All Topics / Value Adding / Property Development and Borrowing

Viewing 17 posts - 1 through 17 (of 17 total)
  • Profile photo of carpe_diem

    Hi
    I'm into residential property investments and have done well (mainly accidental as I lean more to bricks and mortar).  All properties are on land in the inner areas of Canberra.  Virtually all are in redevelopment areas.  Whilst I have excellent equity and low debt (15%) I don't have access to cash other than my income which is fine.  If I decided to develop one of the blocks (zoned 3 storey for about 9 apartments on corner block 5 minutes walk to city) myself am I able to borrow and then sell off the plan?  Perhaps there are particular book(s) that I should read that give me insight on handling from beginning to end such a bold move.  Appreciate any advice you might have to offer.  Probably wouldn't do anything right away but I guess I'd better start planning for growth in the future. Thanks
    Carpe

    Profile photo of Beth AshtonBeth Ashton
    Participant
    @beth-ashton
    Join Date: 2008
    Post Count: 13

    Hey Carpe

    I haven't read any books on multi-developments before but also interested in finding out – if anyone can suggest!

    I guess by the time you have read a couple of books and have Surveying, Engineering + Architectural Drawings your plans could sit in Council a while waiting for DA – by which time, the market may have started heading ^ward again? (hopes)

    Are you set up as a Company? You should be able to visit your Bank Manager / Lender with your current Property Portfolio stats and borrow for a multi-development through your Company. During the Development process you would only pay Interest anyway, which would keep your cash flow plenty!

    If you are registered as a 'Developer' you can have Sales staff (or yourself) selling the apartments without having an Agents Licence – which could save a few thousand bucks if you know what you're doing!

    I guess if you pursue development during the big-bad-Recession, you could always opt toward Leasing your apartments as there will be more of a demand with Vendors selling up! I'd suggest discussing both Off The Plan Sales + Leasing options with your Bank Manager / Lender

    Congrats on such an achievement with just 15% debt! That's incredible :)

    Beth Ashton

    Profile photo of carpe_diem

    Hi Beth
    Thanks for responding and providing info that helps.  Had not thought of forming a company but it seems like a great idea.  I wouldn't start doing anything for another 3 years until the market improves so I have a fair amount of time to plan……I think in the ACT you have 2 years to start once it has been approved.  I have been lucky to get where I have as I did buy land properties over 10 years ago before the housing craze started.  They were days when nobody thought of buying old houses on large blocks of land and  people did not have the option to borrow against equity.  It was a requirement to put down a large deposit on anything you bought regardless of how much your assets were worth.  As you know it went the other way so people could borrow against equity so much so they could borrow more than the cost of the property they were buying.  It's scary to think of the time ahead if unemployment goes so bad that those kind of borrowers with huge debt having to sell their properties in a sliding down market.  When I bought my properties over 10 years ago the cost of a property in Australia was only 2.5 times your income…….up to this credit crisis starting any property was a least 7.5 times the annual income.  We were up there with Spain, US and Britain……and as you know prices are really tumbling particularly in the US and Britain.  We haven't been really hit yet and let's hope we can head off the recession otherwise it will be bad for people in housing debt and the property market for a long time.  Anyway on a lighter note I still think property long term is the best investment as long as people strive to never have less than net 50% equity in a property portfolio and at least a 5% cash flow on any property purchased regardless of employment income.  All the best to you Beth and thanks for taking the time to post some good ideas.
    Regards Carpe

    Profile photo of harry fosterharry foster
    Member
    @harry-foster
    Join Date: 2008
    Post Count: 4

        * Borrowing can only be used to fund the purchase and redevelopment of commercial property
        * Following the changes in Regulations on 6th April 2006, the maximum that can be borrowed is restricted 50% of existing SIPP funds. In calculating the maximum loan “Protected Rights?? funds may be taken into account, but these funds can not be used towards the actual purchase/development. They can however be used for the associated costs, e.g. professional fees and stamp duty
        * The loan can only be secured using the assets of the Member's SIPP
        * The rental income produced by the property must exceed the mortgage repayments (including capital and interest)
        * Where a number of Members are buying property together, each Member may borrow a maximum of 50% of the value of their respective funds. Each Member may have different levels of borrowing if necessary, but each Member’s share of the rent received must still exceed their individual loan repayments.
        * The loan is made to Trustees of the Member’s SIPP, not the Member
        * The Lender is given First Legal Charge on the property as security. All documentation must include a Limitation of Liability clause, which limits the liability of the SIPP’s Trustees to the value of the assets held by the Member's SIPP.
        * Any loan must be repaid when the property is sold
        * No new borrowing is permitted once the Member has begun drawing retirement benefits using all available funds i.e. a “full?? drawdown.
        * If the Member elects to take phased retirement benefits, he/she may still be able to borrow to purchase commercial property, based on the assets not yet “drawn down??
        * Loans should in general be taken out on an interest and capital repayment basis, though some may have an initial interest only period
        * Members may take out a bridging loan to cover any VAT payable on the purchase. This can be in addition to the 50% of fund maximum. However, the term of the bridging loan must be no more than 12 weeks from the completion date of the property purchase.

