Making money from property!
Property development business is different to many businesses in that the stakes are higher, capital required is greater, and often it is the creative flair and skill that is needed to make a difference in undertaking a profitable development.
Return on investment needs to be reasonable to justify the risk and capital. On average you should be aiming for an 18 % and above return. So how does this equate to what you need?
Let’s say you buy land for $650k plus costs of say $350 k = total outlay $1 million plus interest etc. You would need to sell the deal for at least $1.3 million to covers costs, GST and return.
Delays start to erode profit, but a well-planned development can pay dividends.Of course, this is a very simplified approach and costs such GST, and interest needs to consider.
When embarking on a development what areas can erode profitability. Our experience in assisting developers and mum and dad sub divisions here are some areas that you need to be on top off:
- Planning delays with council, soil tests and environmental considerations
- Over run of costs and unplanned variations and delays due to weather and trades
- Design impacts such as thinking you have a site that can develop three town houses when only two are allowed.
- Not thinking about the customer and being too radical in design or colour scheme
- Not being able to sell quickly enough and then reduce margins to sell down
- Financing at a high rate of interest or not getting finance
- No presales. Banks love pre-sales
- Not having a hungry real estate agent
- Not planning for GST and using the margin scheme
- Bad tax planning
The biggest problem we are seeing is in the planning and finance stages. Small developer with lack experience can spell disaster if not planned well.
Always allow for contingencies and shave at least 20% of the net profit after tax for the unexpected and allow up to 4 to 6 months for delays in building.
Like any other business, a well laid out business plan is desirable and talk to those who have trodden the path before you.
Many developers make great money from developing property . It comes down to location , planning and good advice
We specialise in helping developers work through the cash flow and tax considerations of a property development. Drop me a line and let’s see if we can help you.