Disclaimer: This post is rather long. Please skip this thread if you are easily offended by length, not interested in developments, and think you may be offended by my writing style, are in a hurry, or don’t care for the lavish use of exclamation marks. My opinions are not necessarily shared by others, (so sue me!) and …er…my hobbies are filmmaking, debating, dinner parties, and laughing…um…

Hi Michael

>With little upside in the general property markets for the foreseeable future, >many investors are looking at property development as a possible way of >increasing their profits.

Yes, people like meeeeee!!!
However unlike the Melbourne apartment builders, I am doing it in an area with considerable upside, a shortage of rental properties, and other factors.

>Property development has been made popular by a number of seminars or workshops >which suggest property development is lucrative and easy.

Never having been to a devo seminar, (so sue me) I do think it’s going to be lucrative, and as far as ‘easy’ goes well there is a lot more to it than buying a property, but not much more to it than renovating a property, give or take council. (so far.) This is because as with my renovations I am not actually going to do any banging of nails myself, it’s just a matter of organisation.

>Over the years I have seen many inexperienced property developers and quite a >few that I thought were smarter than me go broke.

Yep, and I have taken every precaution that I won’t go broke in many different ways.

>A downturn in the property market
I have guarded against this by developing a particular type of property with a particular rental yield in a particular area with a particular construction, after consulting with all relevant property professionals in the area

>Increases in interest rates resulting in increased holding expenses
I have actually guarded against this as well

>Increases in construction costs during the project.
I have a large buffer for error in my budget which is still going to make the numbers work out equal and 10+ CF+ve. My buffer is 26-45 percent going off an off the plan valuation.
> Many inexperienced developers think they have entered into a fixed price contract yet are hit with cost variations;

I am inexperienced with development, but I am very experienced with contracts, so much so that I could see the holes in the contract I was prepared to sign and ripped it up and wrote a much better one – which the contractor readily accepted as he could see it was far superior – not just for him but for me. It was also about 8 pages long instead of one, and we agreed on procedures for (almost) everything that could go wrong. The things I didn’t guard against are things I am able to wear through the usual protection strategies such as insurance, cash reserves etc

>Changes in the supply and demand ratio for real estate market such as we are >currently seeing in the inner city apartment market which depresses property >values;

Indeed, and I have mitigated this by being the first (recent) developer in the area not the last. However I know there is a wave behind me, because there are wall to wall new subdivisions in the area. Even if my places are only to fuel the already stretched rental and housing demand for the influx of workers on the coming developments behind mine, I’ll be quids up

>Unexpected disputes with building or trade contractors or unions which can >cause costly delays to a project;

I’ve probably used…ah, 50 tradespeople in the last year and never had a dispute with any of them – so I am not expecting any problems.
But if I do have a problem I will just sort it like I always do! Basically every time I’ve ever made any $$ it’s been ‘solving a problem’ of some sort.

>Changes to the laws relating to property development such as the laws relating >to zoning and town planning restrictions on land use, environmental controls, >landlord and tenancy controls, user restrictions, stamp duty, land tax, income >taxation and capital gains tax.

Some of those are unlikely once you have your consent, the council stick to that and any changes are to properties after the law change. Also laws take a bit of time to come in to effect so you do have some warning. A lot of other things yes will change in time but it will be to the developer’s favour such as suddenly being able to build 6 instead of 5 on your site. The world seems to be getting more population-dense. Sites that had one house on them now have two – that’s a trend. In cities people are building upwards. That’s a trend. The other things you mentioned like stamp duty changes – well anything can happen I suppose, and yes, as you become more wealthy your tax bracket changes – but any savvy investor whether a developer or not is prepared for those sorts of things, and has a buffer. If not, yes, of course, they could be wiped out.

>Unexpected delays and increased holding costs may be encountered when town >planning (DA) approval is required for a development. Councils are currently >very slow in assessing development applications and they reject many >development / town planning applications.

Luckily mine is guaranteed approved by the council, or my money back. (another risk-mitigator I wrote into the contract myself – agreed!) and the time frame is not too bad, just 2-3 weeks. The approval guidelines and advice was sought in advance of everything, and I am complying, so I doubt it will be a problem. Me and the council dude are on first name terms, etc etc. All part of the game!

>The cost of obtaining approval or fighting council’s rejection in a court of >appeal is continually rising;

so is the cost of living, inflation, the Kiwi dollar -life, so it’s swings and roundabouts.

