How delays can cost your development

If you’re completing a project that’s being bankrolled with development finance, you’ll want to avoid delays in your project.

One of the most important points that novice developers often forget is the issue of interest costs. Typically, a development loan is a 2-year term and once the term is exceeded the loan is supposed to be repaid in full. However, if it’s not repaid, then the developer will continue to incur interest on the outstanding loan and potentially at higher rates than during the term of the loan.

While most residential developments take up to 18 months to complete, if you don’t have the right builders and contractors working for you, you’re likely to face time blowouts. Delays of a few months can leave developers with little time to sell their finished products and repay the debt before the loan term finishes.

In one instance, a developer engaged Momentum Wealth after failing to repay their loan by the end of the term because their project had suffered major delays. The developer was paying penalty interest of 13%, or about $14,000 per month. Our finance brokers were able to refinance the developer’s loan with a specialist private lender at 9% for an extended term. This significantly reduced the developer’s repayments and provided them with additional time to complete and sell the finished project.

Interest expenses can turn a highly profitable project into a potential loss. Therefore, it’s important to avoid excessive interest costs by using reliable builders and contractors with a good track record of completing projects on time and on budget.

Many investors who want to develop but don’t have the time to manage the project often appoint a development manager, who will manage the entire project and keep the builder to their time frames. Momentum Wealth is managing over $170 million in projects for our clients. If you’d like to speak to one of our development specialists, please call us on 9221 6399 to see how we can help you with your project.

Demand not the only equation

Many investors place a large focus on the future demand of properties when searching for their next acquisition. However, there is another equally important factor that must be taken into consideration. Although robust demand for property is important to help ensure values rise, many investors don’t consider the supply side of the equation.

Oversupply of property in your investment area has the potential to significantly restrain the capital growth of your assets. Quite simply, investors need to look at their properties and consider how easy it is for others to build additional dwellings of the same type in the same location. In other words, how much competition will your property have and could this increase significantly?

In any market that has a high supply of a specific asset, including housing, consumers of that product will have more choice, which subsequently reduces your ability to demand a higher price. A good example of this is residential estates on the urban fringe of metropolitan cities, where large areas of land can be readily developed for new housing. Another example is apartment buildings in central business districts, where new, large-scale apartment complexes can be easily built.

Typically, it’s best suited to acquire investment properties in established areas with high demand and limited availability for new stock to be added. This can help contribute to higher capital growth from your investment properties.

How to build your way to wealth – part 3

Property development is regarded by many investors as the Holy Grail because of the huge profits on offer. So what does it take to be a doyen of development?

In Part 2 of this article series we outlined steps four to six to becoming a successful property developer. This included the necessity to complete a feasibility study, identifying your tax status and buying your development site wisely. In the final part of this three-part series we explain steps seven to 10 – the need to structure your finances correctly, choosing the right designer and builder and deciding whether to hold or sell your development.

Adequately structure your finances
Just about every developer will have to take out a loan to finance their project. For development loans, it’s best to engage a finance broker who specialises in this segment as the terms and conditions can vary significantly, compared to a normal home loan. Loan-to-value ratios, term periods, interest rates and others important issues are vastly different for development finance so it’s best to utilise a broker that has a firm understanding and proven track record of securing loans for development projects.

Choosing the right designer
Typically, it’s best to engage a building designer or architect as opposed to a builder direct. Using a builder direct will mean they own the copyright to the plans and if, for any reason, you don’t want to use that company, you’ll have to restart the planning process, or pay a hefty fee for the copyright. By engaging a building designer or architect, you’ll own the copyright and will be able to tender the plans to builders and choose the company that offers the best deal. Ensure you designer or architect has completed similar projects in the past. Designing a duplex in a middle-class area on a tight budget is significantly different to designing a boutique apartment complex with premium features in an upper class location. Make sure to see examples of the previous work they’ve completed.

Picking the correct builder
With your plans complete you can tender your project to various building companies. Approach builders who have a proven track record of delivering similar projects. When it comes time to selecting a builder, it’s not always best to select the one with the cheapest quote. Also consider the builders quality, reliability and construction time. It’s important to thoroughly compare quotes as some may include items which other builders consider optional extras. It can also be useful to include penalty clauses in the contract, which means the builder will receive a smaller fee if they don’t finish the project in the agreed timeframe.

Develop and hold or develop and sell
Generally it’s best to hold your property and use the equity to finance your next project. By holding, you’ll avoid having to pay income tax, selling agents fees and services tax, which reduce your profit margin. If you decide to sell, make sure the timing is right and there is sufficient demand from buyers.

It’s evident that property development can deliver massive financial windfalls, however there are a myriad of risks that have to be considered and mitigated. To optimise returns and minimise risks, it’s wise to engage independent professional help, such as development finance specialists, buyer’s agent and project manager.

Property management: balancing price with performance

It might be tempting to engage the cheapest property manager you can find, but it could prove to be one of the most costly decisions you’ll ever make. For serious property investors, choosing a property manager based purely on their fees carries significant risk. You wouldn’t choose the cheapest stock broker to manage your shares, so why would you choose the cheapest property manager?

