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 real estate financial gain model is the short-term real estate development model where profits crystallize through the sale of developed products.
While it is beneficial that capital growth works hand in hand with development strategy (so that the market makes great efforts, increasing returns by growing in a market real estate development can also affect returns regardless of capital growth in a stable or slow growing real estate market.
The development of a property to sell the 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 keeping (models of capital growth and rental returns).
Real estate development will combine the following strategies to add short-term value:
• Spatial planning (subdivision).
• Housing construction (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 interline developer is to assess the time required for development against the debt and equity ratio required, 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 start with good design. What is a good design? Good design depends on 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. Provided that 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 owner-occupants active in the current 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 deliver profitable development requires a process of coordinating compliance with laws 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 Factors for Strategic Real Estate Development in Western Australia
As much as your ability to finance a deal will make or break it, so will your target end buyers' ability to buy your product. The main investment driver for strategic real estate developments is therefore accessibility. Indeed:
NO CUSTOMER = NO SALE = NO BENEFIT
You must 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 real estate development strategy topics like how to effectively combine subdivision, construction and renovation, and what the technical profit design process is in detail, the & 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 development director and strategist for FLYNN Subdivision experts based in Perth , in 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 an online course in 14 modules correlated to the development of infill properties in Western Australia.
