The Cost To Develop

A question we are asked on a regular basis is just how much money do I need to develop? As you can appreciate, there is no short answer as it depends on the location, the purchase price, the type of development, the funding arrangement and your level of experience. So don't use the following as any form of hard and fast rule.

A Simple Splitter

The easiest form of development is probably a one into two lot subdivision. Quite often 'splitter' blocks already consist of two lots, but on only one title, usually with a house sitting bang in the middle. If you manage to split one of these you probably won't need to pay infrastructure charges (also known as headworks charges), though be aware that in some instances they may still apply. Infrastructure charges vary from location to location. In Brisbane you are looking at about $30,000 per newly created lot... that's a lot of money! So if you can buy a property that already consists of two lots you are well in front.

Assume we are talking about only having one lot and you want to subdivide it into two lots, then the costs you are up for are in the range of the following:

 - 5 to 20% of the purchase price for the deposit (aim to borrow a maximum of 80% to avoid lender's mortgage insurance)
 - Purchase costs, such as Stamp Duty and conveyancing. In QLD we work on about 5% of the purchase price, though concessions may apply and it does vary from State to State.
 - $30k in infrastructure charges, give or take some.
 - $10-15k in consultants, including surveyor, town planner, basic engineering and a council application fee
 - $10k for a new sewer and water connection, if they are right in front of your property and easy to access. It goes up from there. We find on average it is closer to $20k. Rear lot (or battle-axe) subdivisions will be more as you generally need to take the services a further distance. Sometimes this can be up to $75k.
 - $5k-15k for other civil items, such as a new crossover (driveway) and stormwater connection
 - $1k for legal costs
 - $5-20k for clearing and fences. In most cases council won't allow you to keep structures on the proposed vacant lot, so items such as sheds, pools, existing paths, etc. You may also choose to demolish some trees.
If you have to shift or demolish an existing house you need to allow more for this.

As you can see, the costs can certainly creep up. The easiest developments can be as low as about $25k, but we find the average to be about $55k. This is for the subdivision component only, so it excludes your deposit and purchasing costs.

Larger Developments

Obviously the cost goes up from there! We have the example of a recent project for 16 units, where the consultants costs are nearing $180k.  More on this in future articles.

A Great Strategy

A great strategy that we recommend is to buy well, so $30-50k under market value. This way you are already in front.

Try to keep the existing dwelling for smaller developments and especially where subdividing.

Employ a renovation strategy. If you have bought well and carry out a well considered renovation, you can often get the property revalued and refinanced by enough to then go and get an approval without tipping more cash in (i.e. use a line of credit). Not forgetting that you should now also have more rent coming in.

Once you gain approval it is sometimes possible to get your property revalued and refinanced at a higher amount yet again.

While this is a strategy that can work and has worked in the past, you need to be mindful of your own situation and ensure you are in a position to always be able to service the debt.

You must sit down and talk with a property wise accountant and a finance broker.

Straight-Speaking, Smart and Effective Property Development Information

If you're developing property, you need to know what you're doing.  Because whilst there are big profits to be made, there are also big losses lurking and ready to ruin the best-intentioned plans of the uneducated property developer.

The all new 2012 Developing for Profit Home Study Course DVD and Audio Combo pack is now available for purchase.  Click Here to get your copy now.

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