8 critical steps to take when starting out as a property developer.
The Property Development Industry is one of opportunity for those who are prepared to take the time to acquire the knowledge and willing to take the risk. It is not a business that will reward those who act impulsively or who operate purely on gut feeling. Some profits may be made by luck, but those who depend on luck alone often find themselves failing in the future. It is a risky business with the stakes-placed reasonably high compared to some other ventures. However, with high risks comes higher returns.
The very reason that you are reading this article is that you are interested in the property industry and the financial freedom that comes with it, but do you want to be an investor or a developer? As an architect, I prefer the latter as it is creative and the development of new ideas are limitless, therefore never losing interest. You don’t have to be an architect to be a developer; in fact, you do not need a tertiary education to be successful.
You may have already decided to become a property developer but have you considered what it takes to be successful? Answer the following questions honestly as it will help to define your values:
- Are you willing to face the challenges in property development?
- Do you have entrepreneurial skills?
- Are you prepared to take the risk?
- Do you have a keen interest in property?
- Do you enjoy negotiating and making deals?
- Do you have leadership or management skills?
- Are you creative and a lateral thinker?
If the majority of your answers are affirmative, then you are in the position and have the right attitude to tackle this rewarding industry. Below are the critical steps in starting a career in property development.
Step 1: Educate yourself.
Property developers require a certain level of knowledge in finance, economics, valuation and how to run a business. The best way to learn about developing property is to read about it or enrol in a course (or two). Although many property developers today gained entry into the field without qualifications, most developers have acquired at least a bachelor’s degree in finance, economics or real estate. When looking to do courses, only select reputable courses. Many articles, magazines and books cover property development which you can learn from as well.
Even though there are no formal education requirements, many development companies seek potential candidates with a master’s in business administration (M.B.A.) or, at the very least, a bachelor’s degree in business, civil engineering or management. If you are in a university or a tertiary college and planning on a career in property development, it would be advantageous to undertake at least one internship with a development company to learn about the business and start developing your professional business network.
A word of caution – there are many courses on property development by so-called experts. However, before spending any money on these courses, it is advisable to check out the promoters and whether they are qualified or have the practical experience in property development. So beware of spruikers who promise the world but deliver very little.
Step 2: Talk to trustworthy professionals.
Reading and studying property development is excellent if you want to learn about the theory, but if you’re going to speed up your knowledge process, there is nothing better than speaking to a people who work in the industry, especially seasoned developers. However, it is not easy finding these developers and if they have the time to share knowledge with you especially if they do not know you. Other avenues of accessing professionals are to join online forums, chats and networking functions where you will get the opportunity to meet and network with likeminded property developers.
In addition to talking to other developers, it is worthwhile to build strong relationships with those that are in the property industry. These include a range of people from architects, builders, real estate agent etc. as most of the professionals are involved in the development process and be working for a property developer.
Step 3: Learn to understand the development process.
The property development process requires extensive planning with attention to detail. To ensure a smooth process, a development project must be managed correctly to minimise potential risks. Below is a summary outlining the property development process.
- Project Vision: Before starting a project, you need to have a vision for your project and the outcome when completed. This can be built to sell, built to rent or a combination.
- Finding a site: Finding the right site in the right location is one of the most critical steps in the development process. The location and the council zoning will determine the type of building that can be constructed on the site.
- Due Diligence: This step is where an extensive study of the site is undertaken to minimise risk. This can include market research, soil classification, legal aspects, etc.
- Concept plans & prefeasibility study: Your design and planning team will start preparing concept plans of the proposed development. With this information, a preliminary feasibility study is undertaken to determine if the project is viable.
- Purchasing the site: If the pre-feasibility study proves the project is viable, then an offer is made with conditions that you feel may necessary such as finance approval.
- Development Approval (DA): If the offer to purchase the site is accepted, documentation is then prepared for development approval through the local council.
- Building Approval (BA): Once development approval has been granted, your consultants (architects, engineers etc.) will prepare full documentation for the tender process.
- Tender process: Selected builders are invited to submit a tender price of your project. Selected builders are those who can build at a fair price and the highest quality of workmanship.
