Property development stands head and shoulders above other property wealth creations strategies when considering the potential profitability of a project.
To be clear, we are talking about complete property development and not renovations. The numbers in these two areas are different. Here, the numbers refer to property development and not renovation projects.
Why do I make this distinction? Think of it this way: renovation projects improve on existing structures, property develop adds something new. It’s not just about increasing the value, it’s about adding a new unit or residence.
Understand the risks
The profits available to property developers are significant, however you must understand that there are also significant risks involved. You must make sure that you learn what’s involved before you undertake a project of your own.
Location, location, location
As they say in real estate: the three most important things are location, location, location.
We are playing the same game.
The location of your project has a massive impact on your eventual profitability. A two-lot subdivision at Potts Point would be worth more than a two-lot subdivision in Birdsville.
Size matters
The size of the development project is another key factor in the profitability of a project.
A smaller project takes less time and has less financial risk than a larger undertaking.
On the small project, it might be considerably faster to get a development approval, and construction could be as simple as connecting new services. Contrast this with a large commercial project where approvals and construction can be quite complex.
Another consideration is financing. The smaller project can often attract financing at a lower rate than what is available for big projects. We cover all aspects of financing in our online course.
Profit margin considerations
The industry-standard profit margin for small projects is lower than for larger projects.
Profit margin is calculated as the profit as a percentage of the total costs.
An example from a real project
Gross Realisation Value (Total Sale Price) $3,530,000
Total Development Cost $3,070,000
Profit $460,000
Profit margin is $406,000 / $3,070,000 x 100 = 14.98%
Acceptable profit margins
When considering whether a deal makes sense or not, we often use thumb rules, such as:
- 18% – 20% (and upwards) for a four-townhouse project
- 12% – 14% (and upwards) for a two-lot subdivision
For our own projects and those of our mentoring students, we often look for a profit margin of 20% as a starting point. This gives a quick idea of the viability of a potential deal.
Potential returns on you own projects
In this article, we looked at the profit related to costs however when you consider the profits related to capital invested, you really start to see the amazing potential return of investment in property development.
When you consider that you can gear the borrowings 4 times (25% equity, 75% debt), that gives you an 80% return on funds invested.
It’s not hard to see why property development reigns supreme in the wealth-creation property world.