Getting into property development

People see finished property developments, not the months or years of work that made them happen. But the fact is, property development requires a lot of technical knowledge, repetitive work, and paper pushing. 

The work required will include, but is not limited to:

• Searching for development sites on Trade Me Property. 

• Assessing the potential of each site, which will mean looking at access to infrastructure, risk assessments, zoning, site topography, land size, location and more. 

• Analysing the feasibility of each site. Is it possible to build what you want to build?

• Looking closely at the value of the site and market trends to assess whether the development will make a profit. 

• Getting to grips with the legal and compliance side of property development, including building consents, LIM reports, title searches and more. 

You’ll also need to hire and manage a team of professional advisers . These are likely to include a building contractor, lawyer, accountant, mortgage broker, geotech surveyor, engineer, valuer and more. Part of being a good property developer means knowing when you can do something yourself, and when you need the expertise of a qualified professional. 

If you don’t have property development experience it’s a great idea to learn as much as you can before you get started. You could speak to a local property developer with a good track record and see what they recommend you do, or if they’d be willing to share their wisdom. Or you could study property development at a university by getting either a certificate 4 in Real Estate Practice or a Bachelor of Property and Real Estate.

If not, you should at least absorb as much knowledge as you can. Read books, speak to people who know what they’re doing, listen to podcasts and do as much research as possible. This is not for the faint-hearted. 

• Generally you’ll need 30-35% of the total development costs as a deposit.

• You may be able to get lending from non banks with as little as 20-25%. 

You’ll need access to substantial capital to secure bank lending for a deposit. You could do what Williams Corp founder Blair Chappel told the Informed Investor he did and offer a profit share to a friend or colleague to get started.

Or you could access equity from your home, or sell other property investments. Speak to a mortgage broker or a development finance specialist to get an idea of what your options are.

One of the most important skills any property developer has is the ability to identify and thoroughly assess an opportunity. This means seeing a piece of land and being able to forecast the value you may be able to create, minus the cost to make it happen:

As part of your lending application you’ll need to have a qualified valuer estimate how much you’ll be able to sell your completed development for when it’s done. But before you get to this stage you can roughly calculate your gross sale price by looking at similar properties in the area. 

For example, if you’re planning on building premium three bedroom townhouses in central Auckland, look at how much those properties have sold for in the nearby area. It’s always best to be conservative in your estimates to account for changes in the market which there will undoubtedly be. 

Working out the potential value of a property development is the easy bit. Costs are much, much harder to calculate.

It’s possible to get a fairly accurate estimate together after you’ve applied for consent, signed a building contract and purchased the land but to evaluate the opportunity you’ll need to know much sooner. That’s when it can be useful to have early conversations with both a builder and a surveyor to get a rough idea of what your costs may be before you commit to anything. 

The bank likes to see a clear path towards a finished development with costs clearly defined. So before you get started you’ll need:

• A building contract with at least 80% of costs fixed. 

• Variable costs often make up 30-40% of the costs of a build, and these should be limited as much as possible. 

• A good margin on a development is 25%, but this will probably be down to 18% by the time you’re finished, according to Ian Laywood, Director of Property Finance NZ.

If you assess a development and it doesn’t meet these criteria, it’s important that you’re able to drop it and move on to the next one, says Ian. One of the first things you should do is speak to a surveyor and land development consultant. They’ll be able to give you an insight into what the costs of the build may be, how long it may take and what’s actually possible on your site. 

Another important thing to consider is that there will be no income from your development until after construction is complete. That means, depending on the development, it may take three or more years to actually see any return on your investment so you’ll have to have deep pockets and patience.