It's a very common perception that Property Developers are all greedy (ahem) whose only goal is to jam as many dwellings or blocks of land as possible on a development site.
And let's get real here - many Property Developers do exactly that. But I would suggest that the smart Property Developers apply the principle of "Highest and Best Use" to their development sites, and get better results.
Not sure what I'm talking about? Let me explain!
Now, don't get me wrong here. I am in no way suggesting it's not okay to make money as a Property Developer. In fact, I highly encourage it! You won't be in business very long if you're always losing money.
What I am suggesting, though, is to break the connection in your mind between the idea that making the most money from a development always comes as a result of creating as many little boxes as you can on a site. And by boxes, I mean either dwellings or land lots.
You might even be surprised to learn that there are plenty of occasions when creating the most boxes actually doesn't make the best profit.
And that's what highest and best use is all about. You need to look at your development site and get creative. How many different outcomes can you come up with?
Let's start with a really simple example - a house on a suburban block. Based on your extensive knowledge as an Area Expert, you know that the Council will most likely allow you to build 3 separate units on a site that size.
Now, being a bit cheeky, and with your "as many little boxes as possible" hat on, you might try to push that to 4 units. Or maybe a 3-storey terrace with 5 units in it and garages underneath. Hey, you might even get it through Council!
But let's take a step back and think about other possibilities. Here's a few to get you started:
I could go on for a while! The point is, almost every site has the ability to be developed in multiple ways. And each one will give you a different outcome in terms of profitability.
Where Do You Start?
Numbers, numbers, numbers. Get good at development feasibility spreadsheets Then, when you find a development site, do multiple feasibilities based on different scenarios.
To begin with, you might feel like you're doing a whole lot of work without really understanding why. But as you progress, you'll start to see clearly that some strategies have much better outcomes than others.
And you'll be surprised to find how often those best outcomes aren't the ones based on stuffing the site with as many little boxes as possible!
Demographics
While the numbers are critical, knowing your market is also really important. This is particularly true if you have a couple of strategies which appear to have similar results.
Going back to my earlier example, your feasibilities might show that renovating and flipping the house has a similar percentage return to dividing the site in two and building large dwellings on each lot.
That's when you need to know what the market wants. There are some demographics, for example, who prefer to buy new product rather than renovated. So while the numbers may be similar, you might find that it takes you a lot longer to shift the renovated house, whereas the new product will fly out the door.
Time
Having said that, I'm now going to mess with your head and talk about the time element of a deal, and the example I'm using illustrates this perfectly.
How long is the deal going to take? This is a really important question to answer, as too often developers compare ROI on two projects as a flat percentage for the deal. But in reality, if one deal takes 6 months and the other one takes 2 years, then making 20% in 6 months is a much better return than making it in 2 years.
Confused? Think about it this way. If you can make a 20% return for each 6 month deal, then in 2 years you've effectively made an 80% return, as you'll have done 4 deals instead of just one. You should always annualise the percentage profit to truly compare apples with oranges.
You
Based on that last section, you might now think that the solution is to forget development as a strategy and start doing reno flips. And for some people that might be the path they take.
But the final piece of the puzzle is you and your circumstances. Continuing with the same example, the fact is that renovations are generally quite time intensive. You don't necessarily have to do the work yourself, but you do need to organise other people to do it, which can chew up a lot of time.
If you're going to knock the house down and build two, most of the work is done by other people. Town planners first, then the builder you choose. Sure, you still have to put time into the deal to make it happen, but it's much easier to manage. So you can manage it while still having a job, or using your time to find more deals.
And you know me - I'm all about finding ways to scale your business and increase your profits, rather than just buying yourself a job.
You also need to think about what resources you have, what experience you have, and whether or not you've built up a team of experts who can help guide you through the development process to completion.
Bottom line, numbers are important in order to determine "Highest and Best Use”, but it's about more than that. What works best for the local market? What works best for you? The answer isn't always quantity, so learning how to determine which strategy delivers it best is vital.
