If you’re keen on getting involved in property development,
one important principle you need to understand is called “highest and best
use.”
As a property investor, you’re like a business owner trying
to maximise the return on your assets. If you overlook the highest and best use
principle, you won’t be able to maximise the value of your property
development. This principle determines what your property is worth.
To determine the highest and best use of your property, a
project must pass four tests.
It often boils down to engineering. For example, the cost of
building a 2-level basement on a site with poor sub-soil conditions may not
exactly be the best.
You need to check the local government zoning. Councils have
areas where they encourage large-scale development – typically around main
roads and transportation, where they discourage property development such as
heritage areas, and where they allow incremental development.
A particular plot of land can be large enough for three townhouses,
but the local government zoning may only allow a duplex setting after
consideration of setbacks, driveways, parking and garden zones. Some uses may
even be forbidden by government regulations or title restrictions/covenants. Make
sure you undertake your own due diligence and not rely on any representation
made by selling agents.
The development must show its potential to deliver an
adequate profit so you can justify the construction costs and cover the risks
related to the property development. Common mistakes include not knowing which
numbers must be added into the feasibility to set realistic targets, not
allowing enough profit margin considering the risks involved in the project,
not allowing contingency for time or cost overruns and not getting finance
after tightened construction lending.
Highest return may mean different things to different people
– these could be net present value, development profit, residual land value or
internal rate of return. Often, the use that generates the highest net present
value is the highest and best use because it considers both the cost of capital
and the time value of money.
The challenge for you as a property developer is to
understand the type of property that will be in continuous demand in the
future. Deliver this to the market and make great investment-grade properties
to hold onto in the long term.
Whether you’re a beginner or a seasoned property investor,
you would need an advisor who can take a holistic approach to your development.
Our team at Outside Accounting provides strategic property and accounting
advice to help you grow, protect, and even pass on your wealth. Give us a buzz and
let’s talk about your project!
Your Outside Team
Need a bit of assistance with your business? Contact an Outside Accounting team member today and learn more about our fixed fees. You won’t regret it.
Aside from business consultation, we are business accountants Wellington who offer accounting, bookkeeping, payroll services designed to help you achieve greater financial success.
You can click here to speak to a business, accounting and bookkeeping firm. We will give you a call to know more about your needs. We will explain to you how we can improve your business.
Address: Level 2, 182 Vivian Street,
Te Aro, Wellington 6011, New Zealand
Mail: PO Box 24-457, Wellington 6142
Phone: 04 889 2975
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