    __________________________________________________
    Miami Real Estate | Miami Beach Condos

    Profile photo of wayneclayton

    hi, i,ve been looking at development courses and there are a few, you can spend $6000 with ccorp and get all hyped up(wouldn't recommend) also there are peter comben , google him and also positive property strategists, another mob that do it, also theres the red club developers, in sydney. you'd be better off reading some books first and speaking to a town planner etc or d.a mob who do all the drawings etc and then get the ball rolling as will take 3 years to complete. you better off doing it now as will be perfect timeing then…
    good look.
    wayn e

    Profile photo of miikemiike
    Participant
    @miike
    Join Date: 2008
    Post Count: 111

    Hey Carpe,

    On the other side of the coin, you should really spend time on doing research to maximise profits and target the correct demographic.

    No point targeting middle income families in an area that is high end.

    Invest your time in contacting local real estate agents and rental managers, contact town planning and see what is currently in the works.

    Good Luck.

    Cheers,
    Miike

    Profile photo of carpe_diem

    Thanks Yorkie and Mike for more assistance.  Yorkie you are so right ….. this area is hot (close to city and close to ANU) for 1 bedroom apartments so I can get 10 on it no problems being a corner block.  I still need to do more research/investigation but this is certainly the way I'm leaning.  I've "almost" scrapped for example my heart plan to have built large townhouses (1 for me to live in).  However 4 on the block which would no doubt sell won't yield as well as 10 x1.  One little problem I have to deal with is am I putting greed ahead of quality architecure if I go down the multiple unit path…..something of course I and only I can resolve…..unless anyone on this site happens to be God.  Sorry I might be on the wrong site for this issue.
    Cheers
    Carpe

    Profile photo of kum yin lau

    Hi, you might be alright borrowing off the end value of the devt. I reckon 10×1 might cost 1.5-2M to build? and you might end up with 8-10 apts with end value 3-5M

    Once DA is approved, the banks will provide funding. I borrowed close to 1M for building and the bank released it as and when the builders asked for payment.

    Always borrow more than you need. You pay interest only when it's drawn down.

    The 'danger' period is when the building is almost done but hasn't sold. Your interest cost will be way way up there & the pressure to sell can be quite horrendous.

    Can you do a mix of 1, 2 & 3 BR apts? Or maybe just 1 & 2BR ones? There's no need to have them all uniform.

    That's the part I like about building & 'devt'. Creating the best mix for your land is a very very satisfying exercise.

    Good luck,
    KY

    Profile photo of AzaliaAzalia
    Participant
    @azalia
    Join Date: 2008
    Post Count: 56

    Dont get greedy, that is the trap that many have fallen into and then they get into trouble. Do your research and as suggested earlier go see your town planner as they will give you a rundown of what is needed and wanted in the area, and that will give you an idea of what to built, who to target and will be more likely to be approved by council.

    Do a feasibility study as this will give you a better idea of what costs are involved and what options would create the most profitable and desireable (based on what town needs / demands) result.

    I have done ccorp course, and now work with a development company. Given your property options involve development I would recommend that ccorp course would suit you and you would probably find it money well spent. Or you could JV with someone who already has some knowledge and experience in developments of that sort.

    I also agree that it would be beneficial to you to set up a Company to control the development as you certainly would not want to be at risk of losing your personal assets if you did it in your personal name and something were to go wrong!

    Seek professional advice!

    Profile photo of carpe_diem

    Thanks Kum Yin and Azalia for more information to stew over that helps me tremendously so very grateful for everyone's input.  It does seem a bit scary in many ways to go down such a path of being a developer through to the sale of the units.  Another option I'm now thinking, which some may see as  a cop out, is to sell the block with the plans for a development proposal already approved.  Wondering about the ccorp course as there are two different views posted on this topic on the value of this course but I'll check it out further. 
    Cheers Carpe

    Profile photo of wayneclayton

    its very expensive, check out smartpropertydevelopment.com.au

    $550 dollars and you don't get all the hype…….. email me at [email protected] for any more views,
    good luk
    wayne

    Profile photo of kum yin lau

    Hi Carpe, a couple more points to consider [as though you don't have enough to think about!]

    Just something I've observed : 'best' time to build seems to be near the end of a recession – our recession is just beginning so your idea to wait & learn all the necessary steps while waiting seems sensible.

