Common mistakes of a first time property developer

Building property for a profit may seem like a ‘sure way’ to make a small fortune and it can be quite successful. But in reality it involves a great deal of risk, especially for first-timers.
If you’re just starting out, here’s a few things to be aware of to help you navigate your way and mitigate the risks.

Our top 5 common mistakes for first time property developers:

1. Poor financial forecasting

As with many things in life – there are always hidden costs!

A robust financial forecast can help you keep track of your costs and keep your budget in check.

Preparing a financial forecast early on can help you assess whether the development is even worth doing. In some cases the time and effort (and money) of completing the development may only provide you slightly higher returns than if you sold it today. Sometimes you may even make a loss. Being aware of the opportunities early on will ensure you are in good stead.

Planning is key.

2. Not seeking professional advice

The excitement, hope and potential for success when commencing a property development can cloud your judgement as to whether what you’re doing is financially viable.

Seeking professional advice from an accountant, architect, lawyer or property manager not only helps ensure the finer details are covered, but it also provides an opportunity for someone independent to challenge you and keep your expectations realistic.

3. Assuming its ‘tax free’ or that some capital gains concessions will apply

The tax treatment of property development can be a mine field.

Do I get the main residence exemption?
Can I apply the 50% CGT discount?
Do I have to register for GST?
Can I apply the GST margin scheme?
When do I have to pay tax?
What records do I need to maintain?
Should I use a company or a trust?

The answer – it depends!

4. Poor funding arrangements

Property development is a significant investment and often requires a helping hand from the bank.
Ensure your finance is in place early as trying to sell a half finished project is rarely profitable.

Interest rates and payment terms can vary so we recommend you shop around for the best.

On security, just because you can mortgage your home to fund the development doesn’t mean you should. Try and protect your other assets from the development if you can, as there is always an element of risk involved.

5. Underestimating the development process

We recommend you do your homework and seek as many second or third opinions as possible before making any decisions.

The development process can be long and complex, but generally can be broken down into stages as follows:
• Stage 1: Assess feasibility, understand risks, seek initial guidance from qualified advisors
• Stage 2: Secure funding and planning permits and development approval
• Stage 3: Secure architect / engineer, finalise design and obtain approval
• Stage 4: Engage a builder and/or project manager and begin the build
• Stage 5: Manage the build costs and time – delays happen
• Stage 6: Sell and (hopefully) calculate your profit

If you’ve made your way through our 5 steps and you feel you’re covered, well done, however if you’re still a little bit unsure, please give us a call and we can help.