Hi guys,
As many PI.com members are looking at developing I thought it may be a good idea to start a thread on how to source the right properties, mitigate risk and of course to achieve the best outcome.
Feasibility
Attention to detail is the key between a profitable development and a financial disaster. One main aspect that will determine what you can and cannot develop is the amount of funds available to you and your borrowing capacity.
What process do I need to undertake to determine which site will be a profitable one?
Choose one council area so you can study that particular councils requirements rather than being overwhelmed and looking anywhere and everywhere. You don’t have to develop their but you can learn the process and apply to any other council.
Study the planning code of the council as most councils will have its own twist to the planning code of that State.
You may find that you need to research a few areas before settling on a particular area to develop.
Drive around the areas that you are researching in order to determine whether that particular council is pro-development or not and determine which type of dwellings are in demand.
Once you have found a potential site you can be breakdown the feasibility study into a few key points. These are:
• The purchase price (including stamp duty)
• The number of dwellings
• The cost of construction (including contingencies and demolition)
• The interest cost (this is where determining the length of time to complete your development is important)
• Planning/DA fees and all council contributions including subdivision
• Your selling costs (agent fees, title fees, legal fees)
• The end value of the dwellings developed (be conservative)
From this you can then work out your dollar profit, your profit margin, your holding costs and the amount you need to borrow versus the amount you need to tip into the development.
It would also be good for other developers to contribute their knowledge to this thread.
Oscar
I'm only doing my first one now, but I work in the industry. The mistake that I find that almost all first-time developers make is severely underestimating the time it takes from start to finish for a development because of the number of steps and people involved. Meanwhile, they bleed money. Alot of people when they see a shiny new set of houses for sale, assume that whoever built them is making easy money – but that person could have potentially lost money, and I speak to alot of first-time developers who lose money then never do a development again! Budget for huge delays with the Council, the builder during construction, and the state land authority that registers subdivisions at the end of the process.
I think a strong rule should be.
Always have enough contingency money that you can still finish the project. This can come from savings, investors funds, lines of credit, personal loans, credit cards, most likely in order of use as well. The last thing you would want is for something to happen unexpectedly (ie expensive) and you cannot finish. The quickest way to a empty bank account. If you can't even finish your project and at least sell to get your capital back.
As alfrescodining said about delays. Development is basically red tape the whole way through. No matter how efficient and organised you are, (which you need to be, because you need to be as fast as possible individually ) you are at the mercy of councils, government, builders, subcontractors, LTO. You can pay your money and expect them to work on it, you ring up a week later and find out its still on the pile of to do things.
I think knowing your financial capability as well. If you only have enough money to pay for a deposit and stamp duty, why are you looking at a 3 unit site or even a 2 unit site? As I believe as long as you have the financial resources this eliminates some of the stress. Ie the council come and tell you have to upgrade a power transformer, you organise the power company out they tell you it's going to be 7000. If you didn't have the Financially capacity at this stage it would be a real problem on you. You've suddenly encountered a huge problem If not capacity to pay that bill is not there. Council won't approve a subdivision or your development unless it is. Money solves problems in this case. You can pay for solutions or pay for advice to get those solutions.
think I can summarize the above as
1) having access to money sources, borrowed or not
2) understanding the process, working diligently whilst making sure others are up to deadlines
3) choosing development sites within your capacity more financial then mental.
Some great comments above.
As previously stated a lot of would be developers understate the timeframes considerably and overprice their end products thus bleed money. One very simple rule to run by is the 80/20 rule meaning take 80% profit and leave 20% in it for someone else something i live by. I personally will not touch a development that does not yield under 35% profit margins as you can always expect that 10% of the margin will be dwindled down at some point in time for something you will never ever see coming.
Get the right team around you. Your consultants are your life blood of a project, a good consultant can make you huge amounts of money a bad consultant will cost you a huge amount of money!
I always found on the job experience is the best way to gain knowledge, whether you do a JV with an experienced developer, sit with a financier doing loans, do a small development first (duplex, triplex etc) to mitigate risk or doing work experience these are invaluable lessons needed to be a successful property developer.
Developing is a difficult game to succeed in as everyone wants a piece of the pie – especially councils & legal firms, timing is everything & make sure you have the relevant resources available to you at all times just in case (contingency).
Thanks for contributing to the thread guys.
Property developing is a great strategy but it is a strategy that takes time to realise your profit. Still, rather than rush the whole process it does pay to allow yourself some additional time to complete the project rather than stressing the whole way through.
Oscar
I'm hoping someone can provide some general advice about building quotes and contracts. i.e. what tricky things to look out for, what to expect in contracts/quotes, inclusions/exclusions, etc. This is the part of the process I'm least confident about.
Which part specifically? The building itself? Stormwater?
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There's a short course your can do over a weekend with some training organizations. Called building contracts. Over a weekend they run through the specifics about
fixed price ccontracts
cost plus with % fee
cost plus with fixed fee
cost plus with fixed or % with capped maximum price
Be careful that you get things like stormwater drainage, paving or cement paths around the externals, window blinds if required, gardening and irrigation, rainwater tank installed included or at least get quotes for those things if your not going to put them in a single contract.
Most bigger building companies. Always list their prices from 100k for example. But they miss out the 50k of extras that you actually need to have a turn key solution. Your not going to be on site putting in stormwater drains (which are essential for maintaining the integrity of the footings).
I guess what I'm confused about is what level of detail should be in a building contract, and whether it should be taken for granted that the builder will provide some things. Things I'm talking about are washing machines, blinds, clotheslines, turf, temporary fencing during construction, public works approval for driveways, gas system, etc., even if this stuff is on the plans. Also, in everyone's experience, does the builder take care of the Construction Certificate?, or if you're not in NSW, the equivalent technical detail permit that comes after planning permit/DA.
There is another document along with the building contract which is called the Specifications list. This will detail what is and is not included.
Oscar
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