06/12/2018
Real estate investing is an ever-changing process, and those who engage in it often look for new and different ways to advance their portfolios.
Some investors succeed in transforming a house into added value, with some strategic renovations reinforcing their real estate assets. This desire to improve an existing space often becomes a stepping stone to real estate development, which offers investors an opportunity to significantly increase their profit.
"I can not tell you how many people told me that they would like to embark on real estate development. Almost every barbecue I have attended in the last 15 years has led to discussion, and I am happy to say that I have a handful of friends who have entered the market there are a few years and now doing a small project every day. another year, "said Matthew Lewison, director of OpenCorp.
"It really helped them grow their wealth beyond what their passive residential portfolios could have done. But today, these same guys would have trouble training for the first time as developers. The landscape to find, finance and prepare for a small development is much more difficult than it was before. "
Understanding why you are developing is a crucial precursor to determining how you are going to do it, says Lewison. As with everything related to property, it's essential to become familiar with the different facets of development, because it involves much more than just buying, building and making a profit.
"A good starting point for budding developers is to get involved in real estate renovation. That's from elsewhere which has allowed many experienced developers to learn their craft, "says Bryce Yardney, a real estate development expert at the head of the Metropole Property Management Division.
"Some real estate investors go into real estate development without understanding the rules of the game. They are very different. They do not know what they do not know and they get caught. "
With proper planning and education, development is an excellent way for an investor to build a portfolio of real estate in well-located areas while benefiting from high rental returns.
But while real estate development has many advantages, it certainly has drawbacks, as shown by the story of the residential developer Chris Byhouwer. During an investment trip of about thirty years, he developed more than a dozen properties, with varying results.
"I knew that there were profits to be made in real estate, so I kept trying different things," Byhouwer explains.
Since he's completely renovated a two-bedroom house that he bought in Bowhill, SA, in 2009, he enjoys a rent yield of 12%. Then, in 2014, he demolished a house in Clearview, SA and subdivided the land that he sold for a net profit of $ 75,000.
To date, his most profitable transaction was a corner block purchased in Adelaide in July 2013. "I bought $ 350,000 and spent $ 100,000 on renovations and subdivisions. I sold the house for $ 347,000 and the back block for $ 210,000, making a profit of $ 107,000 in just nine weeks. "
That said, although many of his renovation and development projects were profitable, Byhouwer discovered that the process was not foolproof. He occasionally bought properties in weak growing areas and he recorded losses on transactions that did not materialize – as in 2006, when he had been misinformed by the local council, he had bought a land that he could not develop.
"After this experience, I learned to do more research and I no longer believe what a board representative told me at the counter," he says.
Byhouwer has also embarked on development projects which, despite all his efforts in terms of due diligence and careful planning, have not paid off.
"Most of my transactions have been profitable, but in those that have not been, additional delays with the board, an unknown flood area to which even the board does not. could not give me a clear answer, without getting any clarification. The image of the end buyer was my stumbling block, "says Byhouwer.
Such situations highlight the risks that potential developers must take into account. Before embarking on this path, here are some of the risks to keep in mind:
1. Buy in the wrong place
A property can boast an excellent location near amenities or close to the city, but that does not mean that it is well suited to development. It is important to review the local areas for development to be successful and to check with the local council to determine the rules for major changes, such as plumbing.
2. Developing at the wrong time
You need to monitor the property cycle to make sure that the value of an investment will increase once the work is completed. A recession could end up wasting all the effort and money invested in construction.
"A good place to start budding developers is the renovation of properties – it's the number of experienced developers who originally learned their craft."
3. Disapproval of the Council
Yardney says that getting approvals for developments has not been easy lately. "Currently, boards evaluate development applications very slowly and reject a lot of them. Not getting approval or getting one on unfavorable terms is a growing risk for developers, "he said. "The cost of obtaining approval or rejection of the Combat Council before a Court of Appeal is steadily increasing."
4 Increased Costs
An increase in interest rates could result in increased holding costs, limiting the profits you make. Construction costs could also increase, which would significantly reduce your budget. "It's not unusual for a planning application to take 12 to 18 months," says Lewison. "Add a construction period of nine to twelve months and a small project has gone from an investment of one year (in the 90's) to a minimum of three years today. Banks now also want developers to sell their units in advance before financing construction. "
5. Conflicts
In development, you work with many different trades and suppliers. This can lead to disagreements and disputes between parties, resulting in delays in the project.
In the end, developing a property wisely and efficiently depends on your ability to plan things before you start.
"When you buy your first property, make sure you're ready for a long planning wait and make sure you have the financial capacity to build it!" Says Lewison.
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