Here are some key issues when searching for a development site to build your house:
It is important to determine and decide in the first instance whether your intended development is to be your principal place of residence or as an investment to either hold for the long term, on-sell upon completion or at a later date. Developing a property with the intention of owner occupier as opposed to it being an investment property has obvious tax implications.
As a general guide, I tend to look for development sites which have the following criteria:
i) Located in high-growth areas where there is a history of strong capital growth and is expected to continue. Areas where there is a growing population will also support demand for housing in the future.
ii) Good availability of public amenities such as convenient transport into the CBD, schools, hospitals, schools, colleges, universities and shopping.
The local council of the area you are researching will often have strategic plans and information about its future growth plans, housing requirements, infrastructure building and projections on population growth and so on. The first point of research is often the website of these councils to get a general feel and determine the economic fundamentals.
In many cases, the key is to try and identify potential within a particular site which may not be obvious at first glance. If other investors have overlooked or is not able to identify the potential, you may be able to purchase the site at a discount or in some cases, find a real bargain which will ultimately reduce your investment risk due to lower costs. Money is often made in the buying process rather than trying to achieve a high sale price at the end.
2. Development costs and net profit margin
Once you have identified the potential areas for your development site, you need to ensure the you do not over-capitalise on the investment cost. There are no hard and fast rules but as a general guide, the cost of the development site should be no more than 40% of the eventual market or sale value of the development. That is, if the development site costs $400,000, you need to be confident the final completed property can be sold in the open market for at least $1,000,000. This margin is to cover all other costs, the major item being the building costs, fees to council, project consultants, selling and holding costs.
The net profit margin that any proposed development should aim to achieve is approximately 15%. This 15% margin is to ensure the rewards commensurate with the risks of development because the cycle and timing of the property market determines the eventual sale price or market value of the finished product. In the event there is a downturn in the property market during the process of development, this 15% margin will act as a buffer to cushion soft prices. It is to ensure you make a decent profit in good times and at least break even or come out with a smaller profit in bad times. In this particular case above, the total development costs which include building costs, fees, selling commission and interest charges should not exceed $870,000 in order to return a net profit of approximately $130,000.
3. Site inspection and feasibility
A site inspection and feasibility study by an experienced town planner, land surveyor or architect can help you to minimise costly mistakes and to eliminate certain risks altogether. Often, these professionals understand the intricacies of a development site and most importantly from their experience, they are able to advise an investor about what can or can’t be reasonably done within the development site and the likelihood of your plans being approved by council.