Part I: Understanding property development
Property development can be a daunting challenge — so much to learn, so much to know, so much risk, so much effort. However, it really follows some basic principles that can apply to many different businesses. When you get your head around those principles, the whole process isn’t so daunting. Before I take you into the hands-on stages and action steps of the development process, in this part I outline some of those basic principles as they apply to property development.
You get to look at what actually constitutes property development (and what doesn’t) and just what makes real estate a valuable wealth-creation tool. You get to know the roles in property development — who does what and when — and the value of putting together a top-notch development team. Next I compare the different property types so you can see what might suit you — residential, commerical or industrial. I also take you through the principles of market analysis — the importance of supply and demand! Finally I give you a rundown of the different options of financing your venture.
Now you have no excuse — dive in and start getting your vision for property development humming.
Chapter 1: Real estate development 101
This first chapter sets the scene and covers some of those basic questions you were perhaps too embarrassed to ask. For all my 25 years in the industry, I’m still surprised at how often people misunderstand the basics of property development. This chapter is here to make sure you aren’t one of them.
Real estate development defined
Succinctly, property development can be defined as the process of doing structural work to change the use or intensity of land or buildings.
Here are some more detailed aspects of development:
• Real estate development requires the control of land or buildings (or both), followed by the coordination of people, resources, materials and finance in a series of processes.
• The processes can involve commercial, industrial, residential or infrastructure property and assets.
• The development is planned to meet the requirements and needs of a specific target market, end user or customer.
• The purpose of development is to add value equal to or greater than the cost of the development.
• The intention of the developer is most often to make a profit, though some develop for their own use and enjoyment and others develop not-for-profit; that is, for philanthropic or humanitarian reasons.
• On completion the product developed is usually sold, leased or held as an investment.
Real estate development can include:
• alterations and additions to land and existing buildings to improve their use or increase their value
• demolition of existing buildings and structures followed by the construction of new buildings and structures
• subdivision (or breaking up) of existing buildings or structures to increase density or usage, lower the purchasing threshold or provide additional benefits to the existing or future occupants
• subdivision (or breaking up) of land to increase its density and usage
• consolidation (or joining together) of two or more lots of land or buildings to achieve a more intensive, better or different use
• changing an existing property’s zoning density or usage from residential, commercial or industrial use to an alternative or mixed use.
Whatever you do, the key component in value creation is change: changing from ‘what it is’ to ‘what it could be’. A classic example of creating value through change and how successful property development is genuinely accessible to all is brilliantly demonstrated by one of my clients — Jamie.
Case study: Jamie’s story
Jamie was a small and wiry young man. When he first walked into our offices he was so quiet no-one even noticed him enter. From the far end of the room I eventually heard a quiet, ‘Ahem … Bought a place and hope to subdivide’.
I looked up and there he was … hands thrust deeply into baggy pockets, peering in from just outside the open door. He seemed incredibly nervous. I asked Jamie to come in and explain a little more about his situation.
We spoke briefly about the house Jamie had bought, his dreams and his aspirations. There was nothing remarkable about Jamie that first day he walked into our office. He had a normal post office job, a normal income, drove a normal car and lived a normal, quiet life. What separated him from others, however, was that he wanted more! Jamie recognised that no-one else was going to secure his financial future. His post office job was okay, but it was never going to make him financially secure and, with no rich parents, wealthy uncles or fairy godmothers, he’d realised that his financial future was up to him.
Like millions of people before him, Jamie wanted to own his own home. He couldn’t afford a house in the location he wanted, but he needed to make a start and had bought a house on a 1050 square metre block in the southern suburbs.
You could just imagine the conversation between Jamie and his enthusiastic real estate agent …
‘What do you think, son — it’s a little beauty, isn’t it?’
‘This is it?’
‘A family haven or an investor’s delight, mate!’
‘Is it?’
‘See the potential? You can hear the kids playing on the lawn.’
‘But there is no lawn; it’s just sand.’
‘You add the lawn, mate. You add the lawn. Just imagine it.’