>Some inexperienced developers find that some of the improvements they have made >to their properties do not result in an increase in value.
I think many experienced developers find the exact same thing. I.e. the average capital growth of melbourne apartments in ten years from 1992 – 2002 was 4 percent.
>They learn the hard way that increases in value do not necessarily occur in >line with expenditure on improvements;
Indeed, but this can be said for experienced developers too (i,e, melbourne apartments for the last ten years.)
Another thing is that buildings depreciate, land appreciates. The reason I reckon melbourne apts don’t go up in value the same as houses is because they don’t have a very high land component compared to their price. My developments will have a higher land component like townhouses or units rather than high-rises, so in a lot of ways it is so different what I am doing to what the common garden variety melbourne apartment developer does that it is probably not even comparable. Also I hear that CF+ve developments are rare as hen’s teeth, but mine is going to come in at around 11 percent yield in a town where you can’t even buy a skanky old hovel on a ten percent yield any more.

This is because of land going up in value rather than ‘the improvements’. I think, novice though I am, that the best thing a new developer can do is to choose the right site and type and construction, any mistakes and you could lose just like Michael is saying.

>As you can see many of these risks are outside the control of the developer.
>I know, because at Metropole we act as property developers for our own projects >and as project managers for many clients (we are currently involved in 80 >development projects in Melbourne.)

I think it’s just another example of people doing it one way over and over again and getting a certain result and then becoming masters of that result, and then people like me coming in and doing a different thing, in a different way, with a different result, and becoming (I hope) masters of my particular result. But being ‘judged’ for want of a better word by masters of a different system. It’s like being on a retail forum and discussing MLM versus owning a shop. It’s all ‘development’ that we’re discussing, but it’s I bet so different than how you’re doing it.

>We are aware of the risks involved in a development project and this helps us >minimise them so that our clients do not get any unpleasant surprises. Most of >our projects are very successful, but I have to be honest and admit that we >also into the same problems in some of our projects and they are not as >successful as we initially hoped.

I think that developing is more risky, it’s got to be, you’re creating something out of thin air. and you have to be prepared for the ‘what if’s. If you are not, you get wiped out. A lot of people are not smart enough to figure out what the actual risk is, or don’t get the right advice from the right people. I mean advice from people who understand the MARKET which you are going to appeal to and what they want. Also I think a lot of people are just too highly geared (at risk to start with) and shouldn’t really be doing developments to begin with. I do think that you have to have a bit of equity and cash behind you before you start doing it which is why I am only starting now after I have some money and properties behind me and a very healthy LVR which a lot of developers only dream about.

>I am not a property developer; I never have been, nor do I intend to be (well >not in the immediate future). Why???

Perhaps, because you have been scared off by Michael’s post.!????

Interesting that you were attracted here anyway, perhaps then for a different reason than being particularly interested in development.

>I too have seen many “developer” friends go from owning a hefty portfolio to (some, not all) near bankrupt, those that survived are currently renting and paying off someone else’s mortgage!!!

It depends where you live (if you rent) as to whether or not you are paying your landlord’s mortgage off or not. Basically if you rent a negatively geared place at city yields of 5 percent or less (2-3 for where I live) then you are not even covering your landlords’ interest only repayments let alone holding costs. it is actually the other way around, and the landlord is subsidising the tenants. However if you are the owner of CF+ve properties like I am then the tenant is very much paying off my mortgage because my interest rate is 7.6 but my yield is 15.6 so there is a surplus – I am making a margin on the bank, basically. So things are not always what they seem, especially in Australian cities where most of us live. I think too few people actually understand this concept, and it was a shock to me when I calculated how much worse off I would be to buy where I live rather than rent. But that was a tangent, but one I had to respond to.

>IMHO all too often people get caught up in their greed, and think that if they >can achieve profits with single property investments, all of a sudden they can >”develop” a string of properties and hit the big time!!!

It is not necessarily greed that means you make profits, just that you understand investing and business and how you can multiply your money. I had a lump sum and I could have done a term deposit, property, business or shares and I did property and business. So when that multiplied I found I had a bit more to play with and so now I’m developing. I see it as a way to help my family out by creating an investment that in the current market can’t be bought. and if that’s greed, well, so sue me.
But I feel that development is actually at the top of the heap out of all investing strategies, as it’s pure creation.

And BTW I don’t take advice from the ignorant, and I don’t let negativity get me down. If I did, i wouldn’t be here now. I welcome negativity, as it makes me stronger. However it can be very tiresome too, but once in a while, it’s quite envigorating. By my responses, I realise how on to it I am. By challenges, my reactions to the ‘what if’s give me a good idea of how I am guarded against that if it happens.

>I say crawl before you walk, and walk for a while before you run, otherwise you >could fall flat on your face!!!

