How this investor 'de-risked' her property development strategy
development
1 minute read

How this investor 'de-risked' her property development strategy

How this investor 'de-risked' her property development strategy

by Bianca Dabu | May 02, 2018 | 1 minute read

After building a nine-property portfolio, Melissa Morgan decided to explore property development as a wealth-creation strategy. Find out how she deals with the challenges of the property development process—from development application (DA) to building.

Risk puzzle piece
May 02, 2018

Simply put, Ms Morgan’s strategy involves buying development sites, building properties and selling them. She also continues to hold her nine investment properties and consequently adds value to them using the income she generates from the sales.

She explained: “The nine properties are there to be held long-term. I'm looking at tweaking them a little bit in the coming years. The development sites are there to generate ongoing income and, hopefully, snowball into bigger and bigger projects.”

Aside from being able to make good money out of it, property development also gives her a unique sense of accomplishment.

“I love seeing something from scratch, from nothing all the way through to completion. That motivates me. It makes me feel really productive—like I'm creating something,” Ms Morgan highlighted.

As her investment properties sit and continue to generate cash flow, basically supporting themselves, the investor has decided to focus her time and effort on property development as her new wealth-creation strategy.

First project: Complying development

Ms Morgan’s first major development project is a duplex in LeichhardtLeichhardt, NSW Leichhardt, QLD, which was completed last year—she bought a single house on two lots for a little over $2 million, knocked it down, built two attached dwellings and put those on separate titles.

Apart from the purchase price, the entire project cost her quite a lot because her team needed to build from scratch. In fact, according to her, the demolition already required $30,000 out of her pockets.

The total cost of building the duplex was more than $1 million, and there was another $400,000 that was spent on other associated costs including stamp duty, interest, council fees and planning fees, among others.

Ms Morgan shared: “I made a lot of changes to the plans because the lots were only six metres wide, so we couldn't really get an existing plan.”

“We had to, basically, come up with something from scratch, so I got a draughtsman I've worked with a few times and we tweaked it a lot over a month to a plan I was happy with,” she added.

After a 15-month process, the identical dwellings sold for $2.265 million each—one at an auction and one through a direct sale.

Despite the Leichhardt council’s reputation as a ‘notoriously challenging’ council due to their desire to maintain a certain characteristic in the suburbs under their jurisdiction, the project turned out to be a success, she said.

According to Ms Morgan, the risks were considerably minimised by since it was a complying development, which means that it may not be required to go through the more traditional development application (DA).

Instead, an accredited certifier can do a fast track assessment to provide a combined planning and construction approval.

She explained: “It's a state government policy, and it means you can bypass the local council as long as you follow certain guidelines. They're quite strict, but as long as you meet those guidelines, your approval is almost imminent.”

Luckily for Ms Morgan, her draughtsman is familiar with the guidelines that they need to comply with, which made the entire property development process smoother and generally more efficient for the whole team.

“You need a really good person on your side that actually understands the regulations around compliant development,” she said.

Second project: DA approved

Unfortunately, not all development projects can be considered as complying developments.

Ms Morgan’s second project in Dulwich Hill almost mirrored her first project—it was a knockdown, she built a duplex and subdivided and it is essentially in the same market as her Leichhardt build.

However, instead of it being a complying development, her second project had its development application approved prior to her purchase, which minimised the risks involved.

She shared: “It was a knockdown, but its DA was approved already for a duplex with subdivision. We purchased it on that basis—that it already had an approved DA.”

The investor hopes to conclude the development project in three to four months and be able to sell it at around $2 million for each dwelling.

Third project: Joint venture

Ms Morgan’s third project was a joint venture to build townhouses in WaverleyWaverley, NSW Waverley, TAS—a more risky venture compared to her first two projects.

She said: “It’s a 50/50, so we both put in the same amount of money and we both put in the same amount of work, and we bought a four-townhouse site in Waverley in the east.”

Much like her second project, Ms Morgan was able to minimise the risks on her third project by having the DA approved before finalising the purchase. Based on the contract signed by all parties involved, the vendor will be responsible for having the development application approved and only after the approval will the purchase be finalised.

This took only about two months, according to Ms Morgan.

The investor shared: “We purchased saying that, 'We'll only finalise the sale if we get the DA.' It was quicker than we expected. In the contract, we had nine months for him to get the DA and he ended up getting it in about two months.”

“He'd actually had one rejection. He went for five townhouses on the site, and they rejected it, so he had some idea of what the council were willing to approve. He was already partway through the process and we knew that at some point he was probably going to get the DA.

“We completely de-risked the process by earlier inquiring if the DA was approved, and if not, we could walk away,” she added.

Lesson learned

Over the years, Ms Morgan has been inclined to purchase development sites with their DAs already approved. By doing so, she avoids the risk of being stuck for an unknown period of time and she also saves money on interest.

According to her: “We don't know how long the DA will take. It's too much risk. It could be years before we actually get the approval. We want to have a finite timeframe, so we’ll only buy sites that have DAs.”

“That means we get control of the property but we don't have to pay any interest on it until the DA comes through,” she added.

For her, risks are only ever magnified and ultimately realised if you’re wasting time and money by doing without a concrete plan.

“To me, it's not risky if the numbers stack up and I knew how it was going to pan out,” Ms Morgan concluded.

 

Tune in to Melissa Morgan's episode on The Smart Property Investment Show to know more about her property development strategy and how it will help her achieve her financial goals. 

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