Let’s take a look at some of the risks of real estate development. Undertaking your first real estate development project is more demanding and riskier than buying your first investment property. But while there are more things that can go wrong, there is also the opportunity for greater rewards. I think the biggest risk to the first time developer is inexperience or lack of knowledge.

The good news, however, is that with the help of experts and specialist advice, the risk of inexperience or lack of knowledge can be overcome and common pitfalls avoided.

This will speed you up on the path to becoming a successful developer. Now let’s take a deeper look at what I call the Big 11 Risks.

Risk 1 – Inexperience

The key to eliminating this risk is to always ensure that you have a professional property development specialist involved, especially on your first projects. Not having this assistance could affect your ability to borrow funds. My company has helped many real estate developers start their careers, putting them on the right track from the beginning and helping them grow great.

Risk 2: debt risks and interest rate risks

When borrowing funds, you should be aware of the possibility that interest rates will increase during the term of your development or the long-term tenure of your investment. This can lead to higher development and maintenance costs. However, this need not be a cause for concern, as the actual increase may not be too high. Of course, at the other end of the scale, you could also increase your earnings if interest rates go down.

Risk 3 – Market value risks

Based on the fact that property values ​​can go up or down, you cannot be sure of the value of your project after completion, or even how much demand there will be should you decide to sell. Smaller and faster deliveries will be less risky and there will be less time for values ​​to fall. But in general, property values ​​increase more often than they decrease, and in the long run, if you keep some of your properties, you will make money. Property values ​​would have to fall about 15% before you tend to lose money.

Risk 4 – Risks during construction

There are several reasons why construction costs can increase. Disputes, unexpected delays caused by labor or material shortages, and bad weather can delay the construction period and lead to increased retention charges. Using a one-time, fixed-price, lump sum contract can help decrease the risk of construction costs skyrocketing, as well as ensure that you do thorough due diligence on the builder before hiring them.

Risk 5 – Financial risk factors

The main risk here is not having enough additional capital as a reserve or contingency fund, in case costs rise more than anticipated. I think it is important that you allow and retain a contingency fund for when this happens. Property development involves financial risks and the sooner you realize and understand these risks, the sooner you will be successful as a property developer. As a general rule of thumb, I work with a 5% contingency buffer on all my projects. As I mentioned, you will run into trouble as it is part of the nature of the beast, but a buffer will help ensure they don’t undo it.

Risk 6: risk of not conducting thorough due diligence

Having a complete due diligence checklist is essential. Due diligence must be carried out before purchasing your property. To avoid buying a property that will cause you long-term problems, you need to review your list thoroughly, including all City-related details in terms of planning, engineering, builder, and financial analysis.

Risk 7: paying too much for the site

It is true to say in the real estate business that you “make a profit when you buy the site.” Knowledge of the market, especially in the area of ​​land values, along with the ability to negotiate a good deal, are important assets when it comes to ensuring a correct purchase. Study your market and area wisely; keep your ears to the ground and keep your head out of the clouds. It will save you from burning your cash.

Risk 8: underestimating costs

Getting an idea of ​​the costs involved relative to the revenue side of the feasibility study (sales), from real estate agents and valuation specialists is reasonably easy. However, controlling expenses is much more difficult, especially if you are new to the game. You need to be well aware of all costs related to development income and expenses and how much to allow for each. If you are knowledgeable about your costs, you will be less likely to underestimate them.

Risk 9: set your borrowing limit

Don’t make the mistake of borrowing at full capacity, as this leaves you no room to move in case unforeseen circumstances arise, such as interest rate hikes, slow sales, or construction delays. Know your loan limit and stick to it.

Risk 10: involving the wrong consultants

More and more often, clients are calling me to see poorly designed plans. About 95% of these plans were designed by cartoonists, and the money the client saved by using less skilled designers nearly doubled and sometimes tripled in additional costs associated with construction issues and time delays. If you pay qualified people to do your work, the result will be a satisfactory result and ultimately you will spend less money and make more profit. An architect takes an average of five years to complete a degree and two more years for registration, compared to three years total for a draftsman.

Risk 11: disputes with commercial and construction contractors

Disputes with commercial and construction contractors can cause lengthy delays, which strain the budget as the developer has to cover late costs. When contractors quit prior to completion, a replacement contractor must be found, and in most cases the contractors called in the middle are more expensive. This is because the developer’s bargaining power is weak and the contractors know they are in a tough spot.

Resume

• I think the biggest risk to the first time developer is inexperience or lack of knowledge

• If you pay qualified people to do your work, the result will be a satisfactory result, and ultimately you will spend less money and earn more profit.

• Know your loan limit and stick to it.