Brisbane - 7 Unit Development

I have been an avid reader of this forum for 5 years now and I have learned an incredible amount of knowledge from this wonderful community. It has played a large part in my short investment life and there are many well known forum members who helped me out/shaped my decisions along the way. Big thank you to all.

I guess it is time to contribute something back by diarising my new project in Brisbane. It is uncharted territory for me, a project in terms of size (7) and location (interstate), so I have a project manager right from the beginning. My role is to make decisions, sign paperwork and learn (haven't I already!!). And hopefully anyone reading this will help me to steer this thing along the way and enjoy the ride.

First decision was why do it. I have reached the point where simple buy and hold will not lead me where I want to go. I have had several buy and holds, a not so professional renovation, a relatively successful subdivision, a failed development which is now a dud B&H in my portfolio, and a smaller 4 unit development taking place currently in Melbourne. Develop to hold or sell down is a great way of purchasing new properties at a discount, with instant equity built-in so the process hopefully can be repeated, and enjoying the cashflow and depreciation that comes with it.

Second decision was where to do it. I chose Brisbane because I feel that it is in the right part of the property cycle to be developing in. The third largest capital city in Australia with a lower median house price than many other cities, well known to follow property booms in Sydney. The entry point is also lower compared to other states, giving me more choices of the types of development that can be done within my financial means. I focus on inner city areas within 10km of CBD for maximal capital gain as some units will be held.

So the contract went unconditional on Christmas eve :D and here are some facts at this point in time.

Site: 610sqm corner block 8km from city, in a good part of a gentrifying suburb

Proposal: 7 units three storey walk up, 6x 2B2B and 1x 3B2B units, 4 of the north facing units have city views. Average size of the units are 79sqm plus a 13-15sqm balcony. All units have an undercover carpark and there are two visitor carparks.

Buying process: The site was DA approved listed as EOI. The vendors did not care too much about settlement duration which was great! It took them at least 9 months to get the DA. I decided to go with a cash unconditional contract with a 31/3/15 settlement and it got accepted. The closest offer was also same price but with a few conditions. Happy to go unconditional as there was no further DD items left unchecked when the offer was made.

So the numbers:

Land cost: $660K (94K per unit)

Construction cost: 1.54M (220K per unit)

Total development cost (including interest less GST input tax credits): 2.46M

End value: 3.06M

End value less GST collected: 2.84M

Profit: 381K (based on sell 4 and keep 3) and will be higher or lower depending on if I am keeping more or less.

Margin on development cost 15.5%

Estimated timeline:

(chill out for the next few days, bit of meditation)

working drawings start as soon as people are back in January, already contacted the architect company who put the DA through and they have an in-house engineering firm. Brief meeting on 5th of Jan to discuss things.

settlement 31/3/15

demolition and begin construction April 2015

completion Jan 2016

When we first looked at this site it appeared that the margin was going to be well over 20% and close to 25%. However after checking with three high volume unit builders in the area the estimated construction cost per unit was 220K instead of 190K as initially thought. Trades are apparently getting more expensive. 210K profit was wiped out as a result :p and further items identified during a more detailed feasibility cut the profit a bit further. Once it went under 20% I lost interest, for a few days... But very soon after I came back to the deal. :eek:

The two main factors in this most difficult decision so far (ie: going ahead at 15.5% margin) were:

1. shorter turnaround in a DA approved site
Cash required is 750K and that represents a 50% return on investment over 12 months, not 24 months or longer.

2. ~4% project management fee
...which makes the actual deal bang on 20% margin - in other words I pay 20% of my profit to the most important person on my team, who has the experience to see this viable project through.

Other factors:

1. Definitely did not over pay per site by checking several unit sites and what other developers paid for (100-141K per site)
2. Good recent sales data backing end value and market is rising.
3. Ability to hold all at projected rental once complete.
4. Thorough feasibility not back of envelope style deal cruncher.


So here you go folks. I will update things throughout the year. I feel that I have just been strapped to a high speed roller coaster. In January this thing will go full speed and it's gonna be a bit bumpy.
 
Congratulations evan1875! Will be following your thread with interest.
Can I ask what the zoning is for the block? Looks to be quite a high GFA from my limited knowledge.
 
Would love to know the location of this, I suspect I know the area, but there are tonnes of these going up all over the place.
Its almost like the flood gates have been opened.
Interested to see Funds Distribution of the $750k cash.
Congratulations on getting back on the horse after the not so successful first Development.
 
Congratulations evan1875! Will be following your thread with interest.
Can I ask what the zoning is for the block? Looks to be quite a high GFA from my limited knowledge.

Hi Gradeng,

Thanks

The site is LMR 2 (2/3 storey mix). The site cover is 54% and GFA is 87%.
 
Would love to know the location of this, I suspect I know the area, but there are tonnes of these going up all over the place.
Its almost like the flood gates have been opened.
Interested to see Funds Distribution of the $750k cash.
Congratulations on getting back on the horse after the not so successful first Development.

The first development set me back a lot. But I just had to get back up and keep going.

750K is 30% of TDC. Alternatively I calculated End Value minus 20% in one line discount valuation and it is also 30%. So that is my 'skin' in the deal when I reach peak debt in December or thereabouts.

A shorter project hopefully will minimise market fluctuation risks. Tomorrow's end value is what no one can predict in any development.
 
Well done and looking forward to more updates.

Could I ask who do you intend to use as your project manager?

A company whose director also post in this forum, although infrequently. They have a track record of helping clients complete project this size. I will send you a PM if you need to use a project manager.
 