- Marketing: Competent real estate agents and project marketers who specialise in the area are appointed to market your project (if not earlier).
- Construction: During construction, your architect or project manager will conduct regular site visits to oversee each construction stage to ensure that the highest quality is achieved.
- Completion – Sell or Hold: Depending on your investment strategy, once your project is completed the property can be either handed over if sold or if rented, for tenants to move in on agreed lease terms.
Step 4: Understand how finance works.
As a property developer, it is vitally important to understand how the financing of your project works. This includes how lenders and bank think and what funding is required at each stage of the development process. When I started my career in property development, I read and found out all aspects of finance. Even though I graduated as an Architect, my course did not include finance or project funding. So the knowledge I have in development finance has been self-taught. Below are the basics loan types required at the various stages of your development:
- Land acquisition loan: A land acquisition loan is used to secure the purchase of a development site. Your track record and ability to secure the debt with collateral will weigh heavily on the lender’s decision to provide for this financing.
- Seed capital loan: Depending on your finances, seed capital may be required in the conceptual stage of your development. This initial finance, which is relatively small, is necessary to cover the cost of consultants and disbursements for the initial design and submission for development approval.
- Construction loan: A construction loans generally operate as an interest-only, draw-down facility to finance the building as required. Often the interest on a construction loan is capitalised during the building period, with the entire loan inclusive of interest charged being repaid upon the sale of the development and or the refinance of any residual debt.
The interest percentage on loans, fees and charges can seriously affect your profit margin, so before you invest your time and money, research thoroughly. Also, check the terms and conditions of the loan as it may affect your decision to proceed with the lender or look for another.
Step 5: Research the property markets.
Before you decide to tackle a development, it vitally important that you research your market. This means that you need to examine the socioeconomic climate where you wish to develop. There will always be patterns you can learn from. Studying facts, such as the unemployment rate and other statistics will help inform your decisions. The following factors should be taken into account:
- Supply and demand: The supply and demand are crucial indicators to consider when researching different investment areas.
- Economic factors: Consideration should be given to a range of economic factors including disposable income and employment trends when researching different suburbs.
- Employment growth, consumer confidence and finance trends: This information can be obtained from various government or research companies.
- Median property prices and capital growth: The median property prices for an area can help you determine the average price range of the suburb or area you are researching.
- Market cycle: It is critical that you consider the market cycle of the property industry. While you should not try to time the market, you want to ensure that you do not buy near the peak of a growth cycle when there is a lag before things move on again.
- Demographic data: The demographic profile of an area can assist you in understanding the type of people that live within the area of interest, such as their gender, age, disposable income, as well as their behaviour, including whether they prefer to buy or rent.
- Disposable income: The average salary of people who live in the area is worthy of consideration. This can help to gauge whether their level of disposable income is likely to attract growth and further development, such as new shops or other desirable facilities or infrastructure projects, which are likely to improve property values.
- Resident needs: Consider the needs of the residents living in the area. With demographics, you have to think of the type of people who want to live there.
- Location and close to amenities: To make a location attractive, it should be within proximity to amenities and services. These may include parks, recreational areas, schools, hospitals and transport hubs.
Step 6: Assess your position.
Even if you’re planning on starting a property development business part-time, and if you’re sure if it will become a full-time business or just an additional way to make cash, it’s still sensible to have a property development business plan or strategy. However, before you can do this undertake a self-analysis.
If you are a novice developer starting, you should begin at a level that you will be comfortable with. Assess the following before making a start:
- Your current net worth, i.e. assets minus all liabilities.
- Your current borrowing power from a lending institution.
- Your time that you have to look out potential developments.
- Your time you have to manage these developments.
In addition, ask yourself:
- How much personal money will it cost you to start a development?
- How much of this money can you afford to tie up for an extended period?
- How much of this money can you afford to lose?
- What is your investment strategy – develop and sell or develop and hold?
- What is the most suitable type of residential development you can start with?
After establishing your borrowing capacity and analysing the time you can afford, you will be able to develop a plan to start the process. Your strategy should take into account the points made above and at the same time consider the type of development you feel most comfortable with and the level of return you desire.
