The market presents some wonderful opportunities thanks to a series of major changes. But it's not all good news. Some of these changes may significantly devalue existing development sites and affect many developers.
If you like the idea of growing your wealth significantly in a relatively short period of time, property development could be a viable option. Depending on your goals and how you manage the process, a development project can increase your equity, increase your rental yield or generate a very healthy profit.
Changes to R Codes
Earlier this year, the Western Australian Planning Commission (WAPC) released a new version of the Residential Planning Codes, also known as R-Codes. The R-Codes essentially provide a framework for controlling development and population density in residential areas and are therefore a critical concern for real estate developers.
The new codes outline a number of changes that property developers should be aware of. One of these, which we have already discussed, is the fact that granny flats (secondary homes) can now be occupied by a non-family member, opening the doors to new sources of income.
However, perhaps the most significant changes relate to the reduction of the average and minimum lot size allowed in some of the R codes. For example, with the new R20 code, the average lot size has been reduced from 500m² to 450m² and with the code R60 has been reduced from 180m² to 150m².
The minimum lot sizes have also changed. Plots with a minimum area of 350 m2 are now permitted under the R20 code, 300 m2 under the R25 code and 260 m2 under the R30 code. Please note that although the minimum lot sizes have been reduced for many of the codes, lots must meet the average size regulations. Therefore, unless the average lot size requirement has also changed (as with R20 and R60), the reduction in minimum size simply allows more flexibility in lot design rather than necessarily increasing densities.
Let's take a look at a simplified example to show how changes in R-Codes can create opportunities for developers. In the new R20 zoning, taking into account that the average plot area has been reduced to 450m², the minimum plot area to be granted is 900m² (2 x 450m²). Previously you would need at least 1000m² to subdivide. According to the current rules, a variance of 5% can also be allowed, which means that a plot of up to 855 m² can be subdivided.
But it gets even better by reducing the minimum lot area. Let's say a landowner wants to subdivide his 900m² plot while retaining the existing house. This could have been quite difficult under the old rules, unless the house was placed right on the lot to allow enough clear land for the second lot.
With the minimum plot area now reduced to 350m2, the land could potentially be subdivided into a 350m2 plot and a 550m2 plot (average remains 450m2), allowing greater flexibility in retaining the existing dwelling and potentially a more profitable development.
The changes to the R-Codes offer a great opportunity for experienced investors. Those who understand the codes (or employ someone who knows them) may find a property with land large enough to be subdivided, but whose price does not take into account the real development potential of the property. Given the right conditions, an investor could make a good profit immediately.
Changes to local housing strategies
When a local council introduces a new local housing strategy, the changes have huge potential to benefit property developers, especially those ahead of the learning curve. The primary objective of these strategies is to increase housing density through redevelopment. More specifically, they generally aim to increase density around certain hubs of activity, transport hubs and corridors in order to provide the opportunity to increase residential diversity.
There are several of these new strategies in various stages of progress across Perth's 32 local councils. Some are currently available for public comment or pending WAPC approval. If and when these new strategies are finally implemented, properties in designated zones will increase their zones (to a higher R-number), meaning some will immediately become sub-divisible or have more potential than they had.
Please note that proper zoning does not automatically guarantee that a property has development potential, as there are many requirements that must be met in order to receive development approval.
Monitoring what is proposed in these policy plans and tracking their progress can open up huge opportunities. However, it requires considerable time and effort, not to mention a clear understanding of planning regulations. Momentum Wealth employs a team of experts to research and monitor these changes in order to identify opportunities for our clients.
Before you rush out and buy a property because it's in an area marked for rezoning, remember that it can take many years (up to a decade) for the policies to come in. Additionally, there can often be many changes to policies before they are finally implemented.
A big concern for developers
You may recall that Directions 2031 and Beyond, the framework for managing growth in the greater Perth region, reasonably requires 47% of new housing to come from infill development.