At the end of the day, if you engage a cut-price property manager you’re likely to receive a significantly lower standard of service. This is because the property managers at these agencies are forced to oversee a higher number of properties – sometimes hundreds of properties for each manager. Consequently, these property managers are swamped with work and can’t provide an adequate level of service to each customer.

With cheaper agencies you’re also likely to encounter a higher turnover of property managers. This is because they simply can’t cope with the huge workloads, become burnt out and have to change employees. In other cases, some agencies might offer a cheaper upfront fee, but then charge for additional services.

Eventually, the fees with the budget agency start to add up and might be the same, or more, than with a premium property management firm. Even worse, if owners don’t opt for these additional services, such as property inspections, the condition of the property may suffer and rents won’t be optimised.

Another area that suffers is staff training. If profits are marginal, there is no budget to provide adequate education and keep staff up-to-date with legislation.

As a property investor, you need to weigh up the importance of potentially saving a few hundred dollars each year at the risk of harming the performance of one of your most valuable assets.

Remember, property management fees are a tax write off meaning you’ll pay less tax and recoup some of the cost.

Not your typical investment suburb

Offering good schooling, parks and amenities, this affluent beachside suburb is one of the most expensive in Perth with a median house price of $1.7 million.

City Beach, located in the Town of Cambridge, is one of Perth’s most sought-after suburbs. It boasts a long stretch of beach down its western border, is just 10 kilometres to the Perth central business district and comprises many parks and ovals, including Bold Park and Wembley Golf Course.

The suburb has a population of about 6,400 residents with a median age of 44 years. About 40% of the population are in professional employment, which is double the average.

There is a low concentration of state housing, with the area mostly zoned low density residential (R20 and under) with about 88% of dwellings listed as houses.

About 80% of properties are either fully owned or being purchased while just 13% are being rented – the Perth average is more than double that at 29%.

There are multiple primary schools within the suburb as well as the International School of Western Australia and many prestigious private schools, including Hale College.

City Beach is the fourth most expensive suburb in the Perth metropolitan area with the median house price of $1.7 million.

Neighbouring suburbs include Swanbourne, Scarborough, Floreat, Churchlands and Mount Claremont.

The suburb’s main shopping centres are City Beach Boulevard, Ocean Village and the major shopping centre in neighbouring Floreat, Floreat Forum.

5 features to look for when acquiring a commercial property

If you’re seeking to purchase a commercial investment property, here are five features you need to consider to help attract your future tenant.

When purchasing a commercial investment property there are a number of macro and micro economic factors you need to examine to ensure you acquire a high-quality asset.

These include the area’s future demand and supply for similar properties, major infrastructure initiatives and broader economic activity, among others. However, it’s also crucial to consider some specific aspects of the property itself, particularly tangible features that a future tenant will look for and find appealing. These features generally differ depending upon the type of commercial property, such as industrial, retail or office, because tenants in different properties demand different amenities.

Here are five features you need to consider in your next commercial property to help you attract your future tenant.

Industrial/warehouse

1. Truck turning circles.
2. Truss heights – standard heights are typically about 7-8 metres.
3. Office component – typically about 25%-30% of floor space needed for offices.
4. Overhead crane facilities.
5. Door access – is this big enough for bulky goods?

Retail

1. Foot/car traffic – is the shop frontage in view of a highly-used footpath or road?
2. Accessibility – is there good public transport or major roads nearby?
3. Locus of activity around the property.
4. Car parking – is there sufficient parking facilities and are these paid parking or free?
5. Signage rights – what are you and your tenants entitled to?

Office

1. Employee accessibility – are there sufficient parking facilities or is it close to public transport?
2. Telecommunication – is this sufficient for tenant needs?
3. Sufficient useable floor plate.
4. NABERS/Green Star rating – is it a high-performing building?
5. Air conditioning facilities.

While these are not the only aspects you need to consider when searching for a commercial investment property, they’re a good start and are features that are generally demanded by tenants.

What is a property trust?

You may have heard about property trusts, but what are they and what benefits do they offer investors?

Property trusts are a great way for investors to access property assets, either commercial or residential, but in a different structure from direct property ownership.

Property trusts can either be listed, meaning they are traded as shares on the Australian Securities Exchange, or unlisted, meaning they are held by investors and there is no public market.

Property trusts are generally offered in two forms, either wholesale or retail, with the latter being offered less frequently because these demand more onerous compliance requirements.

Typically, investors will buy units in a trust with the number of units they hold proportional to their interest in the property. For example, if the trust had 5 million units at $1 each and you owned 250,000 units you effectively own 5% of the property.

However, investors are not on the property title – the trustee of the trust holds the property on behalf of the unit holders.

Investors can buy their units in their choice of tax vehicle (i.e. under their own name, self-managed super fund, discretionary trust or company).

Commercial property trusts generally pay distributions to investors on a quarterly basis while the property is held and then a final payout of the gain once the property is sold. For example, if you own 5% of the units on offer, as in the example above, you would receive a 5% share of the rent returns and 5% on the sales proceeds when the property is sold.

Issues relating to a trust can be voted on by investors as provided for in its constitution and voting rights will be proportional to the amount of each investor’s interest.

Property trusts are a great way for investors to gain exposure to high-quality property assets which they may not be able to afford on their own.