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Amateurs of all types are prone to making mistakes those with experience have either made themselves or learned from others not to make. Amateur property developers are prone to particularly costly mistakes, given the price of both the properties they are buying and the cost of renovating properties. Here are four things amateur property developers need to consider.
Education is an investment
Education about property development should be considered an investment. Take the time to understand your market, so that you know what a property could reasonably sell for after renovations and repairs. Understand the average price for various types of repairs and upgrades, so that you don’t pay too much for these services.
Build up a list of reliable contractors who can do work to your standard on time and within budget. Learn the financing options available to you so that you don’t end up paying more than you have to when financing the deal. Take time to understand your buyers. Too many property redevelopers seek to make a home look like something they’d love to move into, instead of decorating the home in ways that appeal to most buyers or putting in upgrades that home buyers are happy to pay more for.
Understand the finances of the project
It has been said that the profit of the project is made at the point of sale. If you pay too much for the property, your profits are limited by the sale price (that’s set by the market) and the cost of renovations and repairs.
If you spend too much for the property, the cost of the necessary renovations and repairs to bring it up to market standards may eat up your profit margin. Another mistake is ignoring the financing costs that eat into your margin. One option is to work with a company like Pure Commercial Finance for affordable auction finance deals so you can buy a property at the lowest possible cost at auction.
Give yourself margin
The best way to minimise the risk of property redevelopment is to give yourself a margin. If you have a 10% margin on the project and keep costs in line, you’ve just earned a hefty profit when the property sells. If you give yourself margin on the project and costs run over, you don’t risk ending up spending weeks on a project and earning less than minimum wage. You also want to give yourself reasonable margin on your schedule. If you plan the project on the assumption you’ll have to carry the costs of the property for X months and it takes X+2 months to sell the property, you may end up losing money on the project.
Stay within the market expectations
You need to consider market expectations so that your upgrades fit the expectations of the community. In a neighbourhood is full of three-bedroom, two bath homes, adding a third bathroom won’t result in a 100% return on investment whereas adding a second bathroom to a house with only one bathroom will have a 100% or higher ROI. If you put a chef grade kitchen in an affordable family home, you may scare away many buyers, while any project that reduces bedroom count hurts the value of the property.
These are just some of the things all amateur property developers should consider. Educate yourself on the cost of various services, the options for financing, the customers you’re aiming for and the market. Understand the math involved and give yourself margin both regarding the finances and the schedule and ensure that your redevelopment project stays within the expectations of the local market.