Building your own Property: Financial considerations

To ensure the successful completion of a construction project, it is important for cash flows and finances to be carefully planned. It is surprising how many people start construction of a property and realise only towards the end that they are running short of funds because they had simply not taken everything into account. This is one of the worst outcomes because completion then depends on cutting costs where it really matters – on finishing work such as interior décor, furniture, fixtures and fittings, and landscaping,

This chapter discusses 8 primary considerations to take into account to ensure the completion of your property.

1. Check BOQ

The first consideration is to make sure all the requirements of the project are included in the BOQ and there are no omissions. As mentioned in chapter 45, once the BOQ has been approved and contracts have been signed, any changes or additions will be treated as “variations”.

2. List specialist contractors and other costs

The second consideration is to identify all the other costs related to finishing the project. This includes the work of specialist contractors and all aspects related to the interior décor and furnishing of the property (particularly if the property needs to be in a rent-ready condition). In addition, the costs involved with the management and administration of your property for the first six months after completion should also be included in your calculations. This includes accounting fees, marketing costs and the fixed costs associated with property management (as distinct from rental management, which are generally variable costs that are covered by rental income, see chapter 118).

The chart below lists some of the items that might need to be included in the overall financial budget:

Expense item Cost
Kitchen design contractor
Kitchen appliances, equipment and utensils
Audio-visual system and electrical appliances (TVs, DVD players, speaker systems)
Utility and service connection costs (electricity, water, sewage, telephone, Internet, satellite or cable TV)
Intelligent lighting systems
Alarm systems
Interior design and furniture (including mattresses and spare beds)
Built-in wardrobes
Outdoor furniture (such as sun loungers, dining tables and umbrellas for pool decks, terraces and balconies)
Curtains and blinds
Pest control (monthly service after completion of the property?)
Landscaping, which includes “hard” landscaping such as retaining walls and water features; and “soft” landscaping, which refers to plants and trees
Garden and exterior lighting
Entrance gate (automatic or manual)
Bed linen and towels
Legal fees, accounting fees and taxes
Marketing and advertising costs
Fixed property management costs (6 months)

It should be noted that costs related to furnishing a property are the costs that are most frequently overlooked, especially for fitted wardrobes, mattresses, bed linen and towels, and outdoor furniture.

For expense items that are not included in the BOQ, particularly those involving specialist contractors, it is necessary to arrange separate quotations to ensure they become part of your overall financial budgeting. If one or two items on the list are forgotten it may not be a big deal; if several major expense items are overlooked, they could account for a noticeable shortfall.

3. Check funds

The third step is to ensure you have sufficient funds available to cover the full contract price with the construction company, all work to be performed by specialist contractors and all the items listed in point 2.

4. Financial cushion

The fourth consideration is to make sure you have a financial “cushion”. This is essential. Although it sounds like common sense, this is the most common reason that properties don’t get finished (or are finished with budget cuts). It is sensible to set aside an extra 10-20% of the contract price to ensure you have liquidity for cost overruns or variations. 10% should be considered an absolute minimum.

There are always unforeseen costs that arise during a construction project: materials that need to be substituted at a higher cost; items that have been overlooked by the architect and the construction company; or changes that you will want to make as construction progresses (variations). If you are already stretching the limits of your financial resources, any additional costs are going to create problems. Alternatively, if financial constraints prevent you from making modifications, they will become a source of frustration.

Important tip: If you have added up the financial requirements of the project and the sum total is already close to the limit of your financial resources, you should cut 10-20% of the costs right now, before you start.

5. Prepare for making payments