Despite this, however, some of the councils in Perth, including the City of Stirling, are taking a step back. They are trying to introduce amendments to local planning laws that effectively ban the building of multiple dwellings in already zoned areas for less than R60. This change, if approved, will substantially remove or limit the development potential of certain lots.
What might happen if these changes go ahead? This spells disaster for some homeowners. Here is an example. If the City of Stirling has its way, inner-city blocks of flats that currently allow up to 6 flats or 3 units could be downgraded to a duplex-only option. This equates to a significant financial loss for the people with these sites. The value of these sites will immediately drop if this subcoding takes place, which can severely impact owners' financial plans and retirement savings.
Worse, even before these proposed changes are implemented (while they are available for public comment), the board may consider them when evaluating new applications for development. This is likely to result in previous stable development applications being dropped.
I do not agree with the board's decision and strongly encourage anyone who believes they may be affected to speak to the Planning and Development team for guidance and see what can be done. One option, for example, could be to submit a development application immediately, which would allow up to 2 years for development, even if there are zoning changes.
Clearly, knowledge is a powerful weapon when it comes to real estate development, especially when it comes to the changes happening in our city. If you can spot opportunities (or threats) before others do, you could be in a position to benefit greatly.
However, identifying opportunities and turning them into reality are two very different things. Real estate development is a major undertaking that requires broad and specialized skills. It comes with significant challenges and often involves large sums of money, so it's almost always best to seek expert help along the way to ensure a successful outcome.
The three most important factors when buying a home are location, location, and location. Too often I hear people talking about making decisions based on the home itself, instead of the location, and that is a mistake.What are the 8 stages of real estate development? ›
The seven stages in the model are: land banking, land packaging, land development, building development, building operation, building renovation, and site redevelopment. Each stage in the process begins with the acquisition tasks and ends with the disposition tasks.What is the principle of supply and demand in real estate? ›
Principle of Supply and Demand
Buyers and sellers tend to set the price or value of a good based on the supply of a good and the demand for that good. If the supply of a good is stable, and demand for that good increases, sellers of that good tend to increase the price.
An R Code of R20 means that an average of 450sqm is required per dwelling: Lot is in the range: 450-899sqm. 900-1,349sqm. 1,350-1,799sqm 1,800-2,249sqm 2,250sqm and over.What are the three C's of real estate? ›
They evaluate credit and payment history, income and assets available for a down payment and categorize their findings as the Three C's: Capacity, Credit and Collateral.What are the 5 P's in real estate? ›
- Plan: The first P in real estate is Plan. ...
- Process: The second P in real estate is Process. ...
- People: The third P in real estate is People. ...
- Property: The fourth P in real estate is Property. ...
- Profit: The final P in real estate is Profit.
Real estate has seven specific characteristics related to its economic impact or physical nature. They are scarcity, improvements, location, investment permanence, uniqueness, immobility, and Indestructibility. A real estate property can be classified into residential, commercial, industrial, or land.How do you calculate housing demand? ›
By taking the number of homes sold in a month and dividing it by the number on the market, you can find a percentage that determines how quickly homes sell. Rates over 20% indicate a hotter real estate market with rising home demand and home prices.What are the factors affecting demand in real estate? ›
Interest rates impact the price and demand of real estate—lower rates bring in more buyers, reflecting the lower cost of getting a mortgage, but also expand the demand for real estate, which can then drive up prices.What does substitution mean in real estate? ›
The principle of substitution in real estate is an economic principle used to conduct a valuation of properties. This principle states that the maximum value of a property is set by the cost of an equally worthy alternative property with the same design and utility.