    Another point is Canberra has peaked after a rather dramatic few years of sharp increase. It has to settle into a plateau before it goes up again.

    By the time you're ready, hopefully valuations are reliable and therefore your calculations will be accurate.

    The cost seems big but by devt stds, it's only a small devt [based on cost of houses/apts] we used to think 1M was huge but high housing prices have shifted the parameters.

    KY

    Profile photo of carpe_diem

    Thanks Yorkie and Kum Yin
    This site is so amazing ….so many generous people with their time, ideas and support…..most of the people around me in life somehow seem to be so busy busy busy they don't seem to have time to do anything for anyone but themselves.  Some of us in normal daily life, including perhaps me sometimes, might be like the aforementioned but seemingly a strange kind of metamorphosis takes place when we log on to this site.  Anyway sorry for rambling on totally off the topic.
    Thanks
    Cheers
     Carpe

    Profile photo of Dave WardDave Ward
    Participant
    @dave-ward
    Join Date: 2004
    Post Count: 37

    Hi Carpe,

    I have now developed over $50M worth of property over the past 5 years (including 1 large $23M at present) and can offer this advice:

    There are many skill bases you require before even contemplating development, especially one the size you are considering. Some of these can be summarised as:

    Negotiation Skills (Most important)
    Design Knowledge (Equally Important)
    Market Knowledge – So a unique product may be created and released into the market for sale/lease with multiple exit strategies to explore if things don't follow plan (which the rarely do)
    Building and construction knowledge
    Knowledge of Law
    Knowledge of Finance and Accounting
    Knowledge of Marketing
    Town Planning/Environmental Law knowledge

    These are the very broad areas of knowledge you require as a bare minimum before you would consider "diving" in. So many people think they can outsource all the above by engaging consultants, and that they will just "take care" of your interests. This IS NOT the case, unless you have the knowledge and skills to drive them in the direction the project requires in order to achieve a favourable outcome. The most dangerous thing you can do is read one of the many generic books on the market that brush over the core skills required and make you believe you can do it on your own. A seasoned, skilled developer (like any professional) gains their knowledge and skills over many years, if not decades. Lastly on this point, if you don't intricately know anything about a particular disipline of a development, how can you go and hire of engage the correct professional to fill that void? What questions do you ask to ensure they are the right person for the job? How do you know what terms to include in any agreement that is to be executed with the consultant?

    The other thing to consider is that when undertaking a development as a one off, you are unable to spread your overheads across multiple projects, which in effect make the exercise unviable. For example, a construction contract (prepared properly) will cost around $15-20K, a sales contract will costs around $2-3K alone to have prepared etc etc etc (I could list the fixed costs for various expenses all day) If you look at these costs as a percentage of the total cost of a 10 unit development vs a 100 unit development, it quickly adds up to ensuring the project isn't viable.

    In summary, setting up all of the infrastructure to run 1 project as well as making all the mistakes along the way that you inevitably make as a result of inexperience will ensure the project fails financially unless the market booms to cover all your mistakes. No business in the world succeeds by outsourcing every skill required to make it a success. You simply have no control over consultants and are at their mercy at all times. You can't run to the courts and take legal action against a company every time they don't perform and if you withold payments, you end up spending more money on legal expenses whilst the lawyers engage in letter wars.

    If you think you want to be a developer, start with a very small, low risk reno to see if you can make that a success. You will learn how to deal with councils, contractors, agents etc etc by doing this and then be in a more powerful position to decide hw you proceed with this property (other than asking others on here what to do, that quite frankly, in the majority of cases, have probably never engaged in a development before either)

    Anyway, goodluck with whatever you decide. I don't usually post on forums, however your situation is a common one, and if you do some research you will find that construction/property services have one of the highest failure rates of any business sector.
    So what I am saying is that you will answer your own questions as you become more sophisticated and gather more experience.

    Wardy

    Dave Ward | Geronimo Finance
    http://www.geronimofinance.com.au
    Email Me | Phone Me

    Property Investor, Property Investment Expert & Advisor, Finance Expert & Strategist

    Profile photo of KailynKailyn
    Member
    @kailyn
    Join Date: 2009
    Post Count: 18

    Is any one knows about Landmark Property Development Company? Why the share price is going down.?

    high interest savings

    Profile photo of kaleidoscopesskaleidoscopess
    Member
    @kaleidoscopess
    Join Date: 2009
    Post Count: 15

    Hi

    I'm interested in something similar and am based in Sydney.

    I've got a few questions.
    How do a legally start up a compnay (Pty Ltd) – does Accountants do this, or can I do it myself? Theres a lot of stuff on the net, but I'm not getting any real luck. Can anyone recommend someone to me in Sydney that sets up a company, e.g. financial advisor/accountant?

