Every man and his dog seem to be getting into it – property development! If you are wondering why property development seems to be so profitable, in this article we will be looking at the big picture considerations of how value is created in property development and consider the substantial risks involved in the process.
At the most fundamental level, value is created in property development through increasing utility or usability. A townhouse or unit developer will take a piece of land that can fit one family, and turn it into a piece of land that can fit two or more families. As the utility of that same piece of land is doubled or tripled, there is value created. The challenge for a property developer is to realise the created value in the form of cash profits.
Profits are created when revenues exceed expenses. In the context of property development, this means that the price that new properties are sold for exceed the cost of creating those properties and any incidental or transaction costs. As far as townhouse or unit development is concerned, these are the top three questions you need to ask yourself in figuring out whether your next development is going to make money.
Where Will You Buy and How Much Will It Cost?
Location. Location. Location. You can’t build townhouses if you don’t have land to put it on. Where you choose to do development and how much you pay for the property are key considerations.
Which local council authority your property lies in will have specific requirements for what can and can’t be built there. Knowing what sort of product you can build on a given site will dramatically effect its development feasibility.
It is a lot easier to make money in development if the cost of site acquisition is low. You will want to make sure that you have a thorough project feasibility study done so that you know what the maximum price you can pay for a site is while still meeting your profit goals.
Remember that there is no rush in this process! You can wait for as long as you need to find the right property for your development goals. There is nothing worse than getting the wrong property or paying the wrong price, and having to struggle to break even on a site.
What Will You Build and How Long Will It Take?
One of the biggest costs that often gets lost in the mix is the time value of money. This is most commonly manifested in interest from the bank for the loan that is funding the development. Even if your development is being funded entirely in cash, there is still an opportunity cost of that cash.
The size, style and quality of your end product are going to be the biggest determinants of the cost of your development. The key question you will want to answer is this: for every additional dollar that I spend, will I be able to sell that dollar spent for more than a dollar? If
Of course, all of the above needs to be matched with the demographic of your target audience. While a double garage is probably too much for a single person with a bike, a carport probably not enough for a more affluent family with young adult children and three cars. This brings us to the last driver of profitability in townhouse development…
Who Will You Sell To and How Much Will They Pay?
What sort of house do you want to buy? Are you going to live in it or are you going to rent it out? Does it have the amenities for the size of your family? These are just some of the considerations that you might consider while choosing a place to rent or buy.
The person who will eventually buy your new townhouse will be asking these same questions. And how these questions are or are not answered by the property you are offering them will have an impact on how much they are willing to pay for it.
The laws of supply and demand kick in here. If you build a product that is wanted by many people who want to live in the area, and there aren’t as many of that product around, then you can command higher prices for them. This is a dynamic that often requires a lot of on-the-ground research.
Not for the Faint of Heart
And that’s the big picture! If you are able to sell new townhouses for more than it costs you to acquire and build them, you can make money in property development.
So after this article are you ready to embark on your next townhouse or unit development? Hold your horses. We’ve outlined the broad stroke drivers of profitability in the townhouse and unit development game. However, the truth is that there are many property developers who fail to make a profit.
Much of the realisation of value property development lies in the details, the execution, and luck. As a developer, you will be committing significant equity, expertise, and talent to create value through upgrading land to its higher and better use.
You’ll need to educate yourself on property, the markets, economics, finance, town planning, the construction processes and the marketing of real estate projects.
It’s certainly not for the faint of heart! But the rewards can be tremendous, and for people with the right temperament, the journey can be enormously fun, as well.
Engineers for Townhouse Developments
So if you haven’t noticed by now, you’re reading this article on the website of a structural and civil consulting engineering company. Why are we talking about property development? The simple answer is because we are consulting engineers for townhouse and unit developers.
At Tingmore Structures, we believe that our specialist engineering advice is best delivered in the context of property development so that our clients are best placed to make critical project decisions. One of the ways we do this is by having our team familiar with the entire development process.
If you are looking for structural and drainage design engineers for your next unit, townhouse or multi-dwelling development, please get in contact with us so we can provide you with a comprehensive fee proposal for our services. We look forward to partnering with you on your next project.