The R-3 High Density Residential zone shall consist of one to 10 and above dwelling units per acre. The purpose of this zone is to establish areas for higher residential densities within easy pedestrian access to commercial areas, public facilities and employment centers of the City.What is the R code 30? ›
R30 zoning: Generally indicates a density of 30 dwellings units per hectare. Minimum site area is 260sqm, with an average of 300sqm.What is the meaning of R40? ›
An R-Code of R40 means that an average of 220m2 is required per dwelling. The table below is a guide as to how many. dwellings could potentially be developed on a lot coded R40: The lot is in the range.What decreases property value the most? ›
- 1) DIY projects gone wrong.
- 2) Lack of curb appeal.
- 3) Unsightly interior wall paint.
- 4) Lack of upkeep.
- 5) Wall to wall carpeting.
- 6) Excessive clutter can hurt property value.
- 7) Unpleasant smells.
Ultimately, the financial backing in a deal determines the property's value, and it's most often a mortgage lender making the call.What are the 4 pillars of real estate? ›
The 4 pillars of real estate include: cash flow, appreciation, amortization and leverage, and tax benefits.What does AAA mean in real estate? ›
AAA [Additional Agent Acknowledgement]What is DS in real estate? ›
In a down market, some real estate agents say the only real motivators for people to sell or seek property may be the three D's: death, divorce and debt.What does P mean in real estate? ›
P (Pending) – The property is still under contract. The buyers are in the process of closing on the property.What does PS mean in housing? ›
PS(Pending Continue to Show).
The seller is waiting on the buyers financing to complete.
The four Ps are product, price, place, and promotion. They are an example of a “marketing mix,” or the combined tools and methodologies used by marketers to achieve their marketing objectives.What are weaknesses in real estate? ›
Weaknesses of Real Estate Business. Difficult to Transfer Ownership. Not Liquid Asset. Huge Capital Required. Limited Supply.What are the two primary characteristics of real estate assets? ›
- It cannot be moved. ...
- Location influences its value. ...
- It has property rights attached to it.
If you're searching for properties you will most often come across a few different property types. The most common being house, townhouse, unit, villa, land, acreage, rural, blocks of units/apartments and retirement living.How do you write a strong real estate offer? ›
- Address the Seller By Name. ...
- Highlight What You Like Most About the Home. ...
- Share Something About Yourself. ...
- Throw in a Personal Picture. ...
- Discuss What You Have in Common. ...
- Keep it Short. ...
- Close the Letter Appropriately.
A project proposal is a written document outlining everything stakeholders should know about a project, including the timeline, budget, objectives, and goals. Your project proposal should summarize your project details and sell your idea so stakeholders buy in to the initiative.What are the steps of formulating development proposal? ›
- Step 1: Form Your Team. ...
- Step 2: Plan. ...
- Step 3: Develop the Outline. ...
- Step 4: Hold a Formal Kickoff Meeting. ...
- Step 5: Prepare Story Board. ...
- Step 6: Pink Review. ...
- Step 7: Prepare the First Draft. ...
- Step 8: Prepare the Second Draft.
A popular standard for budgeting rent is to follow the 30% rule, where you spend a maximum of 30% of your monthly income before taxes (your gross income) on your rent. This has been a rule of thumb since 1981, when the government found that people who spent over 30% of their income on housing were "cost-burdened."What is the formula for housing cost? ›
Divide Your Housing Expenses By Your Gross Monthly Income
To calculate the housing expense ratio as an underwriter might see it, you can divide your expenses ($2,689) by your income ($,7500). This computes to 0.358, or 35.8%, which means that just over a third of your pretax income would be going toward housing costs.
To calculate 'how much house can I afford,' a good rule of thumb is using the 28/36 rule, which states that you shouldn't spend more than 28% of your gross, or pre-tax, monthly income on home-related costs and no more than 36% on total debts, including your mortgage, credit cards and other loans, like auto and student ...
The housing market is a good example of how supply and demand works within an industry. When the demand for housing is high, but supply is low, home prices often rise. When there is a glut of housing available in a market, homeowners may lower their prices due to less demand in the market.What are the 7 factors of demand? ›
- Price of product.
