November 19, 2014 is_admin

The pitfalls of property development for profit

When contemplating wealth creation strategies, my experience tells me a great number of people are attracted to the idea of taking a derelict or unloved property (think ‘renovators delight’) and turning it into a buyers dream with bidders climbing over each other to own your masterpiece.

With the Auctions for the TV Series The Block (Series 9) airing on Channel 9 recently, here are some key lessons the latest series has delivered to anyone considering developing property to make a quick buck:

The Human Cost:

‘Time is money,’ ‘there are not enough hours in the day.’ Ever heard these sayings? Well, juggling your day job and trying to renovate could seriously detract from your performance at work. Focusing on ‘your purple box’ (your Career/Business) is the best investment you can make; if outside influences detract you from performing your role, your boss might not look upon you favourably, or your business might suffer as your mind is busy elsewhere. People also under-estimate the stress this can put on a relationship.

Furthermore, News.com.au (https://www.news.com.au/entertainment/tv/the-block-darren-and-deanne-and-michael-and-carlene-earnt-just-1071-per-hour-for-their-efforts/story-fn8yvfst-1227088489917) took a look at the hourly rate earned by contestants Darren & Deanne and Michael & Carlene and concluded they were paid just $10.71 per hour for the work they put in to their apartments.

The Hidden Costs:

Without a doubt the most frustrating component of The Block, personally, is the lack of transparency around the true costs associated with the Development – the location was mocked up as an old Channel 9 office block, but was in fact the old headquarters of communication technology company Vixtel. The cost of acquiring the site, the interest costs on the loan required to purchase the property, costs for Products and Services provided to The Block by sponsors such as The Good Guys, Mitre 10, Beaumont Tiles and Reece Plumbing, plus Government Taxes and Selling Costs don’t seem to be reflected in the ‘Reserve Prices’ set for the Apartments.

For the average mum and dad looking to add value to a property and turn it over for a profit, these are all very real costs which must be taken into account and factored into your planning.

The Risks:

As seen in The Block finale Auctions, when you have only a few, or even just one (or maybe none!) interested parties to purchase your property, it becomes very difficult to drive the price up to push you into a profit position. As property is a very illiquid asset, if you get yourself into a position where you’re needing to sell quickly you might not be able to wait until you can get a price that better reflects your efforts. Holding costs such as loan interest continue to build up during this time. Furthermore, if you own your own home and are branching out into property development to try to create wealth, you have all your eggs firmly in the one basket; domestic real estate. If there is a market crash, this now impacts both your personal (home) and financial (Investment Property) asset values.

The Experts:

If you’re a professional Property Developer, there is no doubt you can make money in development (much the way a Doctor makes money through advising patients or a Financial Adviser through providing financial advice). If you’re not, chances are you will find the going much tougher. Tradespeople are renowned for upping their prices for mum and dad developers. I’ve also heard countless stories of appliances being stolen from properties just days from settlement. If you intend on taking on this sort of project, factor in costs of bringing in professionals; don’t flatter yourself with huge estimates of cost savings through DIY.

Finally, always seek advice from professionals such as your Financial Adviser when contemplating any investment. To book a consultation with an Income Solutions Adviser contact (03) 9654 0555 or (03) 5229 0577.

Steven_Nickelson

 

By Steven Nickelson

Certified Financial Planner

Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances.  Please seek personal advice prior to acting on this information.

 

 

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