And let's get real here - many Property Developers do exactly that. But I would suggest that the smart Property Developers apply the principle of "Highest and Best Use" to their development sites, and get better results.
Not sure what I'm talking about? Let me explain!
Now, don't get me wrong here. I am in no way suggesting it's not okay to make money as a Property Developer. In fact, I highly encourage it! You won't be in business very long if you're always losing money.
What I am suggesting, though, is to break the connection in your mind between the idea that making the most money from a development always comes as a result of creating as many little boxes as you can on a site. And by boxes, I mean either dwellings or land lots.
You might even be surprised to learn that there are plenty of occasions when creating the most boxes actually doesn't make the best profit.
And that's what highest and best use is all about. You need to look at your development site and get creative. How many different outcomes can you come up with?
Let's start with a really simple example - a house on a suburban block. Based on your extensive knowledge as an Area Expert, you know that the Council will most likely allow you to build 3 separate units on a site that size.
Now, being a bit cheeky, and with your "as many little boxes as possible" hat on, you might try to push that to 4 units. Or maybe a 3-storey terrace with 5 units in it and garages underneath. Hey, you might even get it through Council!But let's take a step back and think about other possibilities. Here's a few to get you started:
- Renovate the house and flip it
- Keep the house and subdivide the backyard, selling it as land or building a unit there to sell
- Split the site into 2 lots and build a big dwelling on each one
- Find out if any neighbours are also interested in selling and consolidating sites
I could go on for a while! The point is, almost every site has the ability to be developed in multiple ways. And each one will give you a different outcome in terms of profitability.
Where Do You Start?
Numbers, numbers, numbers. Get good at development feasibility spreadsheets Then, when you find a development site, do multiple feasibilities based on different scenarios.
To begin with, you might feel like you're doing a whole lot of work without really understanding why. But as you progress, you'll start to see clearly that some strategies have much better outcomes than others.
And you'll be surprised to find how often those best outcomes aren't the ones based on stuffing the site with as many little boxes as possible!
Demographics
While the numbers are critical, knowing your market is also really important. This is particularly true if you have a couple of strategies which appear to have similar results.
Going back to my earlier example, your feasibilities might show that renovating and flipping the house has a similar percentage return to dividing the site in two and building large dwellings on each lot.
That's when you need to know what the market wants. There are some demographics, for example, who prefer to buy new product rather than renovated. So while the numbers may be similar, you might find that it takes you a lot longer to shift the renovated house, whereas the new product will fly out the door.
Time
Having said that, I'm now going to mess with your head and talk about the time element of a deal, and the example I'm using illustrates this perfectly.
How long is the deal going to take? This is a really important question to answer, as too often developers compare ROI on two projects as a flat percentage for the deal. But in reality, if one deal takes 6 months and the other one takes 2 years, then making 20% in 6 months is a much better return than making it in 2 years.
Confused? Think about it this way. If you can make a 20% return for each 6 month deal, then in 2 years you've effectively made an 80% return, as you'll have done 4 deals instead of just one. You should always annualise the percentage profit to truly compare apples with oranges.
You
Based on that last section, you might now think that the solution is to forget development as a strategy and start doing reno flips. And for some people that might be the path they take.
But the final piece of the puzzle is you and your circumstances. Continuing with the same example, the fact is that renovations are generally quite time intensive. You don't necessarily have to do the work yourself, but you do need to organise other people to do it, which can chew up a lot of time.
If you're going to knock the house down and build two, most of the work is done by other people. Town planners first, then the builder you choose. Sure, you still have to put time into the deal to make it happen, but it's much easier to manage. So you can manage it while still having a job, or using your time to find more deals.
And you know me - I'm all about finding ways to scale your business and increase your profits, rather than just buying yourself a job.
You also need to think about what resources you have, what experience you have, and whether or not you've built up a team of experts who can help guide you through the development process to completion.
Bottom line, numbers are important in order to determine "Highest and Best Use”, but it's about more than that. What works best for the local market? What works best for you? The answer isn't always quantity, so learning how to determine which strategy delivers it best is vital.
