Small Development Can Supercharge Returns

Posted on 11/10/2019  
Small Development Can Supercharge Returns

Small scale residential development projects in the right location can help property investors supercharge their returns.

Buyers’ agent and advisor, Alex Dutt of Adviseable, says this can be a profitable way for investors to move on from passive “set and forget” assets and to take greater control over their portfolio’s performance.

“You can create some short-term profit, have greater control over the investment’s performance and you are not relying purely on the market (to increase value),” he says.

“We are talking about entry-level development opportunities.”

Dutt says it’s important to select the right suburb for development, carry out thorough due diligence and seek the help of experts.

Building regulations can vary significantly between councils, so it’s important to investigate thoroughly what is allowable in terms of minimum block sizes, setbacks, fence heights and site coverage.

“You need to get a real feel for an area and what you can do before you go any further,” Dutt says.

“Look at the current developments which are being sold in the area and that will give you an idea of what can be done.

“Then get your property wish list together. Figure out what particular suburbs you want, what are the block sizes you are after and whether you are seeking vacant land or something with an existing dwelling.”

Dutt says smaller developments – e.g. three dwellings or less on a site - mean that it can usually be financed through standard residential lending, while anything bigger may require commercial lending.

He says investors can investigate a variety of options, whether it’s a complete knockdown and rebuild; sub-dividing a large block; or keeping an existing house and building another on the back of a block.

Ideally investors should develop and hold newly-constructed properties for long enough to avoid the full brunt of capital gains tax or any GST liability.

“Once you start to develop to sell it becomes a commercial venture and technically, in the eyes of the ATO, you are a professional developer and have to pay GST accordingly,” he says.

“So, you want to try and avoid those things, minimise capital gains tax and avoid GST entirely, so that means that we are looking to to develop and hold.”

As well as preparing a “wish list” of what sort of site you would like to develop, Dutt says it’s important for investors to sort out their finances and assemble their professional “posse”.

With development sites in high demand, you should try to secure them off market and be ready to move quickly when one does come up.

“Be poised to pounce fast on good sites that tick all the boxes,” he says. “You want all your ducks in a row and when you find something be ready to jump on it very quickly.”

This involves building relationships with town planners, solicitors, surveyors, demolition experts, builders, civil engineers and property managers.

Terry Ryder of Hotspotting says many councils and state governments are supportive of these small-scale projects because they constitute infill development within the existing suburban footprint.

“We tend to find now across Australia in major cities, governments are encouraging infill development to counter urban sprawl,” he says.

Dutt says while it can be a successful way to invest, there are some common mistakes to avoid.

Underestimating infrastructure costs, not having a significant contingency fund in place for unexpected expenses and not factoring potential holding cost blowouts as a result of delays could all be expensive mistakes.

Ryder advises investors to be patient when searching for the right site.

“The perfect sites are out there but they don’t pop up all the time,” he says.

“There can be a tendency to grow impatient and grab something that ticks 80% of the boxes. I think it’s important for people to be patient to wait for something that ticks all of the boxes otherwise the numbers might not add up at the end of the day and you can end up with a disappointing result.”

Watch the webinar - Supercharging your property investing with development

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