Property development is considered as one of the most effective wealth-creation strategies that can help investors maximise their cash flow and ultimately achieve financial freedom and stability.
After conducting a feasibility study and purchasing the block or property, you have a number of weeks to plan the entire development process — from filing an application to the local council to getting through the building process.
According to White Gorilla Developments’ Neal Ashworth, one of the first people to get on board is the lender. Not many people can use cash to develop, so it’s important to maintain good serviceability to get financing from banks or private lenders and facilitate your development project.
The property professional said: “You want the private lender in when you buy the land that you’re going to develop.”
“If you get a bank, then it’s just different because you have to buy out the first mortgage to do the construction finance … It’s a bit messier further down the line when you can’t put your documents in as quick because it’s a different loan.
“You get those lenders on board early while you’re in that search briefs, so ... you know exactly what those interest payments are [and] you can put them in [a] feasibility [study],” he explained further.
Different lenders have different servicing capacities, so make sure you get the right lender for your project by going through more than one option.
Once your financing is set, here’s a step-by-step guide to a successful development:
1. Get all the paperwork together
Gather your development team and finalise all the necessary paperwork.
According to Neal: “[Get your architect’s] plans … permits, [and] ... your finance to get rid of a settlement. If you pick a bank, you don't submit your plans before you get the loan, but if you get a private lender, you can do all that early.”
Some investors opt to secure a block that already has an existing development on it so they can do away with developing plans and applying for permits and start building straight away. However, while this speeds the process up by about 12 months, it could mean fewer returns for the investor.
The property professional said: “You don’t get as much money because you’re giving those guys profit … The ultimate [option] is to buy your own site, you [start to] design it — [and] go through that full cycle.”
After you have filed your development application, leave the block as it is until you get approval from the local council to start building.
In order to avoid being rejected and having to take things up to the Land and Environment Court, understand the council’s requirements and make sure that your plan adheres to the policies implemented.
“Don’t push the limits. You just [need to] design it correctly … Get it approved and get the maximum sale,” Neal said.
2. Prepare your construction documents
Once your development application gets approved, gather all your documents once more in order to prepare your construction plan.
Neal explained: “The council just approved ... the overall design. Then, you’ve got to do tender docs to put it out to the market … [Prepare] construction docs so the thing can be built.”
“There’s a tender process — you go out to the builders, interview the guys, sign the builder up, set up a contract with a timeline, and then manage that build process,” the property professional added.
When signing a contract with a builder, make sure that it has a fixed price stated, a program timeline that details all your schedules and fixtures, as well as contingencies for the so-called rainy days.
“Say [all that’s] going to happen … in that paperwork before anyone starts [building],” Neal advised developers.
In order to make sure that your contract covers everything, work closely with a legal representative and your solicitor, especially during negotiations.
3. Get a demolition party
Employ a demolition party, smash down the walls, and have some fun, according to Neal.
The property professional said: “When the slab’s pulled, you go and inspect, you get all your sign-offs, and then, you release a payment of works complete.”
One of the biggest risks for property developers is the possibility that the builder abandons the project before its completion. To avoid losing money, make sure to release funds only when the contracts have been signed.
According to Neal: “You don’t release funds until there’s a line in the sand every time … You get your paperwork, engineers sign off, the services guys sign off, and then you release payment.”
“You release payment when the build’s up to a particular point … If there’s any problem in the process and that business goes under, that means you’ve paid for what [they’ve] done and you can bring another builder in to finish,” Phil explained further.
“The builder that wants to come along, he’s got everything that he’s happy to take on [because] it’s signed off and there’s plenty left on the plot for him to complete,” Neal added.
You can also mitigate risks by making sure that you’ve got experienced and trustworthy builders on board. Before signing contracts with them, review their professional history, their upcoming projects, and their insurances, take time to discuss your whole development plan, and exchange ideas about the build as well as the risks involved.
Neal said: “Once he’s doing the work … you get what you want, he gets what he wants — it’s all in that contract.”
“You give enough information …[and] he’s got all this stuff … [then] you get a good product finished at the right time … You get a good product, [you build a] good relationship,” the property professional added.
Once the project is complete and all parties involved are satisfied, you can either sell the dwellings, hold them and have them rented, or sell some and hold some.
If you decide to sell them off, do a slow release auction campaign, build up excitement, and sell the biggest property last, Neal advised.
On the other hand, he said: “If that client wants to hold two, sell two, then that’s the process — he leases those two out … [and] buys those sides at cost … He’s got an asset on the market … [and] sells two just to grow his portfolio,” he 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.