Housing affordability. Although it might seem like a hot topic, the fact is it's an issue that's been around for years and isn't going away any time soon.
Countless commentators have written countless paragraphs on the topic, all with their own pet theory about why housing affordability is such a problem and how to fix it.
Despite all this commentary, the subject of taxes and fees is rarely mentioned. You get the occasional expert blaming the whole situation on negative gearing, demanding it be removed immediately, but that's about all.
And yet my own research suggests that taxes and fees are a huge hidden cost in Property Development, adding up to as much as 25% of the costs. This is one of the most overlooked aspects of property development feasibility in Australia.
25%! Just stop and think about that for a moment. I have, and believe me, I've done more than a few "Rob Rants" as a result. And there are plenty of analysts who put that figure a lot higher.
Don't believe me?
I keep a list, and by my last count most projects will include between 25 and 30 "hidden" fees and taxes. I say "hidden", because they're right there on the page in front of you when you do your feasibility. It's more that we don't stop and notice they're there.
So let's take the time to stop and pay attention to these little "gotchas" that are everywhere in your feasibility, gobbling up your cash.
Stamp Duty
This is one tax that definitely isn't hidden. In fact in some states, it's more than painfully obvious. As house prices rise it gets even more painful.
And while as Developers we're well aware of paying it when we buy the property initially, remember that the ultimate buyer also has to pay stamp duty. So as a tax, it affects affordability twice. Stamp duty is one of the largest upfront property development costs and directly impacts buyer demand.
Remember, too, that if you're classed as a foreign buyer by the FIRB (Foreign Investment Review Board), you will pay an additional levy on top of regular stamp duty. So you get to pay more!
Mortgages
Once you've secured a development property, it's time to finance. And all those little fees start sneaking out of their hiding places and adding to your costs. Finance costs in property development can significantly impact overall project profitability.
Depending on what type of finance you need to secure, those fees might take a small nibble (major bank finance) through to a whopping big chunk (private lenders).
Over the course of your project, those fees can really add up. Here are some common ones:
So while mortgage documents are generally quite long and boring, it pays to make sure you've thoroughly reviewed all the paperwork and unearthed all the fees that might be lurking within. Those early repayment/break fees can be particularly painful for Property Developers.
Council
Ah, your local council - they love Developers as a revenue source. I swear they have a department completely devoted to finding new ways to charge Developers fees.
Now, I'm not suggesting that their services should be free. If they've done some work that is needed for your project, fair enough. They just seem to have so many rules requiring things to be done which they can charge you for.
Here's a few to be getting on with:
Makes me wonder how councils that do their best to block new development survive, given how much money most councils make from Developers.
Authority Connections
Ah, another round of pocket emptying development activities - getting connected to all the major services.
Now let's be fair here. Some of these authorities do have to put in quite a bit of work when they connect your new project to their service. But there are some that I swear see a Developer coming, spin an imaginary wheel in their heads and come up with an outrageous fee.
So be prepared to open your wallet when you reach the connection stage of your development project. Also make sure you put in your requests early enough. Despite the large fees often involved, wait time for some of these services to actual complete the connection can be as long as 6 months (I'm looking at you, NBN!!).
Land Tax
And while everything else is going on with your project, remember you're also going to pay land tax annually. Even better, the rate is higher for Property Developers in a number of states. Lucky us! Land tax is an ongoing holding cost that must be factored into development feasibility calculations.
GST
I've left the "best" for last. If you've listened to enough of my material, then you'll have heard me talk about GST and in particular the GST margin scheme.
If you haven't, then I suggest you talk to your accountant about this urgently, as it can have a huge impact on cashflow during the course of your development. Understanding GST in property development is critical for managing cashflow and maximising profit.
I've listed plenty of fees and charges already, and what's even more exciting is that they almost always include GST. So you might have been invoiced $5,000 for the work that was done, but in fact you pay $5,500 once 10% GST has been added.
Some days it feels like you get charged GST just for scratching your backside. That's why the GST margin scheme is so important, as you can potentially claw some of that back on a regular basis throughout the development project. Like I said, book a meeting with your accountant and get clear on how to do things properly.
If you want to better understand how these costs impact your deals, our Property Development Formula course covers feasibility, GST and cashflow step-by-step,
I've done my best not to turn this into a "Rob Rant", but I suspect I probably have! The thing is, unless we pay attention to all the taxes and charges being paid during a project, it's easy to miss just how big a percentage of the final sale price they gobble up.
So next time somebody starts on about housing affordability and how it's all the fault of greedy Developers charging too much, show them this article. It might not change their mind completely, but at least they'll have a better appreciation of the taxes and fees Developers pay before we even start to have a chance of making a profit.
Countless commentators have written countless paragraphs on the topic, all with their own pet theory about why housing affordability is such a problem and how to fix it.
Despite all this commentary, the subject of taxes and fees is rarely mentioned. You get the occasional expert blaming the whole situation on negative gearing, demanding it be removed immediately, but that's about all.
