A Primer on Property Development
Many real estate investors find great thrill in turning into property developers. The starting point looks pretty simple. All that needs to be done is to buy a large plot of land and build many dwellings or apartment units on it. Once done, some of them need to be sold off while others held back for sale on a later day. Simple enough by the looks of it!
May not be all that simple though!
Property development, just like property acquisition, is an art that has to be learned the hard way. Successful property developers will tell you that lot of the hard work begins even as a property development is conceived. Sequential steps need to be followed right from the time of conception to the time of completion of the physical construction; only then can a development project be completed successfully.
Sequentially, the steps of property development can be broken down thus:
- Conceptualising a property
- Refining its structural and functional aspects
- Testing whether it can be practically constructed (feasibility test)
- Contract negotiation
- Setting up a formal commitment towards the project
- Project completion
- Project management (also termed as ongoing asset management)
What is your idea behind turning into a developer?
Is it to make a quick gain in a fast-shifting market? Well, if the answer is yes, you think differently than I do, and maybe for all the right reasons! For me, the strategy that works is this: develop properties, seek high rental yield and capital growth from them, and then keep selling a part of them (and holding back the other part) as is deemed feasible by a portfolio analysis.
Residual land value
Look into the residual land value before starting on a property development project. This value talks about the maximum amount a developer can fork out for a land in order to keep a healthy profit margin (feasibility). How do we come to the value?
The residual land value can be arrived at by factoring in various costs which erode profit margin. These can include construction costs, contingency costs, and consultancy costs, among other things.