How Property Development Is Not As Easy As It Sounds
?? HOW IT’S HARD to #profit from #property #development. Imagine the following scenario: ⬇️
Land purchase price (assuming triplex build is allowed): $200,000
Stamp duty, etc 5%: $10,000
Demolition: $20,000
Subdivision: $60,000
LVR: 80%
Interest rate: 4%
Holding cost up to 24 months (including build): $12,800
TOTAL INITIAL COST: $302,800
Triplex build cost turn-key: $550,000
TOTAL PROJECT: $852,800
Projected selling per unit: $400,000
GST per unit: $40,000
Revenue after GST: $1,080,000
Selling agent fee of 3 units: $30,000
PROFIT: $197,200
Wow….that is excellent…that’s $197,200 profit in 24 months…not bad… well, the problem is, if you can buy a land big enough for triplex build for $200,000, most likely it won’t be in the “up” area. Thus, the projected selling of $400,000 is rather incorrect.
If we change the figure to $350,000, it suddenly becomes $62,200 profit. And the above numbers have not considered further holding costs should the developer hold it for longer.
And from the data we have seen, those units can’t actually sell for $350,000 in this current market in this type of suburb. Imagine if you can only sell it for $275,000…it will be a huge loss.
What if you hold it? Well, probably you can rent it out for $300/week, and this is probably the best strategy you can do for now rather than selling it for a loss.
The moral of the story is, in the rising market, property development can give you a lot of profit simply because property price will keep going up. However, in the downturn market, it is risky because you might not be able to sell it for the price you are looking for.