And yet my own research suggests that taxes and fees are a huge hidden cost in Property Development, adding up to as much as 25% of the costs. This is one of the most overlooked aspects of property development feasibility in Australia.
25%! Just stop and think about that for a moment. I have, and believe me, I've done more than a few "Rob Rants" as a result. And there are plenty of analysts who put that figure a lot higher.
Don't believe me?
I keep a list, and by my last count most projects will include between 25 and 30 "hidden" fees and taxes. I say "hidden", because they're right there on the page in front of you when you do your feasibility. It's more that we don't stop and notice they're there.
So let's take the time to stop and pay attention to these little "gotchas" that are everywhere in your feasibility, gobbling up your cash.
Stamp Duty
This is one tax that definitely isn't hidden. In fact in some states, it's more than painfully obvious. As house prices rise it gets even more painful.
And while as Developers we're well aware of paying it when we buy the property initially, remember that the ultimate buyer also has to pay stamp duty. So as a tax, it affects affordability twice. Stamp duty is one of the largest upfront property development costs and directly impacts buyer demand.
Remember, too, that if you're classed as a foreign buyer by the FIRB (Foreign Investment Review Board), you will pay an additional levy on top of regular stamp duty. So you get to pay more!
Mortgages
Once you've secured a development property, it's time to finance. And all those little fees start sneaking out of their hiding places and adding to your costs. Finance costs in property development can significantly impact overall project profitability.
Depending on what type of finance you need to secure, those fees might take a small nibble (major bank finance) through to a whopping big chunk (private lenders).
Over the course of your project, those fees can really add up. Here are some common ones:
- Application / loan establishment fees
- Valuation fees
- Lender's legal fees
- Settlement fee
- Monthly loan fees
- Annual package fees
- Discharge fees
- Early repayment fee / Break fees
- Redraw fees
- Default fees
So while mortgage documents are generally quite long and boring, it pays to make sure you've thoroughly reviewed all the paperwork and unearthed all the fees that might be lurking within. Those early repayment/break fees can be particularly painful for Property Developers.
Council
Ah, your local council - they love Developers as a revenue source. I swear they have a department completely devoted to finding new ways to charge Developers fees.
Now, I'm not suggesting that their services should be free. If they've done some work that is needed for your project, fair enough. They just seem to have so many rules requiring things to be done which they can charge you for.
Here's a few to be getting on with:
- Building application and approval fees
- Rates (often higher for Developers)
- Council contributions / infrastructure fees
- Operation works applications and approval fees
- Plan sealing fees
- Building inspection fees (up to 15 inspections for a build)
- Titling and easement fees
- Environmental levies
Makes me wonder how councils that do their best to block new development survive, given how much money most councils make from Developers.
Authority Connections
Ah, another round of pocket emptying development activities - getting connected to all the major services.
Now let's be fair here. Some of these authorities do have to put in quite a bit of work when they connect your new project to their service. But there are some that I swear see a Developer coming, spin an imaginary wheel in their heads and come up with an outrageous fee.
So be prepared to open your wallet when you reach the connection stage of your development project. Also make sure you put in your requests early enough. Despite the large fees often involved, wait time for some of these services to actual complete the connection can be as long as 6 months (I'm looking at you, NBN!!).
- Water/Sewer authorities via headworks/connection fees
- Telstra / NBN connection fees
- Electricity application, connection and approval fees
- Gas application, connection and approval fees
- Bonds for larger works to Council/water authorities to guarantee workmanship
Land Tax
And while everything else is going on with your project, remember you're also going to pay land tax annually. Even better, the rate is higher for Property Developers in a number of states. Lucky us! Land tax is an ongoing holding cost that must be factored into development feasibility calculations.
GST
I've left the "best" for last. If you've listened to enough of my material, then you'll have heard me talk about GST and in particular the GST margin scheme.
If you haven't, then I suggest you talk to your accountant about this urgently, as it can have a huge impact on cashflow during the course of your development. Understanding GST in property development is critical for managing cashflow and maximising profit.
I've listed plenty of fees and charges already, and what's even more exciting is that they almost always include GST. So you might have been invoiced $5,000 for the work that was done, but in fact you pay $5,500 once 10% GST has been added.
Some days it feels like you get charged GST just for scratching your backside. That's why the GST margin scheme is so important, as you can potentially claw some of that back on a regular basis throughout the development project. Like I said, book a meeting with your accountant and get clear on how to do things properly.
If you want to better understand how these costs impact your deals, our Property Development Formula course covers feasibility, GST and cashflow step-by-step,
I've done my best not to turn this into a "Rob Rant", but I suspect I probably have! The thing is, unless we pay attention to all the taxes and charges being paid during a project, it's easy to miss just how big a percentage of the final sale price they gobble up.
So next time somebody starts on about housing affordability and how it's all the fault of greedy Developers charging too much, show them this article. It might not change their mind completely, but at least they'll have a better appreciation of the taxes and fees Developers pay before we even start to have a chance of making a profit.
