So, you want to be a property developer
Are you sitting a piece of land that can be subdivided, or do you want to take property investing to the next level? Ben Tutty finds out how.
9 March 2022
New Zealand has a property obsession. For Kiwis, owning our own homes means financial security, certainty, and freedom from niggly property managers.
Following that logic, a career as a property developer has to be the ultimate road to riches, right? Well, sort of.
There’s money to be made in developing property, but it’s not all supercars and capital gains.
From buying land, to getting council consent, to completing a build and selling a development – there are countless complexities to tackle before you make a single dollar.
Putting down foundations
Blair Chappell knows a thing or two about making dollars developing property.
He’s one of two managing directors at Williams Corporation, which has become the fifth largest residential developer in the country* after just nine years of trading.
He says his company sprang from humble beginnings.
“We took a loan out from a contractor friend of ours, bought a $65,000 section in a low-decile area in Christchurch and built
a spec home. We needed capital so we offered our friend a profit share to secure the loan.”
That was the first and last profit share Blair and business partner Matthew Horncastle ever needed, but it built the foundations for what Williams Corp is today.
Just like Chappell, if you want to develop property, starting with something manageable is a good idea.
“Small scale and simple is better at first. Buy a property with a big section and build one house on the back, or subdivide and build a house on the back of a section you already own,” Chappell said.
“This will give you a taste of what it’s really like to develop property. You’ll get a feel for the process of financing, contracts, consenting, subdividing, marketing and selling.”
After a long, arduous and time-consuming process that could take over two years, you should also be prepared to barely break even – or even lose money. After all, property development is a high-risk game and the learning curve is steep.
Build a team then build an empire
Building a home from scratch and selling it is a big job, to put it lightly. Ian Laywood, Director of Property Finance NZ, one of New Zealand’s leading independent property finance specialists, says you need to build a good team and strong relationships before you lay a single brick.
“It’s vital that you have a strong relationship with your builder. If that doesn’t work, it’ll end up in tears, no matter what.
“Make sure you get good references and have a thorough look at what the builder’s done in the past. Talk to people they’ve worked with previously to find out what they’re like. Don’t be scared to get a few prices.”
Equally as important is finance, he says.
“Talk to your bank but don’t be frightened of the non-bank lending market. Banks are very strict and may require you to cover as much as 1.2 x of your debt in pre-sales.”
You’ll also need an architect, a good tax accountant, a geotech surveyor, a valuer, a lawyer, and possibly a real estate agent. Better get out the phonebook.
Does it all add up?
Before you apply for finance, you’ve got a few sums to do. Lenders like certainty – they need to know how much your development is going to cost to build and how much you’re going to sell it for, to make sure they’ll get their money back, says Laywood.
“The lender likes to see a clear path towards a finished development. They want a good understanding of expenses in a solid building contract, preferably with 80 per cent of costs locked in,” he says.
“Often, Prime Cost sums or PC sums (variable, non-fixed costs) make up 40 per cent of a contract and the end price can be all over the place.”
The bank will also want to see that you’ve got a good margin on your development. Ian says a 25 per cent margin is a good place to start, and that you’ll most likely whittle that down to 18 per cent by the time you’re finished.
Once you’ve done the sums on a project, you might find that it costs too much and making a profit may be difficult. If this happens, it’s important to move on to the next one instead of risking it.
Another thing you’ll have to consider is that you may have to cover a lot of expenses before you sell a single home, says Ollie, an Auckland IT account director who’s building his first development on the back of his investment property’s section.
“The time between paying for everything and actually getting paid can be one to three years. And if you’re not careful, you could get $100,000 down the line and realise that what you’re doing is not going to be profitable and you’ll have to swallow the loss.”
He also says that the current market is a big reason why he was able to do what he’s doing.
“If property prices weren’t going crazy like they are, I wouldn’t have got finance approval. You need a good chunk of equity or cash to convince lenders and this market makes getting that a lot easier.”
Still want to be a developer?
Property development can be a money-maker, but it’s far from a get-rich
scheme. Chappell says he absolutely loves what he does, but there’s no denying it’s a fulltime job:
“It can be a long, slow, repetitive cycle of paperwork. It’s not glamorous. There are a lot of moving parts and there isn’t a huge margin for error.”
As well as being repetitive, the way that you get paid with property development can make living tricky.
“There’s a lag between paying for things and getting paid, so you have to figure out a way to fund your lifestyle in that gap.”
You only have to look at New Zealand’s rich list to see that property development is lucrative.
But for every Chappell, Horncastle and Ollie, there are thousands of would-be developers who’ve tried their hand and either lost money or filed property development in the ‘too-hard basket’.
It’s not for everyone and it certainly isn’t easy. But if you’ve got the capital, the dedication and the uncompromising attention to detail it needs, property development could be a great way to earn a dollar while helping solve one of this generations most pressing problems – the housing shortage.
*Based on number of consents issued.
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