updated 4th October 2016
The main benefits of developing are the potential for you to make a good profit above your costs by creating the equity instead of waiting for it over time with capital growth. It also allows you to express your creativity.
There is no question about it, developments are exciting projects to work on and there is a certain amount of pride that goes with completing a project. You also get to call yourself a developer!
From a finance perspective the main benefit with development is that you have the potential to get finance and capital based on the strength of the deal, instead of your own personal equity or income capacity. While there are multiple exit strategies to make money, depending on how quickly and how much profit you want i.e. subdivide and sell, sell with plans and permits, secure plans and permits construct, subdivide and keep, secure plans and permits construct, subdivide and sell etc…
However, like anything, where the potential return is higher, so is the risk. I could write another article just on the complexities of the finance risk in development. Let alone the planning risk, building risk and selling risk!
Developing is a complex business. It’s easy to make a loss if you don’t know your craft. It requires high commercial skills and people skills if it is to be done successfully. It also requires good timing. You have to be able to read the property market extremely well.
And from a money perspective it might not be the most efficient use of your money due to long lead times. There are potential delays in every step of the development process; planning, permits, finance and construction.
Therefore it frequently requires a larger capital commitment (than originally estimated) from the developer, as these delays cost money. So you have to factor in that you will have a lower income while holding the site.