I am in the process of looking into a property development investing opportunity. On the face of things the potential return looks very attractive, the break down of costs and returns is as follows:
Purchase price $1,629,220
Interest on Purchase price $ 137,000
Development costs $ 842,000
Interest on Development costs $ 128,000
Margin for risk $ 50,000
Marketing expenses $ 30,000
Total project costs $2,816,220
Project proceeds $4,165,500
Net return $1,349,280
Return on investment 47.91%The development involves rezoning an “Agricultural Local†property to a “Rural Smallholding,†and subdividing it into smaller lots.
As an investor I would be able to buy a 10% shareholding in the development for $280,000.
I am interested to hear from anyone out there who may success or horror stories about similar types of property developments. Any words of caution or general advice would also be greatly appreciated.
I am investing in a project with similar numbers. What I have done to ensure that I am confident in the investment is:
Visit the area and get a feel for being on the ground
Research the attractions and prices of the area via the internet
Made sure I understand the sale process and likelyhood of getting my money back on time
Made sure I understand the process of becoming a shareholder, what is in it for the developer, myself etc.
Can my money be better used elsewhere? This a very good return but if the project goes for 3 years it isn’t as attractive.
What is the team behind the project, builders, accountants etcSo do all the Due Diligence and you’ll know if you should go ahead, good luck I’f be interested to see how you go!!!
That marketing budget looks awfully small to me.
I have a planned development for 18 3br units in a 3storey walk up with planned/budgeted marketing budget of $250,000.
$50,000 doesn’t buy much advertising anymore. Apart from that I couldn’t see anything that made me cringe. Is there a contingency fund? If so how much? Is this forecast prior to return so it’s a bonus if all goes well without delays or unexpected price increases on services?
What is the exit strategy? Does the developer have one? Who iscarrying the can if the Developer bails and doesn’t complete?
I agree with cbellesini though good homework and plenty of it will potentially save you a bundle later on down the track…
Stuart Milne
Non-Conforming Specialist
READY Mortgages
http://www.readymortgages.com.au
[email protected]
Mob: 0404 056 055I can’t see any allowance for GST.
You will be suprised how many developments i have finance or been involved where it was not reaslised that GCT was payable often on the Margin Scheme.
1/11 makes a big difference.
Richard Taylor
Residential & Commercial Finance Broker
**Lodoc Commercial loans from 7.19%**
Licensed Financial Planner
http://www.yourstatefinance.com
[email protected]
Ph: 07-3720 1888Richard Taylor | Australia's leading private lender
Originally posted by Stuart Milne:$50,000 doesn’t buy much advertising anymore. Apart from that I couldn’t see anything that made me cringe. Is there a contingency fund? If so how much? Is this forecast prior to return so it’s a bonus if all goes well without delays or unexpected price increases on services?
Hi Stuart,
Caught these couple of figures that may, in part, address your valid comments.
Margin for risk $ 50,000
Marketing expenses $ 30,000It would seem (a bit of guess here) that the project has allowed something for contingencies. But $50K in a $2.8m project only represents a fraction under 2% of the project’s total.
Very skimpy there.
Without knowing the area of the proposed development, nor the history of the developers, there could well be significant delays experienced in planning and rezoning, contruction etc that could significantly eat into the 2%.
Derek
[email protected]
http://www.pis.theinvestorsclub.com.au
0409 882 958
Skype – derekjones2113I’d concentrate on the three biggest elements – revenue, control and time.
1. Revenue
How robust is that $ 4.165 MM revenue ?? What’s your margin of error on this figure…..± 10%….± 15% or is it more like -30% and +5%……
What’s behind the revenue figures, and are you intending to sell to suckers, or hard nosed property savvy buyers who aren’t going to buy anything off you unless they can see they are screwing you right down……what do you do if you can’t sell it for your price and they are happy to walk from the deal ?? Can you rent whatever it is you’ll have to offer out to offset the holding costs ??
2. Time
When is this revenue expected to come pouring in the door….in one big flood next year, or dribbled in over the next 4 or 5 years ?? How long can you hang on before it will crush you ??
3. Control
How much influence will you have on decision making with 10% ?? Do you get frustrated easily ?? Are you a control freak or are you happy to just go along for the ride, even if it’s all going down the chute ??
OK…for me, that’s the downsides looked at…..the upside is of course that you might make a packet and form binding business relationships with these developers for the next 20 years and motza here we come…..
How do the numbers stack up taking 10% of this vs buying a little 280K house controlled solely by yourself…..
Good luck with your endeavours.
I don’t have any syndicate experience like that mentioned but we have our own land subdivision we are doing at present of 1 into 7 house lots which includes a new road. Its been a very slow process. Bought land Oct 2003, DA approval Sept 2004, Operational works approval April 2006, and we haven’t turned any soil yet !! Its costs us more than expected in interest holding costs so look further into the process and conditions the Council will impose.
Amanda
“It is better to be inconspicuously wealthy, than to be ostentatiously poor…”Thanks to all of you for you feedback, much appreciated. I am meeting the developer onsite tomorrow and I will be sure to let you all know how it goes.
Thanks again
BGV
I would be wanting some sort of guarantee up front that the land is subdividable and rezonable. So many councils wont budge on downsizing their subdivide requirements. But unless the developers are complete shonkies I’m sure they have some sort of preapproval.
Fern
Hi BGV
Firstly I would be vary about accepting any info dependant upon the expertise of the person supplying it.
I have recently relocated to oz but I was a Director of a Construction Consultancy in the UK and am a Chartered Quantity Surveyor and Project Manager with over 20 years experience working as an advisor to developers.
Without knowing more detail the issues that strike me immediately are:-
1/ What is your contractual relationship with the developer and what are the terms and conditions.Any other liabilities/relationships will flow from this.You need to have this reviewed by a solicitor
2/ What is the timescale of the development and what stage is it at.
Obviously the longer the development period the more risk and the less attractive the return is.3/ Where have the costs come from.You need to have these scrutinised by your own advisors to ensure they are reasonable.
4/ Where has the sale price come from.Is this reasonable
I do not want to appear overly cautious but if this is your first development I would be very wary about entering into this without recieving the necessary professional advice and that does not mean from this forum.
Colin
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