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Maximising Development Returns

An investor with a completed development on their hands must move decisively to ensure gains from the project. In the final instalment in NZ Property Investor’s four-part guide to development, Miriam Bell explores selling options.

By: Miriam Bell

1 May 2016

Completion of a development is always an exhilarating feeling. Even for seasoned developers seeing the end product of all their hard work is equal parts elation and relief.

Once the sensation of heady triumph settles, it is time to embark on the final stage of the project. This is the point at which an investor gets to see returns on the fruits of their labour, whether it be via holding to rent or selling.

Given ongoing supply shortages, particularly in Auckland, the maxim ‘build it and they will come’ certainly applies in the current housing market. However, with each option, there are tactics that can be used to maximise returns and get the most out of your investment.

On finishing a development an investor has two options: They can either sell for immediate profit and increased cash flow, or hold to benefit from rental returns and capital growth. An investor should have made this decision before embarking on the development, but it is worth exploring both options here.

Weighing Pros, Cons

For prominent Auckland investor David Whitburn both strategies have pros and cons. Developing to hold is a long-term strategy, so an investor should be prepared to wait it out, he says. Holding allows you to build equity, as well as benefit from both cash flow performance and capital growth.

There are also tax benefits to holding newly developed properties. For example, no income tax can be levied on you from them, Whitburn says. “This is because you are holding the property on capital account to earn long-term rental income. Further, no GST is levied on the eventual sale as you don't have a taxable activity. Also, you can realise depreciation on a lot of chattels and nonstructural fit-out items in new builds.”

Developing to sell means it is necessary to pay income tax on profits and GST. It is also far more risky, he says. “This means you need to know what you are doing and thorough risk management is critical.”

Planning Ahead

In reality, most investors who develop tend to opt for a hold and rent strategy. This is because the majority carry out smaller scale brownfield developments which are designed to add value to and generate increased income from properties they already own.

Taranaki investor Lois Goodman, who has completed two small developments, is a good example. Both her developments were prompted by the purchase of large sections, with clear potential for subdivision.

“With our first development, we paid $90,000 for the property 12 years ago. After spending approximately $300,000 – which included purchasing the neighbours backyard to add to the property – we ended up with three dwellings which return a rental income of nearly $900 a week.”

Goodman says cash flow and rental returns have always driven her overall strategy. “Being able to add substantial value to existing properties, and create extra rental streams in the process, mean holding the properties we have developed was best for the growth of our wider portfolio, and for our future retirement funds.”

Realestate.co.nz property management specialist Vesna Wells agrees with Goodman’s reasoning. She has just completed her first development project and says she is in it for the long haul.

“It is all about the long term strategy, not short term gain. With our development, we have built two more solid investment properties that will help to provide us with the income we will need when we retire. They will deliver capital growth and solid rental returns and, as such, are part of our plan for the future.”

Hold And Rent Options

Investors who choose to hold and rent need to think about the practicalities of managing their investment. To maximise their returns they need good tenants, limited vacancy periods, a healthy rental income and a well maintained property.

It is all about the long term strategy, not short term gain. With our development, we have built two more solid investment properties that will help to provide us with the income we will need when we retire. - Vesna Wells

In property management, two main options are available: taking a do-it-yourself approach or employing a professional property manager. Another possibility is to contract a letting agent for the tenanting process and then adopt a DIY approach.

An investor should consider their physical proximity to the property; how much time they can devote to managing the property; whether they have the necessary resources and relevant knowledge; how objective they can be if trouble strikes; and whether it will save or cost them money.

For Goodman, who has a portfolio of 10 properties, it’s a no-brainer. She does all her property management herself. It does take time and a lot of work, she says. “But I simply don’t believe anyone else would look after my properties to the same level that I do,” Goodman says. “Also, for me, it works out financially.”

All her properties are, however, sited in the region in which she lives. Able to count on nearly 30 years of hands-on experience, she understands her legal requirements and responsibilities.

