Foot into Development

I i went through the stage of renovating properties. About half the properties I used for quick turn quick cash. In, Reno in 6 weeks, out, sell. And the other half where renovation subdivisions. Where you are not trying to make 50 k from just doing a straight renovation. You would be doing a land division as well. The renovation is just to maintain as much value as you can in the original house. 

I think the biggest thing that renovating house and subdividing homes has taught me is that I can now see value, I can see money. I can look at a home and pretty much know if its worth investigating more. Learning to read specific parts of council development plans, understanding what you can do. Looking at other subdivided homes and going "how did they subdivide that corner block when the minimum block size needed is 350sqm and their block was 270sqm. How did they do that ? Turns out the answer was they had a firewall between the two homes and built on the boundary, they also built a 2 bed with study(eh eh 3rd bed) and therefore only needed one carpark. 

Buying privately instead off a agent is another way to get those "sites" that nobody thinks are out there.  Yes it does involve getting up and dropping letters in all those corner sites. I found that having a business card and a typed signed letter work well. You want people that open your letter to fully believe that if they wanted tto sell you'd be there the next day with a offer for them. Also with negotiating privately, always let them suggest the first price. It might be lower then you though and if there's profit it at that price, negotiate the best conditions you can get. A 6 month settlement with access to the backyard is worth sooo much more more then just 10k lower on price. 

After going from that typical renovation, subdivision you end up at property development.

i would say though in the current market not everywhere but generally. If i had a decent income.. Above 75k with minimal debt and some savings or equity. I would not be out renovating (individually and on a single home) 

in terms of mentors I started with a mate who was out there renovating and subdividing, Learnt the basics and then when i progressed past him I went out looking for new mentors to guide me. This meant people that had done and still doing developments, asking to spend a day with them, absorbing their knowledge, visiting their past sites.  I think think these experiences whilst they don't give you all the answers give you confidence. 

My current single development for this financial year has a net equity gain of 350-400k,  with a positive cashflow result of just under 50k per year. But getting there has involved a couple years of what I call my "apprenticeship years" you work like a dog long hours, your pay is never as high as you expect and you make plenty of mistakes that cost you money. 

Some other things I learnt that are important.

– there's no use talking to the bank teller about finance, speak to someone who is recommended that has done the property deals before, or you'll just waste time explaining. 

– pick your development based on your income and what you can afford. 

– 95 % of properties on the market that are "subdividable" won't make money. They have already added on the value of the land to the un-subdivided house. 

– work out your team, first!

– arrange meetings with various people you will need along the way. All accountants lawyers, surveyors , builders will sit down with you (most likely for free) and learn a bit off each one. You might not use all of the people, but your trying to find people that you get along with, so that you can ask the "stupid " questions.

Im not a registered builder yet, Im currently doing my minimum technical requirements course which is a cert 4 in building and construction so i can go for my licence hopefully at the start of next year. Currently Ive got a building supervisor who works for a fixed fee per development.

With building contracts
The two most common are either
Fixed price or cost plus.

Some states don’t allow cost plus. Ie I don’t think Queensland do.

The advantages for the owner for a fixed price bill.
– they know the price from the start and can budget.
– any extra costs are incurred by the builder (but usually things like hitting rocks when doing footings are priced into the building contract so they wouldn’t pay, owner would have to)
– banks like fixed price contracts a little bit more then cost plus
– but usually the builder puts a fudge factor into his quotes because he doesn’t want to pay more if he goes over. So your quotes reflect this added risk for the builder.

– cost plus contracts (cost plus labour)
Can come with fixed fees ie you pay 50k to the builder,
Or you pay a percentage on top of costs to the builder ie you pay their margin. Ie 15% plus the cost of materials.
– owners worry about these contracts as they don’t see it as a incentive for the builder to keep costs down, with wastage and hiring more expensive tradies.
Because if the costs go up the builder still makes his margin.

– cost plus with fixed fee and fixed maximum price.

this is my personal preference for a couple for reasons
– you know the cost your paying the builder for his service.
– you get the advantage if materials are cheaper that saving gets passed on to you.
– usually you get the builders trade discount. If you have a good builder they will pass this on.
Ie if they have deals with truss companies or boral, masters etc. can save 5-10% on costs just by having there discounts passed through to you.
– you also have a maximum price. This keeps the incentive on the builder to look around for a couple quotes on jobs instead of accepting the first one. This works like hedging your bet. You get the
Benefits of getting a cheaper price in cost plus. But also minimize your risk.

Also if the builder is supplying the contract is have a lawyer look over it first. Because it most defiantly will be worded to favor the builder.
Just double check.

It is my experience that when it comes to projects you need to look at bigger projects and ideally buy the land and then obtain permits. That is the best way to make a profit. The problem with small developments is that you are normally competing with other investors and small builders. What I do is partner with other investors then look to buy a larger project.

We have so far secured a 17 unit project in Melbourne but are now looking at larger projects in Melbourne and Brisbane

You can get $5m 80% of total development costs without presales but is going to cost you 11-13% depending on the lender.

I don't do anything with presales but have seen several clients have issues with them, it is not the presales themselves per se it is just that the loans that require them tend to have lots of conditions and I have seen them move goal posts mid development and it gets messy.

Better question for a broker really.

I think when it comes down to bigger unit developments. If your building to hold them and your Servicablity can afford that, then what presales are you going to need? (None) provided you meet the LVR requirements. I'm about to start building 7 townhouses in a couple months. That's all residential lending at 80 %. At worse they would go to a 70 % GRV loan for the 7 units. And then convert them all to 80 % individual loans at the end of the project.