Property developers continually make headlines for knocking first-home buyers and young families out of the running at auctions, with grand plans to demolish rundown homes and make huge profits building as many properties as possible on the block.
Developing a block of land may seem like one of the quickest ways to build wealth through real estate, and from the outside, it can look like easy money.
But the reality is that it involves a great deal of risk to generate a big reward, and navigating council regulations, finance arrangements and the construction process and can be a time-consuming process that’s not for the faint-hearted.
How to get started in property development
The basic principle of property development is to enhance the use of a piece of land to generate money.
This usually means building new or additional dwellings on the block for rent or sale, but can also involve simply subdividing the site into smaller blocks, and acquiring council approval for new buildings.
That’s how CEO of Capio Property Group Mark Bainey started in property development. After working at an accounting firm for six months, Mr Bainey saved up enough cash for a deposit on a block of land in the Blue Mountains at age 18.
He spent the next 18 months subdividing the site and preparing a development application for two separate houses, before selling both properties to a local builder for a tidy profit. And all while working and studying full-time.
From there, Mr Bainey shifted his focus to Sydney, subdividing blocks and gaining approval for townhouses, then either flipping the approved site or selling the completed units
“After the second project I did, I realised I had enough capital to make this a full-time job rather than a hobby,” he said.
“I then took my business up a next level and started doing multiple properties at once instead of one project. I was working on four or five projects that each had five to 10 houses.”
Fast-forward five years and Mr Bainey is now at the head of a successful development company, with 22 individual projects under his belt.
Understanding the development process
One of the first steps in the process is to target a location for your development, which will largely be determined by your budget. You may already hold the property you wish to develop, either as an investment, an inheritance or even the family home.
Targeting growth areas will generally result in the best return, as property values and rents go up as areas become more desirable, increasing your profit.
“Your funds available naturally limit you,” said Mr Bainey. “If you’re just starting out don’t expect to build a 12-storey apartment block.”
The nature of your development will be dictated by the development constraints and guidelines in your chosen area, which are determined by the local council. Familiarise yourself with the council’s development control plan prior to purchase, and discuss your ideas with the duty planner at the council.
“Explain your vision to the council for what your project is,” said Mr Bainey. “It’s important to be upfront when you’re dealing with council. Development and planning affects the whole community.”
What kinds of developments are best for first-timers?
The biggest barrier to becoming a property developer is the large amount of capital required to get started, meaning keeping costs low is desirable for first-timers.
Founder of Australian Property Advisory Group, and Property Investing Made Simple author Andrew Crossley believes that building a granny flat can be a good way to start in property development for minimal outlay.
“If anyone wants to improve their cashflow and capital growth, then building a granny flat is an excellent strategy,” he said.
Mr Crossley said a key benefit was the relatively low cost to build a granny flat, typically $100,000 to $130,000, compared to the expected rental return, which is often as much as a similarly sized houses.
Building a granny flat on a corner or dual-access block gives residents of each dwelling their own entry, yard and sense of privacy.
Granny flats can be ideal for investors who already own a freestanding house, as they can be constructed without demolishing the existing dwelling, converting a single-income property to dual-income with a significantly higher rental yield.
In NSW planning changes in recent years mean the approval process can be as quick as two weeks, leading to a boom in granny flat construction. But in other states, granny flat legislation is not so investor-friendly.
In Victoria, granny flats can only be used by dependent persons, such as teenagers or elderly parents, and must be removed if no longer in use by that person, although these rules may be set to change. South Australia has similar restrictions.
In Queensland, legislation varies for each local government area, while in South Australia, Western Australia, the Northern Territory and the ACT, residents of granny flats don’t need to be related to the occupants of the main house.
Mr Crossley argued that granny flats can in general improve the value of a property. “A prospective investor would certainly like two incomes.”
But he warned investors to avoid building granny flats if restricted by local regulation. “If you can’t rent it out, then you’ve got to look at why you’re doing it.”
Building on vacant land
Property investor and founder of Binvested Nathan Birch discourages his clients from paying too much for blocks just because they have the potential to add a granny flat, as they can risk overcapitalising if the rental return is lower than expected.
“I hate granny flats,” he said. “Who wants to live in the house with someone living in the backyard?”
He believes building a house or duplex on affordable land in an outlying area of a capital city is one of the best property development strategies for first-timers, as it converts the land to an income-generating asset.
“I try and find new land release properties that are severely below market value,” he said, noting that having multiple properties on one block can generate a higher rental yield.
Mr Birch said that by taking a ‘buy, build, sell’ approach, investors can make hundreds of thousands of dollars, creating wealth quickly with a small amount of debt.
Is property development worth it?
Managing Director of Property Planning Australia David Johnston said budding developers should think about whether there are less risky ways to create wealth.
“From my experience, small-time developers don’t actually actually add value, generally speaking,” he said.
“When anyone goes through the experience of developing, they want to feel like they succeeded, so they’ll often attribute the results to the work they’ve done, whereas the return is often actually attributable to the capital growth of the land.
“Often if they had just held the original asset over the long term, they would have created more wealth.”
According to Mr Johnston, buying and holding a quality piece of real estate in a good area that has the potential to be subdivided further down the track may be a better strategy than taking on the risks and expenses associated with building.
How to become a property developer
- Research suburbs with good growth potential due to improvements to infrastructure, public transport, schools and amenities. Familiarise yourself with the council’s development control plan to determine what developments are possible.
- Identify undervalued properties that have the potential to be subdivided, or for additional dwellings to be built on the block. Discuss your plans with the council to determine if your project is permissible before making an offer on the property.
- Work with an architect, surveyor and town planner to complete the development application and submit it to council. Approval can take several months, so factor this into your timeline.
- Once your application is approved, enlist a reputable builder to complete the project, or alternatively, a real estate agent to help you sell the approved project for a profit.
- If you aren’t selling the completed development, retain the property and use the equity and income to fund your next development.