expert-q-a

A property investor's basic guide to developing townhouses

By Bianca Dabu
Houses

Many investors have been looking into strata and property development to move their investment journey further forward, but in purchasing properties, the process of developing big blocks must be dealt with due diligence.

ClarkeKann Lawyers' Ian McKnight and James Nickless believe that any big step in a property investment journey must be preceded with the right education.

"In business, it's never a case of 'Don't worry about it.' Again, it comes back to that essential rule— [that] knowledge is king. What they need to do, of course, in starting out, is get the facts. Some time ago I was told, 'Always get your facts and then you can apply the law later.' And so it is in business. If you get all the facts, you can work out what you want to do," Ian said.

According to the them, investors putting strata properties onto a title must consider zoning requirements and construction costs among other things.

"Obviously, the zoning requirements are crucial. Construction costs are crucial. What's going to sell there? There's no point in building a unit and [then] planning to sell it for $3 million if you're operating in an area where the best price is only $750,000," Ian explained.

"It may well be that you're in an area near a station, for instance. You might say, 'Oh, well. We could have one of these situations where we could have part of the building for commercial and the other part is residential.'

"It's, again, getting all your facts to the local area [and] the particular constraints that can form part of all of that. Are we on the side of a hill? [Are we] going to have apartments that are looking out only to the sea and not looking backwards towards the cemetery...? All of those things which might determine the number of units you could have in there—all of those things are relevant."

Discussing the plan and building a concrete road map with different sets of experts and professionals can help an investor navigate his way through strata and ultimately make the most out of his investment.

Ian and James share some of their basic guidelines for property developers looking into strata as the next big step in their investment journey:

Who should property investors look for when building a team?

Ian McKnight: All that mix comes into it– discussions with engineers, architects, [and] the local council people. The lawyer [also], to see how you might title this property.

James Nickless: [Get] the right team around you. So having a good planner—you'd hate to come in, rely on yesterday's information, (then) do a row of townhouses and find out you could have gone 30 stories high. You've lost a significant uplift... The other one that everyone seems to leave out is the strata manager.

How can strata managers be of help to developers?

James Nickless: The humble strata manager who's going to be running this after it's in creation [can be of help to the developers]. If you get them on board early on and go, 'This is what I'm looking at building. Where do you see problems?' They'll say, 'Well, parking issues here because I've got a scheme like that over in North Ryde and this is the issue that they're facing.' Or, you know, "You've set this up in a particular way and looking at the way that expenses are going to run through this, that's not quite fair, given that this is how these things operate in existence,'" he further explained.

Ian McKnight: It can be as simple as things like, the developer’s saying, "Oh, we're going to have the garbage bay over there," and the strata manager can come along and say, "Well, hang on. All the trucks, to get to that, are going to have to drive through the complex at 04:00 or 05:00 AM. That's going to be rather clever. Maybe we should reposition this."

What should investors consider when developing properties?

James Nickless: The other thing for them to think about is cash flow and how long is it going to take for sales to happen... One of the unfortunate effects that happen is that when the scheme's created, it has its own legal identity. People can go from being the developer today... [then] the owners corporation or the body corporate comes into existence, and then they become a lot owner within that scheme and they've got to pay levies, just like every other lot owner.

How important is a "timeline for payment" in strata?

James Nickless: [Developers] might have it in their head that, "Look, I'll pay everything out on settlement" because their mentality is "I've built these things. I'm going to settle them and then everybody gets paid." In the meantime, three or four of the lot owners are saying, "Well, hang on. We're contributing towards levies and the developer’s not." I've seen developers go bankrupt because of that.

That's something for them to think about as well—working in with the new owners early to say "This is what our timeline for payment is. Whilst technically we are meant to be paying this stuff as we go, we'll keep you informed of sales and we'll be perhaps selling out in a unit and paying that across multiple units in chunks, that's different." That's technically not in compliance with the legislation but if you can get everybody on board, then [you're good].

Tune in to Ian McKnight and James Nickless' episode in The Smart Property Investment Show to know more about the rules behind strata, the politics involved with the owners' corporation, as well as their tips and tricks to ensuring buyers receive the right advice at the right time.

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A property investor's basic guide to developing townhouses
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