    Wardy – you say you have done many of these projects.

    What type of loans did you utilise? As in did you use GVR loans/capitalised interest? etc What was the lending criteria invovled – as in for someone who is attempting their first project, and with the current economic situation, what would a lender (be it a bank or private lender) be looking at (criteria/asset wise) for lending. Do lenders provide loans based on Margin Development cost and business plan, in addition to personal assets(which i would rather avoid collateralising)

    Can you recommend me any specific lenders/mortgage brokers etc?

    Thanks

    Feel free to private message me if you like

    Cheers

    Profile photo of nurvnurv
    Member
    @nurv
    Join Date: 2006
    Post Count: 6

    Great information Wardy and very true…

    Developing takes many years to get the neccesary skills to understand the total foundation to complete a successful project.
    As Wardy also said be careful of all the generic books out there and take them for what they are, a broad overview. They do give you a base understanding which all helps but most of the skills are learnt on the job.  I learnt the hard way after ending up in the Planning & Environment Court fighting for an approval which had 95% backing of the Community and still getting knocked back because of certain "non competitive" reasons by Local Govt (it's great to have mates in the right places type scenario). I ended up spending a lot of extra money on something that I thought was a shoe in. In the end I did mediate with Local Govt and come to an agreed approval after an extra18 months and couple hundred thousand $$$

    Although times are a bit quieter at the moment and Councils are happy to approve more projects without the typical red tape to keep the economy turning, I would still suggest after covering all bases with a Town Planner and getting his full support on the project, that you allow monies for fighting for your project in the Courts.  As you can see from my experience you just never know.  * One important point also, make sure there is sufficient community "need"  for such a project, that can be easily proved and fought for. This will be the only way that you can win in the Courts should you come up against a Local Govt with the before mentioned type attitude

    On the subject of the development process you can always employ suitably qualified professionals along the way to help coordinate the approval process. Architects and Engineers can do this but are usually at the higher end dollar wise but you can always negotiate a price in these quieter times. I coordinate my projects myself now but in the past did it with the help of a trusted Town Planner ( one who knows the local area well and all that is happening development wise in that area as well as who's who in the game will certainly be beneficial ).  A Town Planner is usually quite a lot less than the previously mentioned professionals to hire and knows the whole process.

    Once all that is done and you have your DA (development approval), BA (building approval showing complete construction materials and final layout) and then Operational Works Approval (for all earth works and services), you will still have 2 important phases to complete.

    1. – Off the plan sales and marketing, then following up through to handover of keys. ( Can be done by a trusted R/Estate Agent/Agency after full Contracts and Disclosure statements have been drafted by a qualified Solicitor)

     2. -Then the construction phase. ( Can be done by a suitably qualified Builder or through a good Project Manager with a proven track record who for a fee usually 5% of total build can direct the whole construction process )…………

    Kaleidoscoppess an Accountant can certainly setup your preferred entity for you, Company/Trust etc .  Depending on how in depth you want the structure to be you can set one up yourself.  A good site to check is Shelco an online Company registration website. A basic Company can be setup from as little as $1500 last time I checked, it might be a little more now.

    Finance.. I am in the process of obtaining finance for a smaller project due to the current economic conditions of about $9mil and I can tell you first hand the Banks are really tight with their lending criteria at the moment and changing daily.  They are wanting the project to show a return of min 30% and as much as 80% pre-sales depending on location and experience. They will also want extra security or Director's guarantees.  Private equity is around but hard to find and they are only interested in exceptional returns or joint venture as they see the current market as very risky. My advice at this stage is if it doesn't stack up with a major lender then be very wary and make sure your due diligence and feasibility is bulletproof and be aware to allow for many variables that are not all covered in the books you read. Also note that a few of the Developer/Authors out there at the moment have gone bust during these recent times not all by bad management mind you but because of the worst global recession since the "Great Depression" and may have ulterior motives to build back up their cashflows by selling information that got them into that trouble in the first place.

    Just to finish off, sorry for rambling I don't usually post on forums either as finding the time to do so is hard.  But after reading what Wardy posted I also agree there is alot more to know with the development game and many pitfalls to be aware of.  I thought that if I share my experiences with you and help save you money, whether it be $1000 or $1mill it all adds up.

    I hope after all of that I have helped educate and not frightened you totally as you can see by my signature the entreprenuerial drive and "Have a Go" attitude is what has got me to where I am today.

    I will soon be embarking on my biggest project to date.  A large fully approved Seniors Housing Development of more than $100mil which has taken me quite sometime to get to this stage but will be marketing in the not to distant future.

    Best of luck to you all!!
    N.U.R.V

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