Common Mistakes Made By New Property Investors
Property development is a whole new level of challenge compared to simply buying and flipping property. It often involves finding opportunities to build projects from scratch or to make major renovations and extensions to the point that you may as well be building the property. As a result, it takes a much bigger investment and much more time, but the potential profits made from it eclipse any other form of property investment. That is, so long as you’re not making the mistakes that undermine a large portion of new property developers. Here, we’re going to look at the mistakes that can rock the boat from the planning to the construction stage and how to avoid them.
Not doing your research
It should be no surprise that property developers need to keep their ears to the ground, constantly. As Appfolio suggests, every new project should be prefaced with a thorough market analysis. You need to ensure there are no competitors buying or developing similar property in the area and that current property prices are in your favor, giving you a good chance of making a profit without having to wait too long. Property developers would do well to recognize the signs of an up-and-coming locale, too. In urban centers, the opening of new businesses and facilities within a certain area can highlight investment potential for you, too.
Overestimating or underestimating the GDV
The Gross Development Value can be a lot of help when choosing a project to go ahead with. By and large, you are hoping to find projects with the highest GDV. You can work out the GDV of a property or of properties similar to your project by gathering data from surveyors, recent sales, and estate agents. However, don’t assume that the project with the highest GDV is always going to be the most profitable. You need to look at the costs involved with a potential project in advance to continue protecting your profit margins.
Borrowing more than you can afford
This is a stumbling block that many property developers make right out of the gate on the very first project they are working on. It takes a significant amount of capital to begin a project, there’s no doubt about that but you don’t have to rush into funding. As The Motley Fool shows, there are a variety of different sources for the capital you need to start investing. Take your time, build up your savings, and make sure you can get a loan that fits not just the project but your ability to pay it back. If you borrow more than you can afford, even if you succeed in your investment, you can get stuck in a loop of dangerous borrowing that makes every venture just that bit riskier.
Asking for forgiveness, not for permission
Finding the right plot of land for your development is one of the most important steps of all. When you find the land that fits your needs perfectly, it’s easy to want to nail it down as soon as possible. However, first, you would do well to ensure that it has the building permits you need. Without the right permits, it’s not even a potential project, there is a chance that you might not be able to start your project on it at all. If you buy property that was remodeled without permits, you could have a new property that’s not up to code, which could also mean that you need to invest significantly more money into it.
Skipping the appraisal
Some new (and old) developers have the bad habit of treating the development appraisal like it’s nothing more than a formality. A potential deal that hasn’t been fully appraised doesn’t mean that it’s not going to be a success, but it does unnecessarily increase the risk related to a project. As Peyco Southwest shows, an appraisal does a lot more than show only the GDV of a project. It can help you better apply for loans, manage the tax side of the project, and ensure you are armed with everything you need to know about the site and property in advance.
Skimping on design
Every step in constructing or remodeling a property should be taken with the utmost care. You might be anxious to start laying the groundwork and see construction begin, but the truth is that the profitability of a project is much more likely to be decided during the design phase as opposed to the building phase. Success in property development is about solving problems and catering to the needs of the market, not just in building and selling any old property. If you’re picking out home designers with good reputations and an impressive body of work, you may soon become known for poorly designed homes. Property developers need to take good care of their brand just like any other business.
Forgetting to lay your groundwork
You have the site and you have the design, so you must be ready to start building, right? Not necessarily. Preparing that site should not be rushed through. It’s about more than clearing the space you need, you also have to ensure the site can support the project you have in mind. Engineers like the Helitech Civil Construction Division can help you get a much better understanding of the soil and how well it will be able to bear the load of any construction. Depending on the soil type and the space available to you, you can find a range of solutions to make a site more secure. So, even if it turns out that the ground isn’t ready for a project yet, you can invest a little more and better prepare it.
Not realizing a project is only as good as its builder
While the majority of your profitability might be decided by the planning and design stages, that doesn’t mean that a poor choice of builders and contractors won’t undermine you entirely. Choosing the right team is crucial. Make sure that they have all the credentials and licenses to back up their ability to work and don’t work with anyone that isn’t willing to share their portfolio and show specific experience in the kind of projects that you are hoping to complete. If you do find a team that gives you the results you need, hold onto them. A long-term relationship with the right construction crew can help you get started on future projects much more quickly with less uncertainty.
Ignoring the legalities
Ensuring you have the permits for a project is but one of the reasons you need to make sure that you have a lawyer on your side when it comes to property development. It can be incredibly time-consuming to go through all the legal necessities, but it is essential. You are going to have to get things like option agreements, pre-lease agreements, building contracts, and JV agreements out of the way to help protect each and every one of your investments as best as possible. Many of them need to be completed before the project can begin and neglecting them can turn out to be hugely costly. Most of these legal agreements protect you so that you don’t take the full brunt of the costs should something go wrong before development, as they sometimes can.
You want to ensure that your projects shine with quality, both in your design and your construction. However, there is a significant risk that you could spend a little too much in creating lavish properties that a) require more investment for you and b) might not necessarily attract the right kind of attention. Adding too many rooms to a home and choosing materials like expensive marble may take the price out of the range of many of your potential buyers, for one. But even if you’re aiming at a luxury market, most buyers are going to make their own renovations and fittings after they purchase the home, anyway. Choose quality, don’t choose lavishness.
Letting emotion rule the roost
Patience is key. You have to be willing to move with the property market and constantly update your understanding of prices and values in the area. Make sure you’re not buying during a spike in the market where you are spending much more on a project than you might half-a-year from now. Similarly, you may be itching to make back your investment after completing a project, but sometimes sitting on a property and waiting for prices to go back up might be your best bet. Try to keep your heart out of the picture and keep relying on your understanding of the numbers, instead.
Property development might be profitable but it’s never a sure thing. As a final piece of advice, make a habit out of confirming information and doing the research yourself. You can find some excellent partners with great expertise, but never take an assumption on faith. It’s your money, you need to make sure you know that it’s going somewhere you’re likely to get a return out of it.