Many property investors start their property development
journey with too much optimism and not much thought of the risks that come with
it. However, for you to maximise your chances of turning a good profit and
minimise threats, you need to understand the risks associated with the process!
Increased interest rates
The first risk related to property development is increased
interest rates, which in turn lead to increased holding expenses. You must
factor in the possible rate rises over the life of your property development,
especially since it may take two to four years for your project to complete and
for you to realise enough profit to refinance and pay out your development
loan. Even experienced property developers get caught out when they borrow too
much money at low-interest rates and can no longer meet their loan commitments
as rates increase substantially.
Rising construction costs
You would also need to factor in increases in construction
costs because of increases in labour and building material costs. Don’t fall
into this common trap! Do not account for set construction costs in your budget
at the start of your project without having contingency for a possible rise in
these costs that typically occur annually in the construction industry. This
could save you from borrowing more money or selling your unfinished project at
a loss.
Property market downturn
Another risk is a property market downturn because of
interest rate increases or unstable economic conditions. Remember, that
property markets move in cycles, so understand the fundamentals that drive
these booms and busts and start or finish your projects accordingly. Buy sites
during quiet times and market your project during heightened demand. Remember
that variations depend on the market supply and demand.
Disputes with builders and tradies
A risk you might also want to avoid is disputes with other
building and trade contractors, which may lead to lengthy delays and budget
blowouts. You don’t want tradespeople walking off the job halfway through, especially
since alternative builders often charge more, leaving you with little
bargaining power just so you can finish the project. It’s important to
establish good communication with your builder and tradespeople right from the
start and document everything to minimise the risk of disputes. Be diplomatic
in case of any disagreements and aim to resolve them as quickly as possible.
Changes to property laws
Changes to laws relating to property development are another
risk! This may include laws relating to restrictions on land use, zoning and
town planning, landlord and tenancy controls, environmental controls, and
taxation. Understand these laws to save you from drama in the long run. Speak
with your local council to know if there are changes in the pipeline.
Other risks include insignificant increases in property
value after renovations and town planning approval not being granted on
favourable terms! Make sure you do your homework and have an exit strategy in
place. Always look for the downside and take a pessimistic view when starting a
property development project. Test your finance ability under the worst
possible conditions and assume that interest rates will substantially rise.
Always remember – be risk-conscious than risk-averse, so you
can look to minimise them.
Property Accountants
If you want to learn more about property development, check
our blog for more info or simply give us a call and hear
it straight from the experts! We are a team of accountants who help tons of
property developers create and grow their wealth.
Your Outside Team
Need a bit of assistance with your business? Contact an Outside Accounting team member today and learn more about our fixed fees. You won’t regret it.
Aside from business consultation, we are business accountants Wellington who offer accounting, bookkeeping, payroll services designed to help you achieve greater financial success.
You can click here to speak to a business, accounting and bookkeeping firm. We will give you a call to know more about your needs. We will explain to you how we can improve your business.
Contact
Address: Level 2, 182 Vivian Street,
Te Aro, Wellington 6011, New Zealand
Mail: PO Box 24-457, Wellington 6142
Phone: 04 889 2975
