The worst property investment mistakes
When people develop a property, they often think they are going to make big dollars. But the reality is, only 20 per cent of developers actually make money. Most of them break even, and some lose money.
Here's an observation that I've seen time and time again – when people become investors they often think that by doing a property development, they're going to make big dollars.
The reality is that only 20 per cent of developers actually make money. Most of them break even, lose money or lose opportunities.
The reason most people want to start property developing is because they see these people driving around in flash cars and so forth but they don't actually see their financials.
Someone having a flash car and calling themselves a developer doesn't necessarily mean that they're making money.
I'll outline how developing property too soon can be a recipe for financial disaster.
Property development reality
The thing is, true wealth comes from holding property long-term.
However, undertaking developments the right way can add immense equity or value in terms of cash flow to your portfolio or give you the opportunity to actually sell down to retire some debt or fund lifestyle.
The reality is that development is a profession but we are property investors and those two don't necessarily mix.
The ideal development site, in my opinion, is the one that you've held for more than two cycles before you do anything with it. That way you've got maximum equity so if something does go wrong, you've got the funds via equity, to absorb it.
There are many ways that developments regularly go wrong including the project taking too long and the market turning on you or you have unexpected costs.
Too many novice developers don't take into account every single cost, including GST.
For example, if you're planning to sell down, because it's a residential property and you're not a registered developer as such, you can't use the margin scheme to claim the GST, but you still have to pay it.
Too much too soon
Many new developers think it will be easy, but the harsh truth is, it's hard.
One of the most common mistakes is trying developing too early in your investing career.
The ideal process, if you're considering developing, is to try a few cosmetic renovations first so you know how to project-manage.
Then, you undertake some structural renovations, perhaps adding a couple of rooms or another level. The next step may be building a granny flat.
From then you could try a simple subdivision – splitting a block in two and constructing a secondary dwelling on it. From that experience, you will learn how to deal with councils and other professionals.
Only then should you look at multiple dwelling developments. For example, four dwellings on the one lot.
Before you start developing seriously, you should go through these five or six steps to give you the best chance of success.
The truth of the matter is that the upside of developing can be very good but the downside risks can also be very damning.
I have seen a lot of people who have bought excellent investment properties and then become developers and they lose the lost, because they don't have the experience and they haven't done that graduation from small to big projects.
As soon as there is an architect involved in a development, if you ask me, you're biting off more than you can chew, unless you've already done the steps I've just outlined.
The bottom line
The major mistake for new players is the holding costs during the project.
There could be problems with finance and costs associated with overruns because you have to do unexpected variations, such as hitting rock.
If you're doing a unit development, you need a lot of money behind you to dig yourself out of that hole – notwithstanding any market shifts that may occur during the development process as well.
New developers also must understand their exit strategy if they're not going to sell such as who they are going to refinance with. If they can't refinance, they might be stuck paying a higher interest rate, which may also kill the deal.
Property development is not something that you take on lightly. It can be lucrative but you could lose a lot of money as well.
I know this for a fact, because I attempted my first development far too early. I went to a seminar many years ago, which seemed to show that I could do subdivisions "easily".
The first mistake was that my properties were taken off stumps and put on drums, which is where they sat for about seven months while I got approvals, all because the tradie offered a 2k discount to do it early.
Trying renting out a house on drums… or even getting finance!
Because I'd already started the development, before I went looking for finance, no lender would fund it. So, a key lesson is that you should never start a development before your funding is drawn down.
So, back then, it took me one and a half years to do something that these days would take me six weeks because I am far more experienced in the development process.
That experience actually took me out of the market for the same period of time, which meant I lost many opportunities to grow my portfolio. The market also softened so it was a double whammy.
So, I know from personal experience the toll that trying your hand at property development too soon can take.
To finish up, then, my last piece of advice is the best development that you can do is the one that you don't.
This article provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such as it does not take into account your personal circumstances or needs. Professional advice should be sought prior to any action being taken in reliance on any of the information.