Figure 1.1, Development Risk Matrix, below, summarises the development characteristics of several residential types, will assist you in choosing a development type suitable to your analysed profile.
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Figure 1.1 Development Risk Matrix
Your strategy should be based on your development and investment goals. If you want some additional income to help pay your general living expenses, you may consider looking into developing a duplex and then renting them out. On the other hand, if you want to build up long-term wealth, you may decide to develop a few small properties every year, sell a few and hold the balance as rental properties.
Alternatively, you may want to consider property development as a career and play an active role in the day-to-day development and management decisions. The level of management and marketing expertise, size of the development, the amount of finance required, amount of time available to spend with the development and the decision whether to have other partners in the deal will all influence your decision.
Step 7: Gaining experience.
Entering the property development industry requires not only a good level of education and skill but also practical experience to give you confidence in the projects you undertake. Most successful property developers gain their experience with an established property development company before starting on their development. However, what if you cannot find a development company that will give you the opportunity to work in their office? Listed below are alternatives which although not thorough, it can assist you in gaining some form of experience.
Become part of an investment group that focuses on development.
If you’re interested in property development but don’t want to go at it alone, you can join a group or club or even start one of your own. Members will each have something to share or give advice on property related matters. Knowledge is power, and wisdom from many bits of help assure success. Members can also pool their money together to start a new project. It is a great way to gain wisdom as others will help you make intelligent decisions.
Join a development syndicate.
Development syndicates is a vehicle where investors pool their money together to develop a particular property. Development professionals initiate these syndicates and then offer investors to participate. Besides gaining access to larger, higher-quality investments with lower capital outlay these syndicates are managed by a team experienced professionals, who will complete the necessary research, negotiation and acquisition of the site, as well as manage planning approvals, project designs and construction of the project. By joining a syndicate, you will be informed of the various stages of the project where you can gain valuable insight and experience.
Hiring a development manager to oversee and manage the process for you.
This allows you to be an active part of the entire process and have the expertise of your development manager to complete the task competently. Development managers usually run the day to day details with you being able to have your say in design, contractors and act as the ultimate decision maker. When selecting a development manager should ensure that they have the experience and knowledge in the type of project you intend undertaking. The fees charged by a development manager is usually a percentage of the total development cost.
Step 8: Find a mentor.
In addition to the above, having a mentor guide you through your first project can speed up your learning experience and will lessen your risk in the process. A mentor is an experienced person who can provide invaluable guidance as you begin your development career and advance in it. When you are just starting, there’s a lot you will not know. It’s just your lack of experience, and you will probably make many mistakes and miss out on many opportunities. Finding a mentor will allow you to limit how often this happens. He or she can guide you through tricky situations and can help you grow your career. Below points out why it is helpful to have a mentor?
Mentors have inside knowledge
As mentors are usually seniors in their field, they are aware of fluctuations and market movements within the property industry and can advise you on professional courses and training programs. For instance, your mentor can brief you on upcoming development opportunities thanks to his/her contacts and share their views on the risks and rewards of the opportunity.
Mentors have experience and expertise.
Mentors have put a lot of time, money and personal effort in building their careers and they instinctively know what will and not work with a project or strategy. In addition, they have learnt from their mistakes, so you need to appreciate their feedback and learn from their mistakes and take their advice on board.
Mentors give professional advice.
A mentor will provide you with unbiased, honest advice to help your career progression. They can help to refine your strengths and work on your weaknesses. As there is no emotional attachment, you know that the guidance you receive is trustworthy.
Mentors offer networking opportunities.
The saying goes ‘It’s not what you know; it’s whom you know’. With the years spent in the property industry, mentors have built up their professional network which can help your career progression. Make sure you appreciate any information or connections they give you but do not rely solely on them some of the networks may be old and not in tune with the next generation.
Mentors in the property development industry are difficult to find as most good, or successful developers do not have the time to teach as they are focused on their developments. At AYR International Pty Ltd, various mentorship programs are offered to those starting in property development to seasoned professionals who need to gain further knowledge in a specific area of property development. If you are interested, read more about our Mentoring Programs and Contact Us