Time to read: 3 mins
Property development can be a very challenging adventure to embark on. Along the way, you are going to face many ups and downs, trials and tribulations, challenges and achievements. However, most successful developers have a trait that sets them apart from defeat: they are tenacious. That is to say, they are driven and remain focused on their goals. Here are some of the challenges many developers face and techniques on how to overcome them.
Managing Risk
This is probably the biggest and one of the most difficult challenges every developer must face. Traditionally, a developer begins with one small property that they invest in to make a profit margin of 15 to 20 percent. Once this first project is completed, they use their original stake investment plus their profits to purchase a bigger property. Then, the investment and profit from this to buy two other projects, and so on and so on. The goal being, that 10 years from now they are worth millions, all of which are made in the property sector.
When they started they developed only when a 15 to 20 percent profit margin was achievable. Now, however, due to a frantic and unpredictable global market, a 10 to 15 percent return is acceptable. So, to stay in business, they get into developments that yield a smaller return and when the market drops they lose everything. Such an occurrence is sadly more common than you think.
Here’s how you can protect yourself from reaching such an undesirable end and continue on your successful development journey. First, you must aim for a 15 to 20 percent profit margin on development costs. Secondly, your development must financially work for both a sell-on and long-term hold scenario. This will help to protect you should the market turn during or once the development is completed. If the market crashed tomorrow, you must calculate what amount of rental income is required to cover your financial costs and make sure that your adjusted development plan meets this figure.
What Other Risks Are Involved in Developing?
Here are the other risks that you need to look out for when developing property:
- Rising interest rates leading to increased holding expenses;
- Increases to the construction cost either due to the rising cost of material or labour;
- Property market downturn resulting in lower property values or increased holding costs;
- Local real estate market variations between supply and demand causing property pricing fluctuations;
- Builder or trade contractor disputes;
- Changes to the property development related law – such as zoning, town planning, stamp duty, capital gains tax, etc.;
- Unexpected delays with town planning approval resulting in increased holding costs, plus the potential for the approval to not be granted or granted on unfavourable terms;
- Unexpected expenses due to structural defects or building deficiencies; and/or
- Improvements not resulting in an increased value.
Being aware of these risks is a good step to minimise them, but the truth is most of these risks are outside of the developer’s control. The trick to overcoming these risks is simply to be ‘Risk-Conscious’, not ‘Risk Adverse’. A successful developer is someone that takes risks but is always looking to minimise their risks.
With the proper planning and preparation, the potential for great profits is huge when it comes to property development. Don’t be afraid of the risks, but be prepared for them to happen.