I agree and I wouldn’t say that everyone could get the same result as I will. That depends on the person, the investor, first and foremost.
There are a lot of stupid people about, and good luck to them, but I don’t take advice from them either.

>I’m not saying “property development” is to be avoided, only researched, >perhaps even moreso than if you were to research into the purchase of a single >property. It stands to reason, mutliple your research by the number of >properties you intend to develop (and then triple it again just for luck).

I agree, as a first time developer I have been looking into it ever since I purchased the site, which I thought somewhat loosely ‘one day I might develop this land’. At that time it was just a speculative buy and hold negatively geared piece of land that cost me the price of rates to hold, which I was quite OK with, that I was hoping quadruple in value within a year. In fact it was my ‘insurance’ against another speculative venture I was undertaking elsewhere and even I called it my ‘insurance’ property!

When the land doubled in value in three months and the house prices rose over a critical dollar mark, until now there is nothing under a certain price range, nothing cashflow positive since november on asking price, currently nothing CF+ve even at negotiating ten percent off asking prices, and when the new subdivision sections started selling, suddenly it became viable. I did various costings (many) and learned a lot in the process. I tweaked by amount of bedrooms and square metreage after talking to various property professionals with the aim of getting maximum value for my cost. One key decision here improved the numbers considerably.
It’s just the same as renovations. You can spend a lot and not get the value, or you can spend SMART and get more than the value.
I think developments in many ways are very similar to renovations apart from the beurocracy and increased risk, but I do evaluate what I am going to do and if it’s viable with the same sort of criteria and analysis as I would cost a renovation budget for the purposes of increasing rent.

I also looked into house relocations and other building recycling. House relocations I reckon are the halfway point between renovations and new developments. the author of the book kept saying how similar the costing/planning/strategy for a removal and renovation of a house was to a new development – except (my opinion) that you have the grief of two sites to sort, not just one – and you still only have a ‘second hand’ house.
In many ways, building new is FAR easier than a relocation, in so many ways – beaurocracy for a start, as councils are much more amenable to you building new, as are your neighbours.

With my development my aim is to get the most rent and the highest valuation in proportion to what I am spending, and a valuer is a key guiding light in this, as is a trusted real estate agent, and a trusted rental manager.

So my final costings to date have come in at aprox. half my original per square meter cost (i.e. my first quote.) If I had done these same costings as I have today 6 months earlier, despite being extremely competitive, I would not have got the valuation and equity result I am now expecting and the development would not have been so viable.

As a result even of the lessons already learned, I am buying the land for the next development now – even though I won’t commence for 6 months or so – in an area where I see the same characteristics as my current development town was showing 6-8 months ago.

I will further leverage by using the exact same supplier and plans, just tweaking the site plan a bit.

Sacha at ANZ as others have noted is an absolutely triple AAA+++++ contact. The person and their can=do attitude is so often the difference between a positive experience and not.

nevertheless I have heard good reports of service all over NZ with different brokers and lenders and I put it down to the low population density means they just have a few less people to deal with compared to Aus and so therefore they have more time for you. You get more real people and less automated waiting queues like you get here in Aus, because in Aus they are processing so many more people.

Oh dear, I really do try to be polite, but in the end sometimes I feel that stronger and more challenging thoughts need to be expressed. So, i’ll throw down the gauntlet and put myself on the line here: And for the record, Robot is right on, and obviously a ‘smart’ investor:

how often have I heard this, from (my name for them) Auckland Wanker type investors:

“Tok has always been at the lower socio-economic end of the scale.”

Well, Point Piper Sydney has always been at the upper socio-economic end of the scale. Why don’t you buy an investment property there, then? You’ll get a 2 percent yield and it might even go down in value, in which case you can claim the loss as a tax write-off. The average wage of the locals is not on it’s own an indication of which area you invest in, and which property you purchase in that area.

Perhaps you are a snob, and perhaps you just do not understand the numbers of investment? Or is it just not the sort of property you’d want to DIY manage?

Well, in my experience, the comments that you are making tend to be made by people in one or more of those groups.

“There’s just nothing there that’d take you there.”

Correction, there’s just nothing there that would take YOU there, because of your current paradigm as above. Carter Hold Harvey, many big and savvy investors I know, our tenants, the locals, see a different paradigm, and so be it.

In the end, blaming it on Tokoroa the scapegoat town (but anywhere in NZ for that matter) is a red herring.

People are still dissing redfern as an ‘a#$shole of the universe” suburb, meanwhile prices are climbing by hundreds of thousands.

Loads of Highly Successful Investors who i know have made huge money in Tokoroa, and continue to.

people were dissing it then, as they’re dissing it now – possibly even harder back then.

