What a year 2023 has been so far for Perth property development, and what a good time it is to prepare for a big 2024. This article is a reflective piece about how to develop property successfully in Western Australia. More concisely, we will focus on what preparation activities need to be undertaken if you want to have successful property development experiences, before you start.
What I’m sharing with you is a bit of our process, and is applicable to the types of people we’ve been helping over the last year. In fact, you probably fall into one of these categories. There are lots of people getting started in property development in Perth, and I find they are falling into three categories :
- Interstate investors or developers being lured by our affordability and sunshine,
- Local investors or landlords who have inherited something or want to unlock potential on something they’ve owned for a while, now that rents and values are climbing, or
- Singles, couples or groups of working professionals looking to get into the business of property development.
All groups share one thing in common; they have never done a property development in Western Australia before, and they often come at me with the wrong questions. Can I subdivide this? Where should I subdivide? Is this property a good opportunity? How should I develop this property?
Before we start even looking at development potential of a site, or even for development sites to buy, there are bigger picture items to consider to ensure you have a successful and profitable experience. This means planning out why we are doing something, how we are going to do it, to narrow down to what type of project we are targeting. This helps be clear on what we are doing (and what we can actually do and afford), ensuring the model is repeatable, and will get you to where you want to go.
We run a process called EPIC Projects, to help people succeed in their property development journey. All the letters in EPIC stand for something, they are part of a 4 step process:
- E is for Education
- P is for Preparation
- I is for investigation
- C is for construction
Actually going and looking for sites (or determine exactly what is is we are doing with one you already own) is the third step in the process . Before that, we need to to do Preparation activities, which drive the best Strategy for you, given you particular circumstances. What does this mean? This means spending some time on three key activities:
- Tax Planning. Who cares about 200k in gross profit form an activity, if with poor tax planning GST liabilities and income tax chews up more than half of it. We spend time helping you determine the best Net tax outcome for your circumstances based on the type of activity you want ot do. That’s typically going to be develop to sell, or develop to rent. Both are distinctly different intentions in the eye of the Australian Tax Office (ATO), and both carry remarkably different tax consequences for you. Develop to sell will put you on revenue account treatment, and most instances of development to rent will put you on capital account treatment, both with completely different consequences for profit and GST treatment. It behoves us to plan for this , and set up any necessary SPV’ s ( special purpose vehicles), before you go and buy something or begin an activity, otherwise it can cost you extra stamp duty or tax later on down the track. We also spend time looking at the type of deal you want to do in isolation, and also how it fits into your overall financial freedom plan. This will help us to set up the right models for income and profit disbursement with our tax advisory partners, to achieve the best results for now and balance those with life into retirement.
- Finance. Hand in hand with the tax planning around the type of activity we want to undertake is spending time determining a project budget. This means looking at the activity intention and assessing you cash, equity and servicing position, to see what scale and type of project you can actually afford to do. We can then tick the box, make it bigger, or adjust it strategy down accordingly. This allows us to align expectations with reality, or look for ways to “fill like the gaps”, like sourcing JV partners or equity injections, ahead of time. It makes sense to sort out those problems before we go project shopping, so we know the reality of what purchase price range and target suburbs we are going to go hunting in. This is much better that instead of wasting time and energy looking at anything and everything, only to be disappointed on a real site that we work out later we can’t afford. Spending time on financial and developing a budget and strategy driven hypothetical project cash flow model allows us to assess and fill any funding holes, get pre approvals in place, restructure debt, and form a very clear project acquisition brief. This way, the hunter knows what they are looking for!
- Project modelling and Acquisition Briefing. This is the connection between the tax planning and financial planning activity. Based on the desired strategy , we prepare a hypothetical project underwriting feasibility with a cash flow summary, to facilitate discussions with lenders and the chosen tax advisory specialists. This allows us to identify funding shortfalls and potential tax problems , refine budget, set up tax vehicles, and get pre approvals in place. We use to model as a basis for off and pre market site acquisition activity, as it underpins out Site Acquisition Brief that gets issued to our network of real estate and buyers agents. They then know who you are, exactly what you can afford, that you are prequalified, and that you are ready to go. This gets you taken seriously and given priority treatment.
I don’t know too many other consultants that spend time working through these sorts of activities, helping their clients come up with smarter ways to develop their property and achieve the best net tax outcomes possible.
We are in the business of facilitating informed decision making on the basis of building the right business case for each project. We are here to create successful experiences built on appropriate strategy and project planning activities. The focus is never to pull you into our office and sell you as much built form as possible without considering the tax and finance consequences.
Get in touch and work with us to follow a tried and tested process of turning dreams into reality. You can learn more about turning your Property Development ideas in an EPIC project experience.