3 traps for small property developers to avoid

The recovery of the Perth property market after the Global Financial Crisis (GFC) has been great for a lot of people, but it may be filling others with a false sense of security. The GFC reset the market to a point where some thought it would never recover, but now Perth median prices are at an all-time record high.

Many investors look at the current market and want to “get in before it’s too late.” They see a healthy market and feel like it is a licence to print money. However, much of the market’s current health has more to do with record low interest rates than the overall economy.

While there is still plenty of money to be made, you still have to be careful not to fall into some of the traps at this stage of the market. I see the market for investment property in Perth as entering the end of the “growth” phase, with the outer suburbs seeing the most growth in the coming year.

Here are three traps that even a seasoned investor can fall into if they aren’t careful.

Failure to develop straight away
In 2007, at the end of the last property cycle, I bought an investment property in Ipswich QLD. I didn’t have the funds to start the development immediately, but the numbers stacked up at the time I bought it. So, I decided that I could wait and develop it later when I had the money to see it through.

Within one year, everything had changed. The council had increased contribution costs significantly. The GFC destroyed the market and then the floods set the whole market further back because even if my property wasn’t flooded the sentiment was at an all time low. Being an older property, with a lower rental return it was costing me $12,000 a year to hold, so I had to make the difficult decision to “cut my losses”, selling it at a $70,000 loss.

You could argue that I had really bad luck and I purchased it at the wrong time. What I do know is that the longer you wait to develop a property, the greater the risk the market or other factors can change to negatively affect you.

All investors make mistakes, but they can be the best learning lessons. This experience taught me that you should never buy a property based on its development potential unless you can develop it straight away.

If you plan on developing a property, make sure that you have the resources to do it immediately and make sure that the regulations set forth by the local council allow for subdivision and development now.

Failure to create sufficient returns
It is tempting at this stage of the market when the competition is hot for development sites, to pay that little bit extra to secure a property.

Don't fall into that trap because if the market goes backwards in the coming years, you need to the extra return to insulate you.

If you plan on subdividing or developing a duplex house behind house, I recommend that you generate a minimum gross return of 15% of total expenses (property, purchase, subdivision, building, sale costs) and that you aim for closer to 20%. If you are going to develop apartments, we recommend a minimum gross return of 25%.

Failure to budget for interest rate increases
Interest rates were lowered to stimulate the market. A healthy market means that they will eventually rise again. Make sure that you have budgeted a projected rise in rates so that you will be able to afford to keep your properties when the rates increase.

Don’t do it all by yourself
The market is just too tricky to navigate on your own. Some will succeed, but some will fail. Hire an investment property professional.

About Jarrad Mahon

Jarrad is the director of Investors Edge Real Estate.

Jarrad thrives on helping hundreds of investors every year formulate a clear plan to get the best returns from their Perth property. This requires a carefully thought out and innovative approach to understand your situation and help you to make the right move at the right time.

His renowned personalised "Property Success Plan" takes you step by step through how to make thousands of extra dollars and avoid the costly mistakes that Jarrad has learnt the hard way by investing himself all around Australia.

Over the last five years he has used his engineering background to build and refine a unique property management, sales & investing process that is sure to impress while getting you real results.

A sales and marketing expert, Jarrad combines the latest technology and cutting edge sales strategies to sell homes across the whole of Perth metro area.