I’ve learned to EXPECT this from the lion’s share of investors who own less than three investment properties, where I was always guided by people who had, i.e. 135 in 3.5 years, if you get my drift!

In the end it is your skill as an investor that will decide whether you will make money or not. What you buy, when, and how, and for how much, and why. What you will do when you own the property and why. Whether you will sell or hold the property and why. And when. What you predict will happen, and your ability to get that result and not another less desirable result. Figuring out what your worst case is, and being ready, but feeling confident that your investment will be a lot closer to best case than it is to worst case.

Gaining confidence in your ability to research the market, analyse a deal, and judge whether it suits your strategy. Having a strategy in the first place! Getting smarter.

Skill in terms of being able to discern a good deal from a bad deal (research, and market knowledge), what the values are likely to do in the future (research, and market knowledge), whether the town is stable, has an upside, or a downside (research, and market knowledge) and the degree of risk in your investment and the buffer you have – and your exit or hold strategy.

it then comes down to how you managed the deal. If you don’t pay your bills and your rental manager doesn’t want to manage any of your properties any more, then no matter what yield you are theoretically getting, you now have a problem – but it’s not the town’s fault.

If you let something slide without reacting, it’s your fault not the town’s.

If you didn’t account and allow for some unexpected maintenance issue and your figures are now out, it’s your fault – it’s not the town’s fault.

If you bought sight unseen without market knowledge and/or didn’t get a builder’s report or an independent rental assessment, it’s your fault – not the town’s fault.

If you believed everything everyone told you who was working for the vendor and therefore biased and with an agenda, and bought solely on that, and didn’t double check, then blame away, but it was your fault – not the town’s.

Okay, i am buying wonderful amazing deals all over nz for myself and clients, and simultaneously there are people buying ordinary, stupid, overpriced, lame or just BAD deals all over NZ, some in the same towns as us.

There are many many reasons why this is the case but most of them come down to the skill of the investor and their market knowledge in some shape or form.

Hi Guys

Yes I use a clause that grants us access after unconditional but I think Sparticus means before such as when you are doing your due diligence.

well it is just the same as your building inspector. They will have to make an appointment with the person who has the keys (rental or selling agent) and give the tenants the right amount of notice as required by law, then they go in and do their inspection. so basically allow a couple of days.

cheers-
Mini

Hi Seafire

I just started with a huge search engine list and picked my way through it. You need to do the same and not just take the first quote as the best you can do (or email me and ask me who I am using).

As I told you and as others have in the development section project builders are a good option and cheaper than made to measure builders.
If you don’t know what a project builder is then you have to go off and find out otherwise I fear for you, I really do. Part of your education is being able to speak the same language as your project manager, and know a soffit from a batten, a project builder from another, the going rate for cost per square meter for five different construction types, the different cladding options, and so much more. I am not the best person to ask as I haven’t done my first development yet, but gee, I’m making it my BUSINESS to educate myself on the subject. Nobody can do this for you. And if it’s all a bit much, then just pay someone to organise it for you, it’s called hiring a project manager.
You mentioned using Australian plans but why, are you making art, or being cost-effective?
Local people for local knowledge. Another reason why my team are irrelevant to you unless you happen to be developing in exactly the same town, and if you are, you won’t be able to use my team cause they are already booked! hehe

But first you need to figure out that the area you want to build in has a shortage of houses and capital gains through the roof. Do you have good local market knowledge on where you are developing? Because otherwise just please don’t do it, certainly not because you’ve seen some cheap land on the internet. I get the feeling from chatting to you on emails that you are not that far down the track with your research, and you really really need to be. before you do anything. Touch base with valuers, rental managers, real estate agents.

Also I need for an area I am developing in to not only have cap gains going through the roof but also that rental demand is through the roof with a waiting list. THAT is where you want to develop and where you have the best chance.
Basically you are developing to solve that town’s housing shortage, or expected future housing shortgage (such as some big project commencing in the future that you will be ready for, catering for the expected demand.)

if the town doesn’t HAVE a housing shortage, it’s risky to develop there!

You need to also consult with a rental manager as to what is the most popular amount of bedrooms to build, things like that. Also whether your style of building fits in to the surrounding areas.
You don’t want to contrast too much i.e. too ‘poor’ in comparison or ‘too rich’.

Units you would build in Paddington Sydney or Perth metro would be way different to units you would build in Eketahuna, NZ. This is also in relation to you mentioning you want to use Aussie plans. Why!

What I am aiming for is that the property will be going up in value even while I am building it.
Where you can’t buy CF+ve any more.
If you still can buy CF+ve where you are thinking of developing then it is unlikely just by logic that you will be able to manage a CF+ve development. Just buy one instead.!

