Forums / Property Investing / Value Adding / average development profits??

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  • Profile photo of matissematisse
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    @matisse
    Join Date: 2010
    Post Count: 1

    hi guys,

    been browsing the net trying to find out the answer to my question , but i cant seem to find it anywhere. my question is what sort of profit do devepors make? i know there a lots of different answers but just as a general ballpark figure, what makes it an attractive deal?  for example someone buys a block of land  and puts 4 townhouses on it or something along those lines??

    now i no people are gonna jump up and down saying"oh you need to acount for this and council that, but you know what i mean.As a percentage of total cost what is an attractive profit?

    cheers guys.

    Profile photo of ducksterduckster
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    @duckster
    Join Date: 2004
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    One factor is that a construction loan is lent out in stages. So say for example you had $800,000 in construction costs then the interest is not charged on the total $800,000 for the 12 months of construction time.
    Also there is a saying that the profit is made when you purchase the property at a discount.
    Some developers buy a block of land and sit on it so it gains value over time. So it is not really a development profit but rather capital gain and developer profit.
    AS an example say a 1.3 million layout a 300,000 profit would be good at around 20% mark.

    You have to be respectful of  "oh you need to account for Blah Blah" because if you get it wrong imagine a 20% loss instead.
    imagine having a $300,000 short fall cause the figures were not worked out and you had a cost blowout.

    And I have noticed where I live that some of the local developers are selling their developments straight off the plan before the development is completed.

    .

    Profile photo of Scott No MatesScott No Mates
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    @scott-no-mates
    Join Date: 2005
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    use 2 methodologies eg dcf & tdc. If they give similar answers, then it’s a goer.

    Discount factor of 15%

    Profile photo of jxfjxf
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    @jxf
    Join Date: 2007
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    I have no development experience so others may correct me here – but I think I understand your question.
    After talking with some commercial lenders (just from the Big 4) they need a project to show a 15 – 20% profit margin (so profit margin = profit / (total expenses)) before they will lend to it (other factors will of course affect things but that's one criteria).  
    In this market one lender commented he's seeing more projects at the lower end of that scale with only 15% profit margins coming across his desk.
    In case this kind of info is state sensitive – I live in Melb.
    Cheers.

    Profile photo of Ben KBen K
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    @ben-k
    Join Date: 2010
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    My mums partner was a developer for about 7 years from the mid 90's.He was in the top 5 small business borrowers from ANZ in NZ for a period of time. i have picked his brains on many occasions and he said to me regarding developments/subdivisions: 

    If it costs a mill to buy, spend a mill to develop, make a mill in the sale. he was a simple bloke lol, but it worked,well. he said what ever land costs were, spend that amount on development and make that amount on the back end (in simple terms)

    dont know how savvy developers on this forum feel about that but just wanted to share what i had been told about developing. obviously alot more complex than that – but just giving that answer in regards to the question!

    Ben 

    Profile photo of Matt007Matt007
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    @matt007
    Join Date: 2008
    Post Count: 259

    As someone said above, most lenders look for 15-20%profit before they'll consider it. They will also look for (in some cases) 100% presales which is why there is so much being sold off the plan these days. Some lenders will take less but they essentially won't accept any risk at all these days. I like the 'spend a mill make a mill if it costs you a mill' analogy, often the simple things work the best I find.

    In saying that there are SO many different factors and contingencies (that yes I realise you don't want to hear about but avoiding them means death by lender in this market).

    20% is your minimum target profit. IF you can't reach or sustain that, you'll probably struggle to get funding for it (unless you have private equity or funders who'll charge you a lot higher rates than the normal pirat…er..banks.)

    Profile photo of DWolfeDWolfe
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    @dwolfe
    Join Date: 2009
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    I'd buy that for a dollar :)

    I've had other developers tell me that they work in "high teens" percentage wise. I always understood it to be a 25% profit that was aimed at but having said that if 25% is a profit of $50k and you spent 18–24 mths on it then it probably would not be worth it.

    Depends what you think is a good profit, how much time you spend doing it, if you could have made more money somewhere else, if it is likely that the profit will eventuate etc etc. Not to mention all the standard stuff like costs of land, build, other.

    Also depends on what the project is risk wise, if you are churn and burn low end or top end or high risk, you'd want more from the deal.

    Myself – 1st profit 25%
    next deal working on at this stage 40%. But the suburb I'm in might be hit by a meteor or something ;)

    D

    DWolfe | www.homestagers.com.au
    http://www.homestagers.com.au
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    Profile photo of DWolfeDWolfe
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    Yeah spot on Matt007, presales are now my bestest buddy :)

    D

    DWolfe | www.homestagers.com.au
    http://www.homestagers.com.au
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    Profile photo of GiumelliGroupGiumelliGroup
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    @giumelligroup
    Join Date: 2010
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    In this market with the amount of good deals around, if your not achieving around 30% NP its not worth it. To work off 20% or less is really disaster in the making. Things always come up and your margins will always move so you need to have a good amount of buffer in it!

    Buy right, develop the right product and you will reap the rewards..

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