- Tastes and preferences.
- Consumer's income.
- Availability of substitutes.
- Number of consumers in the market.
- Consumer's expectations.
- Elasticity vs. inelasticity.
Answer and Explanation: Four factors that affect demand are price, buyers' income level, consumer taste, and competition.What are the four factors that influence value? ›
The current and future importance consumers place on the four factors of value (Desire, Utility, Scarcity, and Effective Purchasing Power) represents Demand and Supply of the product or service.What is the highest and best use of a property? ›
The Appraisal Institute defines highest and best use as “the reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible and that results in the highest value.” Appraisers typically apply four tests to determine that use.What is external Obsolescence in real estate? ›
External Obsolescence is a form of depreciation caused by factors not on the property itself, such as environmental, social, or economic forces. An example would be a very nearby garbage dump. The homeowner cannot reverse this loss in value by spending money to fix something.What does R3 mean on a property? ›
R3 (Residential, Multi-Family Medium-Density) District. The R3 zoning district provides for the development of a wide range of multi-family dwelling units, including apartments and condominiums.What is R-5 zoning in Washington state? ›
This section was recently amended by Ordinance 3083, codified in October 2022. A. Purpose. The R-5 Single-Family Urban Residential zone provides for primarily single-family residential neighborhoods on lands suitable for residential development with an allowed base density of five dwellings per gross acre.What is R2 zoning in WA? ›
The purpose of the “R-2” Medium Density Residential Zoning District is to provide for medium density residential neighborhoods that permit all housing types and to protect these areas from incompatible uses.How to check type R code? ›
The main way to check your data type is to use the function class() . If you have a data frame, another easy way to check data types is to use the str() function. This displays the structure of your data frame and tells you what data type each of your columns is.
a1400: natatory, n. (meaning 'A pool; a place to swim. rare.What does R20 R40 mean? ›
What does R20/40 mean? R20/40 is a dual-coded residential area which means that the development is R20 by default but may allow up to R40 if certain conditions are met. Usually, these are set by the local council and differ between each local council's policies.How do you use R40? ›
Generally 2-3 times daily 15 drops in a little water before meals.What are the 3 most important things when looking to buy real estate? ›
- Search for the right price.
- Prioritize the location.
- Think long term.
- Assess property condition.
- Don't focus on minor cosmetic details.
- Stick with your must-haves.
- Location of the Property. ...
- Valuation of the Property. ...
- Investment Purpose and Investment Horizon. ...
- Expected Cash Flows & Profit Opportunities. ...
- Be Careful with Leverage - Know the Pitfalls. ...
- Investment in New Construction vs.
A home's value is affected by local real estate trends, the housing market, the home's condition, age, location and property size.What are 3 of the 6 things you need to buy a house? ›
The process can differ among lenders but in every case, there are six boxes to check off when applying for a home loan: Get your down payment together; pick a lender, check your credit score, check your debt-to-income ratio, set aside closing costs, and apply for pre-approval of a mortgage.What are the top things buyers want in a house? ›
- 83% of buyers want ENERGY STAR windows.
- 81% of buyers want ENERGY STAR appliances.
- 80% of buyers want energy-efficient lighting.
- 79% of buyers want an ENERGY STAR rated home.
- 73% of buyers want triple pane glass windows.
High Vacancy Rates
High vacancies are especially risky if you count on rental income to pay for the property's mortgage, insurance, property taxes, maintenance, and the like.
“Success in real estate comes down to two factors: taking care of and valuing the customer.”
- Physically possible. You must consider the size, shape, topography, and accessibility of the site when determining if it is physically possible. ...
- Legally permissible. ...
- Financially feasible. ...
- Maximally productive.
Market value is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.What is the best indicator of value in real estate? ›
Housing supply is a strong indicator of price. If the housing supply in an area goes down, it means that more people are moving to that area. This raises the average price of each home and means you'll have more competition if you want to buy.