You want an area where it’s so hot that the tenants are waiting before it’s even finished. Where the real estate agent is ringing you before you’ve even hammered the first nail telling you they have some interest. Where the valuer is telling you what he thinks they will be worth before you even have plans.

It’s finding a viable area first. If you are doing a development in the wrong area then no matter how cheap your development, it may not give you the result you want.

the weird but good search engine I found was called Piper Pat. Type in BUILDING and then click GO (don’t just press return as on other sites, otherwise it doesn’t work) you will find loads of links.

Then come back here and share your insights as others have done with you, good luck.

Don and Liz, Yes, indeed! GRRR that same thing happened to me with one of the first three properties I ever bought. Like you I moved agents too. What I learned is that this is why you MUST get an independent rental assessment. As Bill says sometimes they will do it for free because they may get the business but even if you have to pay $50 or something it is worth it, whatever it takes to get the TRUTH.!

If your independent rental assessment doesn’t come in as well as you had hoped, use it to negotiate the price down!

cheers-
Mini

A certain local industry insider on the ground and super Mata hari style property deal super-sleuthing intelligence infiltrator and deal-sniffing bloodhound and all around legend AKA NZ Bird Dog reported that yesterday there was a LINE of Aussie investors outside the real estate agent’s office!

I’m sure the news would have made the local paper!

cheers-
Mini

Hi Simon,

All of the people I know who have created their wealth fairly fast and then retired (i.e. fast tracked) have done so with cashflow positive properties. This is not to say that negatively geared ones don’t make you money or that your own home won’t be worth a fortune in 20 years time while you work your job to pay it down.

But anything negatively geared I believe slows you down and keeps you working, so it is the opposite effect of becoming financially free fast. And that was your question.

OK negatively geared properties may become positive over time and go up in value, and they can be great for speculating, hey, even I have one and I’m the cashflow queen. but so do the positively geared ones go up in value, much to the vociferous denials of the CF+ve detractors of this world.

Most investors start with single residential and then move into commercial properties but I reckon if you want to fast track your wealth and you have the bucks, go straight to level two, buy a positive cashflow block of units with an upside to improve the rent in a place with very low vacancy and a stable or increasing population.

By the way if you have a 2m portfolio returning ten percent or more with half of that going in holding costs (depending on your LVR) you should be able to live on that and continue to invest too.

cheers-
Mini

A buyer’s agent I see a little differently, such as you may sign up properties ‘as agent’ for a client. Bird-Dogs on the other hand are just people who find deals for investors.

So if we found a deal for investors and hadn’t signed them up, as I used to do, there was always the possibility that the client thought about it for a bit, then decided yes, but the deal was gone. Or else, that the client says ‘yes thank you very much for that information’ and signs it up direct, therefore we did the work to present the deal and the client took it but we were cut out.

So what we do is sign the deal up OURSELVES and/or nominee. Now I don’t know if this would work in Aus or incur double stamp duty, but it most certainly works in NZ, where stamp duty is set to zero dollars.

It is quite common that in NZ even if signing up your own deals that you sign it in your own name and /or/ nominee, and then direct settlement to a trust, foundation or company structure (whatever) often, that may not even be created yet.

What we like about this method is that we have actually SECURED the deal and almost always, the price and terms we negotiate are better than what others can achieve in the current market, not to mention the access to our team to assist doing whatever needs to be done, be that organise valuers, builders, or quote for repairs, appoint who we think is the top rental manager, help the client get a solicitor if they don’t have one, liase with their finance and source all the documentation they need (well usually it all goes out with the deal, anyway) – that sort of thing.

We make no claims that we are financial advisors, and though we sign up only deals that we think are good buying, we say why – every deal is different. Some are CF+ve and with a huge flat development site and in a good area with a tenant in place for 4 years like the one we sent out last night. Others have for example a head lease with the hospital. Others might come with a registered valuation that the vendor provided which proves the price is under valuation (i.e. a good thing) plus being CF+ve. It just depends on the deal, but we think all our deals are good and so must our clients, because so far it’s been over 6 months since we last had a deal that didn’t sell within a day if not hours and sometimes minutes of being released to the list.

cheers-
Mini

There is a good book by Hans Doevendans
all about relocating houses. In NZ, but it’s relevant to anywhere.

http://home.clear.net.nz/pages/doef/about_us.html

He will mail it to you for $35 odd and it is SUPER well worth getting if you are thinking about it. It may put you off the process completely, but if you decide to do it, you will be prepared for everything and learn lots of tricks to save you money etc