What do you need to know about property development costs? Australia’s Billion Dollar Property Developer, Bob Andersen, discusses.
Bob Andersen back again talking about your favourite subject and mine, property development.
Have you ever heard the saying, “Show me the numbers” or perhaps another one, “The numbers don’t lie”? That’s quite true in property development. In fact, when you boil them all down, it’s really all about the numbers.
Whether a deal is worth doing or not worth doing depends on what we call the numbers. What do I mean go with the numbers?
Quite simply, I’ll probably liken it to a profit and loss statement. Perhaps you’ve seen a profit and loss statement after a business. And what it is in its simplest form, you got your income, whether you derived that from selling things or sales or whatever, your income less all your expenditure is going to give you what? It’s going to give you your profit, isn’t it?
It’s the same with property development costs. When you’re doing your feasibility, your income – that’s pretty simple. That’s what you get when you sell your product. If you did a two-lot splitters, one block land cutting the two is what you get when you sell the two blocks of land. You might also do a three-townhouse project. It’s what you get when you sell the three-townhouse project. So, that’s your income. That’s pretty easy.
But where people really get messed up are property development costs. What are they? How much are they? What I found in property development is when people go wrong, particularly people who are new to property development, they get their numbers wrong. They’re not sure what the items are, they’re not sure what the dollar values are.
So let’s say we’re building a small townhouse project, perhaps four-townhouse project. So, what we have to know on the income side of the equation? Well, if you’re doing what I’ve suggested to do and you’re getting out into the marketplace and you’ve tried it in a particular area, you’re get to understand pricing.
You’ll be going to open townhouses, you’ll be talking to real estate agents, everything that sells in your area, when you see sales go up, you’ll be talking to the agent. So, you will get a pretty good idea of what things are selling for. Any properties that are up for sale in your area of interest, you’ll be contacting the agent. When you see the sales going up, contact them again and see what it’s sold for. So, it’s not that hard really. You can go ahead and handle this self-process.
But what about the costs? When it comes to property development costs, just like the profit and loss statement if you like for little business, and that’s all what the development is, it’s just a little stand-alone business. What do I mean by that?
Obviously the land, we buy some land. We’re going to buy a block of land, we’re going to cut it in half, we’re going to do two lots and have a division, and we’re going to build some townhouses. And once again, when we go into the marketplace, we’re talking to agents, we’re seeing sites that are getting sold, we’re getting pretty good to handle on what sale prices as well and at the end of the day when we’re doing our first line of numbers, we’re just putting the asking price.
It might be an auction selling a little bit of field for that or it might be a listing where we not get the price. And so that will go in. Obviously the land, plus the legals and the stamp duty. That’s where we’re getting our property development costs from just initially from the asking price. As far as working at stamp duty in different states, there are so many finance websites out there that have little calculators on them for working that out. So, that’s pretty easy.
So, back to our hypothetical four-townhouse project, so other than the sell price because we’re in the marketplace, the land amount is what the asking prices, now construction process.
So, when you first started, you might not know what a townhouse costs to build. And so once again, you need to ask – the two primary sources are actually builders and quantity surveyors. You can talk about it to those but I find builders are the best. Now, when you’re at the beginning to understand your market, when you go to open houses, you’ll be asking the agent, “Who was the builder?” And therefore you can make contact with the builder, you’ve seen the townhouses and you can talk about what they cost. Or if it’s a contractor who built these townhouses.
When you say a development is coming up and you see a builder or an owner, you need to talk to that builder and get to know some the builders that are building in your area and in that way, you can understand pricing as well. The same with quantity surveyors. But I prefer builders when it comes to construction process. You’re going to need some professional people in this that can help. Architects, town planners, some engineers a little bit later. And what you can do, you pretty much can get an architect.
Architects pretty well understand the prices, they understand the different professional people that are going to be needed and the first one to call, I’ll be going to the architect, and the architect can pretty well tell which consultants you need and what is the going right.
So, if it’s a four-townhouse project, he will know what a town planner would cost, what the different engineers would cost in site. A good point of call. But once again, if you go to those open houses, you have to ask who the architect is and it’s pretty wise tracking that architect.
So, we’ve talked about land, we’ve talked about construction, we’ve talked about the different professional people and of course, the council fees. The best classifier for council fees are is what? Pretty clever. Yes. Ask the council. You go the council websites. Some councils has fantastic websites but otherwise, contact the town planning section at the council and they can give you a list of what the different fees are in a normal development.
Financing also falls under property development costs. So it really matters understanding the finance cost. It could be an application fee, evaluation fee, and what the interest rate is.
Finance, well, that’s a different subject. You’ve heard me talk about it probably in the past. And we’ve got marketing cost. It’s what the real estate agent or the project marketers are charging to sell the property. And that’s not too high to work out because you can just ask them.
What are your fees? Another one is GST. Don’t forget the GST because the Federal Government will have their hand here. GST is generally 10% so it’s 10% of your cost relative to GST but not all costs. Government statutory charges, things like stamp duty, land tax and even council fees don’t have GST component but pretty well, everything else does so don’t forget GST. Other than that, there are just little miscellaneous bits and pieces.
Let’s say some legals on sale, perhaps setting up a nameless corporation. Just a few little bits and pieces.
So, the good news is, when it comes to property development costs, there is always an expert out there that can help you whether we’re talking about an architect to help you with the consultant fees, whether we’re talking about finance, I could perhaps help you with finance fees, the council can help you with their fees, there is always somebody there to help. So, what you need to do is to get familiar with these costs, how to get them so that you can get the right numbers.
It’s very important, the numbers don’t lie, and the numbers are everything in property development. When it comes to them, you have to get it right.