How to Mitigate Risk in Property Development: Strategies and Techniques

manage risk property development May 22, 2023

Aspiring property developers and investors looking to create wealth and achieve financial independence often turn to property development as a way to achieve their goals. However, property development can be a risky venture, and it is crucial to take steps to mitigate those risks. In this article, we'll discuss some strategies and techniques that you can use to minimise the risks and increase your chances of success.

Conduct thorough due diligence

One of the most important things you can do to mitigate risk in property development is to conduct thorough due diligence. This involves researching the property and its location, as well as understanding the local market and the regulations that govern property development in that area.

Conducting due diligence can help you identify any potential issues that may impact the success of your investment. For example, you may discover that the property is in a flood-prone area, which could affect the value of the property or make it more difficult to sell in the future. Alternatively, you may uncover issues with local zoning laws that could prevent you from developing the property as planned.

Conducting a thorough due diligence is like a buyer’s “homework” in real estate investment before deciding on a purchase.

By conducting thorough due diligence, you can make informed decisions about whether or not to invest in a particular property and minimise the risks associated with your investment.

Develop a solid business plan

Another key strategy for mitigating risk in property development is to develop a solid business plan.

This should include a detailed analysis of the costs and potential profits associated with your investment, as well as a timeline for completing the project.

Your business plan should also consider potential risks and how you will address them. For example, you may want to include contingency plans in case of unexpected delays or cost overruns. By developing a solid business plan, you can be more confident in your investment and minimise the risks associated with it.

Build a strong team

Property development can be a complex process that involves a variety of professionals, including architects, builders, and lawyers. To mitigate risk, it is essential to build a strong team that can help you navigate the challenges of the development process.

"If everyone is moving forward together, then success takes care of itself." – Henry Ford

Make sure to choose professionals with experience in property development who can provide you with expert advice and guidance. This includes selecting builders who have a strong track record of delivering quality projects on time and within budget. By building a strong team, you can minimise the risks associated with your investment and increase your chances of success.

Have adequate funding

One of the most common risks associated with property development is running out of funding before the project is completed. To mitigate this risk, it is essential to have adequate funding in place before you begin the project.

A blog article from Peter Kelly mentions one way to prevent going over budget when building is to include an extra amount of money for earthworks in your overall cost estimate. This is a smart idea because it covers all the potential expenses and helps you avoid any surprise costs later on. Including this contingency in your budget is a widely accepted way to manage costs and gives you more control over your project's financial success.

This includes having a clear understanding of the costs associated with the project, as well as securing financing from a reliable source. Make sure to factor in any potential delays or cost overruns when estimating the costs of the project. By having adequate funding in place, you can minimise the risks associated with your investment and ensure that your project is completed on time and within budget.

Stay up-to-date with regulations

Property development is highly regulated, and it is essential to stay up-to-date with any changes to the laws and regulations that govern property development in your area. This includes understanding zoning laws, building codes, and other regulations that may impact your project.

By staying up-to-date with regulations, you can avoid potential legal issues that could delay or derail your project. This includes obtaining all necessary permits and approvals before beginning construction. By following the rules and regulations, you can minimise the risks associated with your investment and ensure that your project is completed successfully

Manage the 5 main risks

To mitigate the risks associated with property development, it is essential to manage the five main risks involved in the development process: Deal, Finance, Planning, Sales, and Building Risk.

Deal risk refers to the risk that the property may not be a good investment or that you may overpay for it. To mitigate this risk, you should conduct thorough due diligence and make sure to only invest in properties that are likely to generate a profit.
Finance risk refers to the risk of running out of funding before the project is completed or even not getting funding in the first place. To mitigate this risk, you should have adequate funding in place before beginning the project and factor in potential delays or cost overruns when estimating the costs of the project.
Planning risk refers to the risk of not getting what you want on the site approved. To mitigate this risk, you should stay up-to-date with regulations and obtain all necessary permits and approvals before beginning construction.
Sales risk refers to the risk of not being able to sell the property once it is completed. To mitigate this risk, you should conduct market research to ensure that there is demand for the type of property you are developing and price it appropriately.
Building risk refers to the risk of encountering unexpected issues during the construction process, such as delays or cost overruns. To mitigate this risk, you should choose experienced builders and monitor the construction process closely to ensure that it stays on track.

With Rising Star Developer, we share with you strategies on how to minimise risk and increase your chances of success. Read Exit Strategies: Start With the End in Mind on how you are going to exit your project when you are securing your site.

Consider joint ventures

Another strategy for mitigating risk in property development is to consider joint ventures. This involves partnering with another investor or group of investors to share the risks and rewards of the development process.

Joint ventures can be particularly beneficial for new investors who may not have the experience or funding to undertake a development project on their own. By partnering with more experienced investors, you can learn from their expertise and minimise the risks associated with your investment.

“One doesn't have to be a large corporation to benefit from the advantages of volume. This can also be achieved through joint ventures.” - Norbert Reithofer

Diversify your Deal

Finally, to mitigate risk in property development, consider diversifying your deal. This involves creating a mix of product to appeal to a broader audience to spread your risk.

Diversification can help you minimise sales risk and increase your chances of generating a profit overall. For example, you may choose to create a mix of 2 bedroom and 3 bedroom homes you are opening up your target market.

Property development can be a lucrative way to create wealth and achieve financial independence, but it also comes with significant risks. With Rising Star Developer and by taking steps to mitigate those risks and with, such as conducting thorough due diligence, developing a solid business plan, building a strong team, and managing the five main risks, you can increase your chances of success.

Additionally, considering joint ventures, diversifying your deal, and staying up-to-date with regulations can also help you minimise risk and achieve your property goals. Learn more about how to exit your project when you are securing your site by reading “Exit Strategies: Start With the End in Mind”.

FAQs

What is property development?

Property development involves purchasing property with the intention of adding value to it through development and then selling or renting the property for a profit.

What are the risks associated with property development?

The main risks associated with property development include deal risk, finance risk, planning risk, sales risk, and building risk. These risks can be mitigated through thorough due diligence, developing a solid business plan, building a strong team, and managing the risks associated with the development process.

How can I minimise risk in property development?

You can minimise risk in property development by conducting thorough due diligence, developing a solid business plan, building a strong team, managing the five main risks involved in the development process, considering joint ventures, diversifying your portfolio, and staying up-to-date with regulations.

What is due diligence?

Due diligence involves researching the property and its location, as well as understanding the local market and the regulations that govern property development in that area. Conducting due diligence can help you identify any potential issues that may impact the success of your investment and make informed decisions about whether or not to invest in a particular property.

How do I develop a solid business plan for property development?

To develop a solid business plan for property development, you should conduct a detailed analysis of the costs and potential profits associated with your investment, as well as a timeline for completing the project. Your business plan should also consider potential risks and how you will address them.

What is building risk in property development?

Building risk refers to the risk of encountering unexpected issues during the construction process, such as delays or cost overruns. To mitigate this risk, you should choose experienced builders and monitor the construction process closely to ensure that it stays on track.

What is the role of joint ventures in property development?

Joint ventures involve partnering with another investor or group of investors to share the risks and rewards of the development process. Joint ventures can be particularly beneficial for new investors who may not have the experience or funding to undertake a development project on their own.

How can I diversify my property development portfolio?

You can diversify your property development portfolio by investing in a variety of different properties and projects to spread your risk. This includes investing in a mix of commercial and residential properties or in properties in different geographic locations.

Read our eBook Exit Strategies: Start with the End in Mind, to learn how to build a successful property development investment and achieve financial independence.

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