Choosing DIY

Independent Property Managers Association (IPMA) president Karen Withers says carrying out effective property management requires knowledge and expertise that most landlords, particularly those starting out, don’t have.

However, she has much advice for those undertaking to manage their properties themselves. Her number one tip, which applies to all landlords whether they are managing their property themselves or not, is to get comprehensive insurance, including landlord cover. Understand your insurance policy inside-out, she says.

“The reason for this is that different insurance companies and policy have different standards and requirements when it comes to rental properties,” Withers says. “For example, some policies require three-monthly property inspections while others require six monthly visits. So make sure you know what the requirements of your policy are and what exactly you have signed up to. Your insurance policy will impact on a range of the tasks you have to carry out – including tenant selection and rent collection.”

Tenant selection is also critical. Withers says it is necessary to do comprehensive due diligence on potential tenants. This does not mean simply asking for some references. “Proper tenant vetting means calling the references, making sure references are not all family and friends, calling their employer, and doing background checks which includes research on the Tenancy Tribunal website.

“Again, make sure that you are doing all that your insurance policy requires. And, if you decide to get a letting agent, find out what checks they will do and then make sure that they do checks to the level that you require.”

Her other tips include keeping up-to-date with the relevant paperwork; thoroughly documenting property inspections – with photos as well as documentation; checking the rent regularly and acting immediately if there is a problem.

Going Professional

While some investors are good at managing their properties for themselves, professional property managers exist for a reason. Quinovic Property Management’s Bernard Parker says that often beginner investors are unaware of the basic responsibilities and requirements of being a landlord.

“They don’t know all the relevant legislation that applies to rental properties and tenants – and how to enact it,” Parker says. “A landlord has responsibilities under the Residential Tenancies Act, but there’s a host of other legislation they have to comply with. The new Health and Safety at Work Act and upcoming requirements for insulation and smoke alarms in rental properties are good examples.”

In his view, if a landlord has a lack of knowledge or time, is wary of challenging tenant situations and/or doesn’t live in the same region as their property, they should employ a property manager. But that doesn’t mean just getting a family member or a friend to do it, he says.

“That is not good business sense. Too often people think about the cost of a professional first, but they shouldn’t. They need to get someone who has a credibility and who has the proven systems, processes and resources in place to effectively manage their property. And they need to know they can trust a property manager to ensure their property is a profitable business enterprise.”

The Tasks Involved In Property Management

  • Advertising the property (for rent).
  • Finding and vetting tenants.
  • Accepting applications – signing tenants to a lease, arranging the appropriate bond and deposit, lodging the bond with the appropriate authorities.
  • Collecting rental payments – and following up any issues with non-payment.
  • Responding to enquiries and requests – both before and after rental.
  • Conducting regular and thorough property inspections.
  • Keeping comprehensive records (including photos).
  • Conducting rental appraisals and setting rent increases.
  • Overseeing repairs and maintenance.
  • Understanding tenant rights, as well as landlord rights and responsibilities (which requires knowledge of the relevant tenancy legislation).

Big Picture Focus

In contrast to Goodman, Vesna Wells staunchly favours leaving the management of her newly developed property with a professional, believing her time is better spent focusing on the big picture of expanding her portfolio.

“Delegating the property management to a specialist is not only tax deductible, but takes away some of the risk of doing things ourselves,” Wells says. “For example, if a regular inspection was missed because we were too busy, and an issue occurred, there could be a disagreement regarding an insurance claim.”

Sales Considerations

If an investor’s plan is to sell their completed development, their sales and marketing strategy will depend on the size of the project and the number of dwellings involved. With large scale developments, experts recommend embarking on the process as early on in the project as possible. This is because large scale developments – such as apartment buildings – send to sell a proportion of dwellings (if not all) off the plan in the initial stages of the project.

