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This is the fifth article in a series based on goal setting. One of the most important areas we cover in the University Property Investment course is that of setting your own goals. I break down these goals into six different categories:
• Retire richer
• Retire earlier
• Supplement your income
• Work part-time
• Give up your day job
• All or some of the above!
This week I consider the goal of giving up your day job. This goal is quite common amongst the students. I need to stress from the outset that this is an achievable goal but it is not easy. It sounds wonderful to give up your day job but it takes time, effort and perseverance to do so successfully. Basically, to give up your day job you need to replace the income from your job with profits from dealing in property.
The best way to do this is to renovate on a regular basis or develop land. Information on making money through renovating is here (click here to read article “Interested in supplementing your income?”). In this article I will explore the option of becoming a property developer as a means of giving up your day job. Don’t expect to become a property developer after reading just this one article but buy the time you finish reading the article, you should have a basic idea of the process.
Property development is a great way to make money but it is also a great way to lose money. You need to do your due diligence, including a scenario analysis (click here to read more on scenario analysis “Interested in being able to work part time”). You should also consider a sensitivity analysis which encourages you to study each input in the process and determine how a variation in each factor will affect your profit.
The first step is to find land suitable for development. This not only requires searching on the internet, newspapers and conducting inspections but most importantly, you need to check with the local council to find out what sort of development is allowable (if any), in the area you wish to develop. The most important aspects that the council will consider in determining whether your land is able to be sub-divided and developed are:
1. Does the zoning allow for development?
2. What sort of development is allowed? e.g. detached, semi-detached, row dwellings, residential flat buildings, apartments, single storey/double storey, etc
3. Do you have enough area to build multiple dwellings?
4. Do you have enough frontage to build?
5. Is your block deep enough?
Other questions about the proposed buildings will also be asked such as overlooking, overshadowing, set backs from boundaries, etc but the five points above are the most important.
Assuming you have all the approvals in place from the Council, your next step will be to find a builder. Some people contemplate sub contracting the building works but if you are just starting out on your journey as a property developer, I would strongly encourage you to use a licensed, experienced and reputable builder so as to minimise your stress. A common mistake at this point is to develop with “your heart and not your head”. For example, you want to tell the builder exactly how you want the dwellings designed, which fixtures and fittings you’d like and the colours you wish to use. Let the builder provide some input into these matters as (hopefully) they have built and made a profit many times before.
Finally, you need to sell at a profit. You may consider selling off the plan or before it is completed but in this current market, you have a better chance of selling at a higher price once the project is completed. Presentation is critical when selling any property. Ensure that any minor (or major) building faults such as cracks, stains and poor workmanship are corrected before you open the property for inspection. Consider hiring furniture so as to turn the house into a home.
I have very briefly outlined the strategy above. Now let’s look at the numbers.
Let’s imagine that you have bought a block of land where you are able to sub-divide and build two townhouses.
Land purchase $400,000
Purchase costs (approx 6% of purchase price) $25,000
Demolition costs (remove one old small home) $20,000
Sub-division costs $20,000
Building costs ($1,500 sqm, 200 sqm homes) $600,000 (2 x 200 x $1,500)
Holding costs (7.0% interest for 12 months) $50,000
Selling costs (approx 3.5% of final sale price) $50,000
Total development costs $1,165,000
Profit 20% (gross) $235,000
Final sale price $1,400,000 ($700,000 each)
I’d like to highlight three important points:
• A rule of thumb I teach in class is that you should aim for a 20% gross profit on all costs. In the above example, the cost of purchasing the property, developing, holding and selling costs totaled $1,165,000. A 20% profit on all the costs equates to $235,000.
• DO YOUR RESEARCH. If you can’t find similar new townhouses in your area that have sold for $700,000 don’t buy the land in the first place. There’s no point in going to all this work, cost and effort if no one is willing to pay you for the finished product.
• I haven’t allowed for GST payments. In residential property, we don’t normally have to concern ourselves with GST. However, when you are creating something new (in this case, two new townhouses), you must factor in GST payments. If you are interested in property development, speak to your account about registering for the margin scheme BEFORE you buy any land.
For simplicity, let’s just assume that you are left with a profit after GST of $150,000. If your annual income from your day job is $75,000, you have just made the equivalent of two years’ salary. And you didn’t have to go to the office 48 weeks a year, 5 days a week, from 9 to 5!
The most common way property investors give up their day job is to renovate regularly or become a property developer. However, you need to remember that this is not a guaranteed way of making money. There are no guarantees when investing as there is always some risk. Property development is the riskiest strategy of all!
This article is only a very brief outline of the development process. There is much more to learn if you are interested in this strategy. If you have never developed before, I encourage you to read books, magazines, speak to people who have already developed, speak to a Property Planning Australia adviser and consider enrolling in the University Endorsed Property Investment workshop. Educating yourself will mininise your chances of losing money and maximize your opportunities of making a profit.
I would also suggest that you embark on your life as a property developer in stages. Firstly, buy and hold some investment property. Then try renovating a property or two. Once you have gained some experience and confidence in dealing with property, then you may consider property development.
Happy House Hunting!
• Written by Peter Koulizos, university lecturer, author and buyers advocate.