23 Aug The 3 Costly Mistake Most People Make When Starting Property Developments
The 3 Costly Mistakes Most People Make When Starting Property Developments
A new investor hears about stories of real estate market. It says people make six figure incomes in a short period of time. They do not know the risks involved in property development.
Trent Giumelli of Giumelli Group has 18 years of experience in the field. He has seen highs and lows of the market. He has been into all kinds of property dealings. To name a few –Negative Gearing, Flipping and Renovation.He has lot of stories to tell the newbie about investment decision. Decisions that made people lose lots of money. One wrong property deal turns dreams into nightmare.
High risk gives high returns. This is true for property market too. But this is not a gambling bet. Simple rules followed by new investors save money for them. If the investor opts for bank loan, bank checks for credit score. In some cases, investor could go bankrupt if property deal turns bad.
Before learning about the mistakes to avoid, understand few basic simple rules.
- Have realistic expectations
Do not hope for overnight success in property project. Even seasoned investor spend good amount of time to find good places.
- Do your research
Google search about the property. Also about people associated with development. Do everything you can, to arrive make good investment decision.
- Don’t get emotional
It is okay to have renovation ideas about the duplex project. But hold your horses; your buyer needs to accept it too. Leave some scope for changes for the end user.
- Discipline is the key to success
Don’t be eager to invest.A project has possibilities of risks. Experienced mentoring staff sees these risks. They will tell you to walk away from the project. Follow this kind of advice.
#1 Mistake by new investor – Failing to get in touch with people who have great advice
A new investor is confident about investing in a property development project. They do not conduct enough research. Makes rough estimate of time and resources required. Low risk projects are a good way to succeed in this market.
Experienced mentorsprovide honest and up-front advice. Valuable advice at the start of project saves thousands of dollars on small projects. New investor fails to seek such advice.
A development project or a renovation project needs right approach. Saving cost by not consulting an expert will result into mayhem later. New investors have no idea about structural, electrical and plumbing requirements.
Consider the following 2 scenarios of investment decision:
Scenario 1 — New investor attends a course about small property development project. He thinks he has acquired enough knowledge to get started. He arranges the cash. Makes estimate of project completion time.
Failing to consult a design expert — He invests $50000 dollars in the project. He realizes design mistakes after few months of work. This results into $5000 gone into wrong way of development work. This is an unexpected expense. The risk of 10% loss because investor wanted to save consultation cost.
Scenario 2 — New investor consults a design expert. The design expert studies structure of existing project. Shows two new ways of development on paper first. One layout shows $5000 dollars work. Other layout shows same work costing $400 dollars, if done in another way.
Here the investor saves $4600 to provide better features in bedroom space. Or invest this amount in leveraging the garden space.
The expert will also guide about risk mitigation strategies. Consultation fees would appear small for this valuable insight. Expert has learned them from years of research and work on the field.
#2 Mistake by new investor – Failing to get simple math, right builder = right development
You want to invest in a property project. Next step, you approach a bank for loan. Bank makes a detailed credit check enquiry. Gathers the required income proof and property related documents.Bank does this in depth verification before lending any money.
New investor fails to make this kind of in depth verification. They choose builder based on their instinct. This will lead to reduced profit margin. May cause delay in time needed for project completion.
Some basic questions to ask for correct builder selection:
- Does builder have experience with this kind of project?
- How many projects he has developed earlier?
- Does he have enough turnovers to deliver a profitable project?
- If the builder is new, then what kind of people or resources he has for successful project completion?
If the builder keeps you in dark about the type of materials he will use. Or the builder has a history of delayed fees payment on previous project. In that case, take legal advice or stay away from the builder.
For your project to turn profitable, it must be completed on time. Visit previous sites developed by the builder. Read reviews or meet in person with previous clients of the builder.
#3 Mistake by new investor — Forget to count the overhead cost in overall project cost
Property development requires research on accurate cost estimate of project completion.
Small property projects involve inclusion of overhead cost in total project cost.
- New investors conduct optimistic project cost estimates. They only consider the built up cost. They visit the project sight. Check the locality around it. Do not understand structural issues. Do not spend on inspection to check pest issues. They are unaware about town planning.
- They do not consider effects of infrastructure development nearby.Discounting theseoverheads reduces the profit margin. Cost estimates take a plunge of 15-16 %. For example, if a project estimated profit value of 35%. After reducing overhead cost it comes down to 19%.
- Bank requires the project to provide a return of at least 16-17 %. 20% should be the investor’s profit margin target. Delay in completion by builder also reduces profit margin.
- It is important to identify the possibilities of risks and arrive at a minimum 25% return rate. Experts at Giumelli Group conduct feasibility studies which ensure this profit percentage.
New investor should learn from the mentor. This will help to avoid above mistakes. An informed investor is sure to make wealth from real estate market.