Ask Margaret: when is the right time to develop my investment properties?

Hello Margaret  

Long-time fan of yours!  Thank you for your insights.  

I am a single mum who has managed to grow (through some tough personal times), a small portfolio of three properties since 2004 in south-East Melbourne.  

I purchased a small development property during the GFC and have sat on this waiting for the “right time” to develop (it's a two-unit site).

I am fast approaching retirement age (currently 53) and believe I should be developing now, but my “gut feel” says wait.

How do I know “when is the right time”?  

I have contacted real estate agents to find out rental / sale values and research seems to show the area is devaluing slightly/stagnating as with a few areas of Melbourne.

However the agents seem to talk up the amount of rent I could receive, as well as the amount I would get for them should I sell, once built. I don’t know who or what to believe.

My current PPOR (beachside) also has potential for a 3-4 unit site.

Thanks.

The decision to develop any site must come after an extensive analysis of both the area, and the potential costs involved, before proceeding.  

It’s crucial that you first examine your capacity to meet budget blow outs and also the holding costs of waiting until this development is income producing.  Among the costs you will be required to meet will be:  

• Costs to obtain the DA, which can run to $40 - $50,000 and includes town planners fees and council contributions and fees

• Costs to retain architects to draw up plans

• The interest on progress payments as the build progresses

• Stamp duties and other statutory charges

Even if you are able to access a loan from a bank for the entire amount, you will need to meet the interest payments as you draw down, and you will not have any rental income to support this.  You must try to establish an overall loan amount, workout the interest payments and establish if this is within your capacity to afford.  Make sure you consider the worst case scenario – I have seen developments take years to complete and you will have holding costs right up until you can rent the properties or sell them.  

You also need to then add these holding costs to the overall project amount so that you can determine whether the final product is worth what you are paying to build it.  You would want to see at least a 20% profit margin to make this worthwhile, as there will be capital gains tax to consider.  In order to reduce that capital gains tax, you will need to ensure that you hold the properties for 12 months past the contract date to get the 50% discount, although if you are building with the intention to sell for profit, the tax office may treat you differently and you may not get the discount.  

There is so much more I could say about this, but I think you get my drift at this stage – developing is quite a risky venture and if you are a single mum who has worked hard to get where you are, you are about to add a level of risk to your investing which has the potential to undo all of your hard work.  

Your other option is to sell this development site to another developer and you might like to put in place the DA approval first, which can often make the property more saleable.  This still has costs attached though, which you will need to meet with no guarantees that you will recoup it via a gain to the value of the property.  

You should speak to a town planner to get a good idea of what you may be up for regarding costs, and then to a qualified valuer to see what potential value you might get out of building.  Then perhaps even talk to a builder about the costs of the build so that you can establish a ballpark project cost before making any decisions.

Margaret Lomas is a best-selling author and writes and hosts the popularProperty Success With Margaret Lomas and heads up the panel on Your Money, Your Call, both on Sky News. She is the founder of Destiny.

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