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Many investors are often attracted to the glamour of being a property developer, but how do you know if this wealth-creation strategy will work for you?
According to White Gorilla Developments’ Neal Ashworth, one of the very first requirements in property development is a good serviceability.
“As long as you got the serviceability to take on another loan, finance, or you have the cash to support it,” he said.
Usually, those who want to explore property development have a principal place of residence or around two to four investment properties that they can refinance or pull money from.
Most of Neal’s clients are property investors who have built their portfolio by acquiring established dwellings through the years. These investors take time to discuss their current financial situation with their accountants and advisors in order to determine the next step they can take in their wealth-creation journey.
Neal said: “They have got the portfolio up to a certain level … All the rent returns … [and] percentages of growth, they just want to step it up to the next level.”
“They can use that equity, they can use what they’ve already got … [and] see how much this next model will bring them in return. They can add extra properties to their portfolio,” the property professional added.
For people new to property investment, Neal suggests getting familiar with the process of buying existing assets before dipping their toes into development.
Once you have determined your financial capacity and serviceability, you also have to consider whether you have the time and the right connections to dive into a new industry. Do your own research and seek the assistance of property professionals who have already paved the way to success for other developers.
According to Neal: “Go see a financial planning advisor just to [know] where you’re at with all the stuff that’s going on.”
“[Find out how] you’re going to refinance, where you’re going to get money from, [your ideal] timeline... Get all that advice ready so [that] your stall is set,” he added.
Lastly, “stress test” the upside benefit of your development asset.
Most investors start their property development journey by building three to four townhouses on a 1,000-square metre block. If your financial situation allows for the same investment, you need approximately 22 per cent upside benefit to make sure that the development is worth your while.
Neal said: “About 22 per cent and above … That example is a million-dollar-lend, million-dollar-build. [So], 3.2 per cent sales, something like that is what to look for.”
“You could do that percentage. You stress test it and do the percentage up and down. See what can be,” the property professional added.
While you can’t control market movements, interest rates and other growth drivers, you can take advantage of your ability to control the “contractual side of things” as well as your end goal.
“What you can’t control is that timeline from the council, but to help with that … you just keep with those controls. Everything outside that is just normal commercial negotiations,” Neal concluded.
Tune in to Neal Ashworth’s episode on The Smart Property Investment Show to know more about the step-by-step process of getting the best chance of maximising cash flow and how to excel in the property development industry.