When selling off the plan, investors should sign up a specialist agent with experience. Such agents have pre-existing databases of people wanting to buy and will know how to best market the development in the local market.

However, a smaller-scale development means developers can utilise more traditional selling and marketing strategies.

Their first step should be to talk to well-regarded local agents to develop a dynamic marketing strategy suited to the properties and the local market. They also need to decide what type of sales method (for example auction or negotiated sale) they want to pursue as this will impact on the marketing campaign.

Agent Credentials

Choosing the right real estate agent is essential to making a good sale. Harcourts CEO Chris Kennedy says that, ultimately, when a vendor selects an agent it should all come down to trust and relationships.

Vendors should check an agent’s sales credentials, their company’s credentials, and also make sure they get along with the agent, he says. “You need to engage with someone who has the credentials to make the process easy for you,” Kennedy says. “Because every day your property sits vacant is a cost for you, so ensure you have confidence the agent you are engaging can mitigate your costs.”

Apartment Specialists’ director Andrew Murray agrees, but adds vendors should go for agents who specialise in the property type suited to the property they have developed. For example, a vendor shouldn’t get an apartment agent to sell a house or a prestige specialist to sell an entry-level property.

“Vendors should understand that they are in control of the process,” Murray says. “They shouldn’t let their agent bulldoze them into something they are not happy with. They should ask their agent questions. Also, they can negotiate the commission throughout the process. If the agent is not getting the results they said they would, a vendor shouldn’t feel they have to pay them the original commission.”

Presenting Well

Ensuring a property looks appealing to the buyer market targeted is critical in realising the best possible price.

Kennedy says if the target market is investors the property should be presented cleanly and tidily to show off its features. “It doesn’t need to be furnished and staged though. That may not represent the best returns for your money.”

But if the target market is first home buyers or other owner-occupiers, who buy on emotion, a property must be dressed and staged appropriately. “A lot of people struggle to visualise the end product, so help them. Then ensure the quality of your pictures, brochures, and marketing generally befits the quality of your property.”

For Murray, pictures are the most important thing when marketing a property. “Good pictures drive interest, views, and sales. Too often advertising overlooks the need to help people visualise what the property could be for them.”

He recommends vendors read through all their marketing material as though they are a buyer themselves. “If it makes you think that it is an attractive prospect, then it is a good ad. Really put yourself in the position of the buyer and look at the marketing from that point of view. Think about what it is you are trying to sell and who to. And sell it accordingly.”

Vetting tenants: what to do

  • Require them to fill out a detailed application form.
  • Get both professional and personal references and thoroughly verify them.
  • Use a credit referencing service.
  • Ask them to show evidence of assets (eg: a car).
  • Try to speak to some previous landlords to establish their rental history.
  • Talk to their employer to establish their employment record.
  • Ask for a copy of their passport and/or driver’s license.
  • Check the Tenancy Tribunal database.
  • Always meet them in person to assess them and get a feel for who they are.
  • Have a look on social media – online presence can reveal a lot about a person.

Top 10 tips

  1. Choose to work with a well-regarded local agent who specialises in the market you are targeting.
  2. If you are selling off-the-plan, get started on the sales and marketing campaign as early as possible in the project.
  3. You don’t have to accept the terms in a contract offered by an agent, it is possible to negotiate on things like a 90 day listing term.
  4. Incentivise your agent by offering them an above average commission if they secure you an above average sale price.
  5. An agent’s commission can be negotiated down if you feel they are not delivering the results they promised.
  6. Ensure your target price represents the value of the property and reflects retail costs in the local market.
  7. Always get any legal information checked professionally and make sure that you understand it before signing. Getting a lawyer on board could save you a lot of money if something goes wrong.
  8. Online marketing is more cost and time effective than traditional print advertising, and social media is growing in marketing importance.
  9. Highlighting your property’s best features, internally and externally, in all photos and marketing information will drive interest and views.
  10. Effective staging can help to speed the sale and boost your sale price.

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