination of strategies to add value to the property in the short term. Generally, the duration of these projects is 6 to 18 months. The value-added property can then be sold to repeat the process. Real estate development is a recurring economic model, with profits crystallized by sales transactions (sale of final products). It is different from buying and owning (capital growth and rental yield models).
Real estate development will combine the following strategies to add short-term value:
Regional planning (subdivision).
Construction of housing (building).
Renovation of preserved housing (renovation).
You can use several of these strategies simultaneously or in stages, to extract the maximum development value. The use of the subdivision, construction and renovation simultaneously or in stages will depend on your ability to finance the separate strategies at the same time. Of course, the upscaling potential of the site in question (where can you add value and how?) Will also determine which of these strategies will be used and in what order.
Will your capital position (bank liquidity, equity and borrowing capacity) generally determine the best way to combine these strategies?
In addition, it is useful to consider the opportunity cost of your resources in relation to the risk and reward of the project. Where can I invest my money? Is there a better earning capacity elsewhere?
Your job as a successful infill developer is to assess the time required for development against the required debt and equity ratio, and to find a balance. Think about the simplest way to optimize your return on investment based on your personal situation. For example, will two small projects in 18 months present less risk, will they be easier and more profitable than a large project in the same period? You will have to run the numbers and make a decision.
Design as a key profit factor
Profitable developments begin with good design. What is a good design? Good design is driven by the needs of the end user.
The ideal end user in residential development is an owner-occupier. By definition, an owner-occupier is a buyer who purchases their principal place of residence. Their decision to buy a property will be driven primarily by emotions (as opposed to an investor or speculator). This is perfect from a sales and marketing point of view as price will not be the only determinant taken into account by the buyer. As long as you produce the right product that hits an occupying owner's emotional hotspots, a good price can be ordered for your product because of the perceived value in the product offering.
Thinking about the end user, ask yourself:
Can someone build functional housing on the land I create (if you only divide land for sale)?
Will the homes I build meet the needs and expectations of the types of homeowners active in today's market?
Can the market segment (types of end users) that I target allow me to buy the product?
Your ability to produce the right designs and achieve profitable development requires a process of coordinating statutory compliance and market research. Housing designs must comply with state and local government planning legislation and be guided by end-user market research (to find out what kind of products with what respective features there are currently market demand).
1 – Input pilots for a profitable design
Investment drivers for strategic real estate development in Western Australia
As much as your ability to finance a deal will make or break it, so will the ability of your target end buyers to buy your product. The main investment driver for strategic real estate developments is therefore accessibility. Indeed:
NO CUSTOMER = NO SALE = NO BENEFIT
You need to take into account the demographics of your target end buyer and their ability to finance a purchase from you in the current economic climate. This is generally based on their equity and debt situation, their employment status and / or their ease of service. Affordability does not mean producing a cheap product (unless this is what is required by your target market), it means ensuring that there is a type of product in demand coming from a market segment that can afford to buy it. You need to think carefully about the type of homeowner at all times.
To emphasize the point from the developers' point of view: affordability means ensuring that there are enough buyers with financial capacity who want and can buy your product. The target buyer groups that fit this mold will change periodically, due to lending policies and wider macroeconomic factors (such as employment trends, wage growth, cost of living , etc.).
If you learn more about the topics of real estate development strategy like how to effectively combine subdivision, construction and renovation, and what the technical design process of profit is in detail, the author of this article explains them in more detail in the publication below.
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The author of this article, Anton Flynn, is director of development and strategist for the experts at FLYNN Subdivision based in Perth, Western Australia. He wrote a 225-page guide, The Infill Developer: a Concise Guide to Small Lot Subdivision and Development in Western Australia, and also developed a 14-module online course on infill real estate development in Western Australia.