Congratulations Evan. I suspect this suburb is on the north side of Brisbane. Quite impressive that they could get 7 units on 600sqm.

Do you mind sharing the list of builders you have short listed?
 
Can you also provide a list of mistakes you did on your first development, hopefully, us learners can gain 'what not to do' knowledge from it
 
Can you also provide a list of mistakes you did on your first development, hopefully, us learners can gain 'what not to do' knowledge from it

Hmm, where to start?

Did not see the looming over-supply but in hindsight it was blindingly obvious
Overcome by greed and detached from fundamentals
Locality chosen more volatile as it is outside capital cities
DA and On-Sell is not a viable exit strategy (my plan B at the time) in most cases (ironically I purchased a DA approved site this time around)
Market can turn against a developer very quickly
Not enough knowledge and the wrong project to take on
DD is no where nearly as thorough as it should have been
Overpaying for sites
Underestimated time taken for DA, OPW etc

But in hindsight this last one saved me from going ahead, abandoned project when it became clear end values dropped enough to make the margin too thin. Had council been good and given me the all clear 6-12 months earlier, I would have started on the build which will land me in a difficult situation on completion. I personally know people caught with end products that they cannot move and even the project rental plummeted.

So I swallowed a bit of pride and pulled the plug. This dud site is draining 20K per annum and would lose me >200K if I sold it today. But I absorb the negative cashflow with income from my paid work, to save the equity for another day, such as another development. The property is still in the portfolio yielding a paltry 2.5% gross. It is a reminder to me on a daily basis that I could have been wiped me out, if not for my ability to hold onto it.

The good news is that I have stopped worrying about it now. Used to find it hard to go back to sleep if waking up thinking about it. And that was not healthy.
 
Hi Evan,

Sounds like a great deal, in my day job I finance a number of BNE developments of this size and to be honest the only people I am seeing making 20% profit on TDC is an owner builder as they always load their 10% margin in on costs.

Can I ask why you are throwing in 30% of TDC when most banks only require 25%?

Thanks
 
Hi Evan,

Sounds like a great deal, in my day job I finance a number of BNE developments of this size and to be honest the only people I am seeing making 20% profit on TDC is an owner builder as they always load their 10% margin in on costs.

Can I ask why you are throwing in 30% of TDC when most banks only require 25%?

Thanks

Hi Caferacer,

It is interesting. You said that from a finance perspective. We have been looking and actually finding it very difficult to achieve 20%. And competing against builders doesn't help. But I guess they should be near 30% if they actually have the luxury to wait and buy well.

So coming back to my decision to proceed. The other major factor I forgot to mention was that within my budget, after two months of searching this one was the best deal. Something better may come up but I don't know how many months I will end up waiting.

The 30% was what I have always been told for commercial loan. But I am probably confusing EDV with hard cost when it comes to the 30%. Will hopefully hear shortly from my MB who posts here regarding the details. As the settlement is very close to construction (hopefully) he indicated that most likely one commercial loan will be involved.

May I ask if you are in the banking or broking industry? Is it only Brisbane that is difficult to get 20%? Plenty of people on the forum seem to get at least 20% in other states. For my own interest, at what TDC do you start seeing margins > 20%, >30% in Brisbane?
 
Hi Evan,

I work for a bank in the property finance section.

Trying to find my own site at the moment and my feaso's keep coming back with a 15% return, it just seems that the builders are making most of the money out of the process not the developer.

Generally for a project of that size most banks will do 75% of TDC and 65% on comp (ex GST).

Perhaps with the extra 5% equity you have available you could negotiate a GST companion account so you don?t have to pay for the GST out of your own cash flow.

Cheers
 
Hi Evan,

I work for a bank in the property finance section.

Trying to find my own site at the moment and my feaso's keep coming back with a 15% return, it just seems that the builders are making most of the money out of the process not the developer.

Generally for a project of that size most banks will do 75% of TDC and 65% on comp (ex GST).

Perhaps with the extra 5% equity you have available you could negotiate a GST companion account so you don?t have to pay for the GST out of your own cash flow.

Cheers


With the percentages that you have just outlined, does it depend on the deal, the borrower or neither or both?

What is a GST companion account?
 
Plans attached for those who are interested.

Slightly slopy site with some cut along the south-east boundary. High side of the street facing city.

We were not involved in the designing process up to this point but the GFA was impressive and both height and building envelope were pushed. (neighbour being non residential helped). Overall I think I would have been happy if I was getting a raw site and achieving this with the DA.
 

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Gst

My accountant is away on holidays currently. So any help from accountants will be much appreciated on this one.

If I was claiming GST input credits along the way with the intention to sell on completion (Margin Scheme) but end up changing my mind and hold the units. What happens to the GST that I claimed?
 
With the percentages that you have just outlined, does it depend on the deal, the borrower or neither or both?

What is a GST companion account?

If I was applying for finance I would look at it this way -
75% TDC - $1.84M
65% GRV (Gross realisation value) - $1.98M

So a bank would lend you up to $1.84M (always the lesser amount of TDC & GRV)

So in this case you would have an extra 5% up your sleeve if you are contributing 30% equity.
In the case of property development GST funding can be considered, to assist developer cash flow on a revolving basis, within normal lending margins. The effect of this will be that the developer will need to contribute slightly more than the minimum equity requirement. If the developer submits monthly BAS returns the revolving GST limit would be approx. 2 months of GST based on the development cash flow budget. The developer would then pay the GST as a component of paying for inputs, at the end of month 1 submit a BAS return, when the ATO refunds GST during month 2 the developer re-imburses the GST funded by the Bank, to the Bank, and the process repeats throughout the development.
 
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