"Developing property can be risky and not for everyone. There are many things that can go wrong, so it is important to really do your due diligence."
The first step when getting involved in property development: Choose the right location
I had a call this week from a chap who was weighing up whether he should develop property or just go out and buy some new properties. I explained that buying existing property is like buying at full retail prices or perhaps at sale prices if you are lucky.
But by building your own properties, and I mean two or more, not just one, is more like buying at cost prices as you can manufacture equity through the development process.
I thought I’d share what I believe to be the main benefits of developing property over buying an existing today and give you my three top tips to get started on your development journey. This will run as a three-part series, beginning with part one today.
Property development can encompass many activities including renovating an existing dwelling or building, demolition of buildings and/or building new and subdividing or changing the use of land.
By developing property you are adding value and will be creating or manufacturing equity through the development process rather than waiting for capital growth, as you do when you purchase an existing dwelling. Most the towns we develop in are growing at an annualised rate of over 10%.
If you plan well and time your development so that you are adding value and manufacturing equity while the market is in an upswing, then you could make some good money, as you’ll also benefit from the capital growth during the period you are developing
But if your timing and/or location is wrong and your plan is to sell on completion, then you may find it hard to sell or your margin has diminished if values are dropping.
Developing property can be risky and not for everyone. There are many things that can go wrong, so it is important to really do your due diligence and understand the many facets involved.
I’ve compiled what I think are the top three things to do first when embarking on a property development.
Select the right location for your property development
Which region and then which town are you going to develop in?
You'll need to do lots of research. Start with the local council's website, which will give you information on:
When talking to a council town planner and ask questions like:
The council website will usually include many valuable links to other websites in the area.
Speak to local agents to understand the average lot size and use Google Earth, it’s a fantastic tool for armchair street inspections.
Of course, you will need to visit the area and drive around, chat to the locals and take note of the type of housing currently available and what perhaps is missing.
Look for an area that is currently undervalued and has huge potential to grow and whose population is actually growing and is supported by diversified industry.
This means it will probably have a strong rental demand. You can find out the vacancy rates by asking all the local agents how many properties they manage and how many they have available to rent. Add them all up and divide the available for rent properties by the total under management and you’ll get the vacancy rate percentage. Areas with a consistent vacancy rate around 1% have a strong rental market.
Total number of properties available to rent in X town: 29
Total number of properties under management: 1,397
Vacancy rate: 2%
You'll need an area that has affordable land with large lot sizes. The more dwellings you can build on one block, the more equity you can create.
Also consider how far you want to travel, in order to manage your development you’ll need to do regular site visits.
Jo Chivers is director of Property Bloom, which manages property development.