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Moving Up To Becoming A Property Developer
Whenever the term “developer” is mentioned in Singapore, we think about Capitaland, City Developments Limited, Far East Organisation, etc. But the activities of buying land, building properties on it, and selling the property is not limited to billion dollar companies that does this for a living. You can actually become a developer yourself. As these can be a highly risky form of investment, it is not for the faint-hearted and those who are risk-adverse.
Investors who develop buy property with the full intention of erecting properties and either hold onto it or resell it. It could involve activities as simple renovating a place, dividing up land or building multiple units buildings for public sales. As the investment risk is considerable, the key to success lies on the ability to build and sell within as fast a time frame as possible. The longer the time frame stretches, the riskier your investment becomes. It has to also be within budget to be profitable as well.
Developing property is definitely not remotely close to the ease of just buying and selling properties. Because of the expertise involved, not many investors take on this route of investment. This also leaves a chance for you to get into an area where there are far less investors competition. Some of the additional responsibilities you have to take up include:
- Dealing with the authorities like URA, SLA, LTA, BCA, etc.
- Attending to those who are against your development plans.
- Working with architects on what you want and what is feasible.
- Sourcing for builders, contractors and sub-contractors.
- Planning and working within your budget.
- Getting finance for development and getting working capital for operational expenses.
- Coordinating with all parties to complete the project in a timely manner.
- Marketing and sales of your property.
As you can see, it is definitely not an ideal investment for first time and inexperienced investors. If you are a rookie to developing properties, you should certainly hire or work with a partner that has experience. In a common property transaction, all you have to deal with is the buyer or seller or real estate agent. But when it comes to being a property developer, you are dealing with profit-driven entities (except the government autohrities) that are out to maximize their profits.
For example, the air-conditioning contractor may suddenly tell you that they are no longer able to give you what you requested at the price previously agreed upon. You will now have to settle for a system of lesser quality or cough up more money. Another contractor might then inform you that the shipment of tiles you wanted came in the wrong design. Ordering a new shipment may take up to a month to reach Singapore. You cannot wait that long as a lot of works are dependent on the tiles being put up first. It is a tough job to undertake.
For a property investor inexperienced at development, it is best to start off small and slowly work your way up to bigger projects. You can buy a block and build extensions. Then start having a hand in townhouse multi-unit developments. With more experience, you will then move onto building size projects.
Then consider your options of either holding onto it or selling it. There is a whole checklist of costs that you will incur on selling it. This will eat into your margin like a cookie monster. A lot of newbies make a loss from developing as they fail to see the closing costs of selling. When your forecast margin is 25% and end up with 10% after closing costs, you have to really ask yourself whether all the time, effort and risks were worth it.
A very limited number of people can live off property development full time. It take a lot of time for a deal to go full circle assuming you are selling it. This also means that the cash flow cycle is extremely prolonged. By the end of 1 cycle, you could be too exhausted to start all over again.
You will also have to avoid the common mistakes made when developing properties:
- Paying too high a price of land.
- Costs miscalculation by missing out on small factors that add up.
- Not enough cash to withstand unanticipated setbacks.
- Building at the wrong time in the property market cycle.
Before getting your feet wet into development, do an analysis of how much risks you are willing to take on. Then think about how to build your team with experienced players. Follow that up by ascertaining how much cash and leverage you have access to. Although property development can reap great rewards, failure can take you down fairly quickly as well.