Transitioning from builder to property developer

If you’re a small builder looking to transition from builder working on client projects to the more lucrative world of property development, particularly townhouse projects, then we are here to help. Let’s explore crucial strategies for managing costs, navigating GST, and ensuring your business thrives, not just survives as you decide to transition to property development.

While demand for townhouses remains steady, rising costs, complex regulations, and fierce competition for high-quality land continue to squeeze profit margins. Over the years many builders decide its time to make their own homes and enjoy the potential profits housing developments can bring.

Making the transition is a big step that needs planning.

You probably been looking at other builders who have made the transition and decided its also for you. To do so needs a vision, funding and a plan. Many undertake the transition from being a builder or contractor to a property developer over a few years. Others have 2 separate businesses that feed off each other. Some do a development then go back to servicing clients and then do another development in a year or so post the first development. Your journey depends upon a number of factors but very much guided by demand and supply and funding and your drive to develop

Mastering Your Project Cost Management: Your Foundation for Success

As a property developer the successful managing costs is crucial for any profitable property development project. The current climate demands more than just a rough estimate; it requires meticulous planning and vigilant monitoring of costs, margins, and work quality.

The Reality Check: The Australian construction industry is facing significant headwinds. A staggering 3,217 construction firms collapsed in 2024, representing a 26% year-on-year increase [8].

This stark statistic highlights the importance of robust financial management. Furthermore, productivity in housing construction has declined significantly, with dwellings completed per hour worked decreasing by 53% over the past three decades . The reality is that for many, you’re working harder and longer for less output, directly impacting your bottom line.

Actionable Insights:

In running a building business or considering the move to a property developer then it takes effort and a need to get a few fundamentals right , such as:

• Detailed Budgets: Don’t underestimate the power of a meticulously crafted budget for your project and or your business. Include everything: labour, materials, equipment hire, permits, insurance, and a contingency fund of 15% . BMT Construction Cost Table can assist in benchmarking your costs against similar townhouse projects in Melbourne. Remember, a 2-bedroom single-level townhouse will have a different cost structure than a 3-bedroom two-level townhouse.

Look at timing of cashflow of selling a town house vs regular client building work.

• Real-Time Cost Monitoring: Waiting for monthly reports is a recipe for disaster. Implement a system to track expenses on a daily or weekly basis. Construction management software can provide real-time visibility into your spending and resource allocation especially for a new project.

• Material Cost Control: Material prices change frequently. Negotiate with suppliers, build long-term relationships, and consider bulk purchase agreements. Partnering with local suppliers can also minimise transportation costs and can assist if you need something urgently

• Labour Optimisation: Labour is a significant cost driver. Avoid over allocating resources, as this can lead to burnout, reduced productivity, and lower profits. Hire local talent, subcontract specialised tasks, and invest in training to improve worker efficiency and minimise rework. Many construction companies lose an average of 20% of yearly profits due to rework and disputes. Work out how your going juggle the resource for customers vs your own projects.

GST Planning for Property Development: Avoiding ATO Pitfalls

Navigating GST is a critical aspect of property development. Understanding your obligations and opportunities can significantly impact the profitability of your project and ensure compliance with the ATO.

New residential premises, including townhouses, are subject to GST at 10% on sale. However, you can claim input tax credits on construction costs and other development-related expenses. This creates both opportunities and potential pitfalls.

Things you need to address

• Understand the Rules: Construction of new residential premises is a taxable supply. However, the margin scheme allows you to calculate GST only on the profit margin, potentially saving you money. We can work with you and help you to understand the eligibility criteria.

• GST Withholding: Changes in 2018 mean that buyers of new residential premises must withhold 10 % GST from the purchase price and remit it directly to the ATO. This can impact cash flow and GST tax remission. We can assist you in relation to these requirements to avoid penalties.

• Accurate Record-Keeping: The ATO scrutinises the construction industry. Maintain comprehensive records of all taxable and non-taxable transactions, including invoices, contracts, and settlement statements . Digital record-keeping tools can streamline this process.

• TPRS Compliance: Don’t forget the Taxable Payments Reporting System (TPRS). You must report total payments made to contractors annually. Failure to comply can result in significant penalties

From Builder to Property Developer: A Strategic Transition for Small Businesses

Transitioning from building for clients to becoming a property developer requires a strategic shift in mindset and operations.
The Challenge: The construction industry is dominated by small businesses, comprising 90% of the sector. However, many lack the financial and managerial expertise to navigate the complexities of property development or funding successfully. As an observation, half the builders make good money when it comes to development, while the other half lack funding and skills, and often make a mess of it. Don’t be the one who ends up in a financial mess!

Planning is the key, and this includes a finance plan

Planning includes

• Risk Assessment: Development projects involve significantly higher upfront capital investment and longer timelines than traditional building work. Conduct a thorough risk assessment to identify potential challenges and develop mitigation strategies.

• Joint Ventures and Partnerships: Consider partnering with other contractors or investors to access larger projects and share the risk . However, conduct thorough due diligence before committing to any joint venture with another builder including capacity to fund and organisational skills

• Contract Structures: Fixed-price contracts can be risky in the current environment of rising input costs. Include rise-and-fall clauses to protect against cost increases.

• Technology Adoption: Embrace technology to improve efficiency and reduce costs. Building Information Modelling (BIM) and other digital tools can significantly improve cost predictability and reduce waste.
• Have pre-determined plans and costing that can be plugged into a potential property .

Managing Cash Flow and the ATO: Staying Afloat in a Sea of Expenses

Cash flow management is arguably the most critical challenge for small builders transitioning to property development. The extended timelines and front-loaded expenses can create significant working capital requirements. A common occurrence in the construction industry is that many small businesses experienced late or overdue payments in the past year, with the construction sector particularly hard hit . In extreme cases, cash flow challenges lead to insolvency.

Things that can help you stay above the crocodiles:

• Payment Schedules: Align payment schedules with receivables and negotiate better terms where possible.

• Credit Policies: Implement strict credit policies and enforceable terms when dealing with buyers and investors.

• ATO Compliance: The ATO has identified the property and construction industry as a focus area. Maintain comprehensive records and seek a good bookkeeper to ensure compliance.

• Receivables Management: Implement robust systems for managing receivables, including clear payment terms and follow-up processes for overdue accounts.
• Financing Options: Explore various financing options, including development loans, mezzanine finance, and private investors [14]. Establish relationships with lenders who have a thorough understanding of the construction industry.

The Bottom Line

The path to success as a builder developer of townhouses in Melbourne requires a blend of construction expertise, financial acumen, and a proactive approach to risk management. By implementing the strategies outlined above, you can navigate the challenges, capitalise on the opportunities, and build a thriving business.
Grab the opportunities and don’t let the complexities of property development hold you back. Gartly Advisory specialise in the construction industry and can assist to develop a tailored plan for your business. Take control of your costs, master GST compliance, and build a sustainable future for your small business in Melbourne and launch your property development business.

Where to start

Sit down and put a plan in place for the next 5 years, addressing things like:

• Consider the type of property development you are going to build?
• How will I service my current business in terms of current customers?
• What capital do I have towards the development project?
• Identify assets that will be needed to realise this?
• How much funding will I need?
• Will I keep all the development, sell or keep a combination

Your next step is to meet with Geoff for a complimentary chat about how we can assist you in making it happen!