‘It’s hard to imagine. It’s very sandy.’
‘It’s the perfect renovator’s dream, son, just perfect.’
‘Is it?’
‘Yes, and the block’s so big. You could build a golf course or put an Olympic-size swimming pool out the back. Just imagine that. Or you could chop the property in half: then you’ve got two blocks for the price of one! That’s where the money is, mate!’
Whatever the conversation, Jamie agreed, and it was his first purchase. He wanted to split the block in two and sell off the rear lot, then live in the existing cottage at the front with an affordable mortgage. He approached my team to find out what was possible and how to do it.
It was clear that if the existing cottage had to be demolished to enable the subdivision, Jamie wouldn’t be able to afford the subdivision and construction of two new dwellings. So I went with him to visit the property.
The cottage had been a dream home when it had been built more than 50 years before. Since then, the dream and the cottage had faded. It sat near the front of the property, powder-blue and boxy, held just off the dusty ground by grey-black timber stumps with rusted metal caps. The roof was dull terracotta and weather-beaten. It looked tired and heavy, pressing down on the building below as though it was about to return to the earth it had come from. The dilapidated white post-and-rail fence that weaved across the front was losing the battle to contain a row of weed-infested roses. A concrete speckled path that had once been green ran to the front door, stretched out over the dirt like a broken tape.
Enough room had been allowed down the side of the cottage to park the family sedan, which had probably also been powder blue and boxy. The backyard was large, hot and dusty; a private desert of dark sand scattered with thin leafless shrubs, old jars and some partly buried car parts. The only green was the buffalo grass growing tall in clumps in the shade of the speckled corrugated fences. It certainly was a renovator’s dream.
Still, while its residential zoning at the time wouldn’t permit a straight subdivision, Jamie’s property had all the ingredients for a strata subdivision. And, because the cottage was at the front of the property, with more than 3.5 metres of access down the side, it was possible to keep the original building intact and do a vacant-lot subdivision at the rear. Also, while the cottage was in truly ‘original’ condition, it appeared solid and structurally sound.
Jamie was obviously stressed about his purchase and whether he’d made the right decision. Once we had gone over the potential of the property he seemed relieved and excited, like a starving man who’d won a meat tray at the local club.
By the time the subdivision plans were prepared, submitted and approved, five months had passed.
Jamie tidied up the cottage with paint, repairs, polished floorboards, new turf, and rear and side fencing. He decided to sell the renovated cottage and keep the vacant lot at the rear. When he put the cottage on the market, it sold quickly for 20 per cent less than he’d paid for the entire site. He was now holding the rear lot debt-free: his dreams of homeownership and financial freedom were coming to life, and so was he.
Within six weeks of the sale of the cottage, Jamie had secured a second block and was doing the same thing again. After 14 months, he had two vacant strata lots of just over 500 square metres each, with virtually no debt. He was gaining momentum. He kept buying lots that could be subdivided and began constructing homes on the first two vacant lots. Just over two years later, he was earning more from his part-time development work than he was from his full-time job.
After three years, Jamie’s net worth had skyrocketed. His outlook, confidence and attitude towards life had also changed substantially. He walked away from his job to pursue developing full-time. He’d discovered that he was a real estate developer, and he has never looked back.
With his initial property, Jamie added value first when he subdivided, going from a single residential lot to a two-lot strata. He added value again through a basic makeover of the cottage; the makeover created the least wealth of all his changes, but added substantially more appeal to both of the new strata lots. The final value-add was the construction of a new home on the rear of the property. In most cases, people would rather walk into a new home than build their dream home themselves.
What real estate development is not
Buying a commercial, industrial or residential property and repainting it, landscaping the garden or installing a new kitchen, bathroom, roof or driveway is not property development. These are cosmetic changes, not structural changes and, while they may add value, they are not considered development.
Neither is buying and holding property in the hope of capital growth. In this case the investor’s only influence on the future return is in selecting a suitable, well-placed property and a good tenant. Property development is an active investment: the ...
