Opportunity

[Donald Trump]

Freinds,

I would like to give you my situation and seek your input on finding the best solution to becoming a property developer.

My role was recently made redundant and my wife have two small children which places our houshold with no income. We own our own house having approx $900k in equity and cash of approx $26k (Equates to 4 months of living expenses). We also own an investment property with only $10k in equity as it was a recent purchase and positively geared, therefore not a burdon on cash flow.


My father is a pensioner who is willing to transfer ornership of his property to me so that i can use the equity to start a business in developing properties.
This would provide me with total equity of approx $1.3m

I also have a line of credit to approx $600k.

In my view, the following structure is the best vehicle for success:

1. Set up a company and register for GST.
2. Inorder to live during the development cycle, transfer $100k in a savings account which will then fund my living expenses.
3. The balance of my equity will be used to purchase a site
4. Need to gain further finance on the finished properties for the construction costs, plus interest payments probably as a construction loan?.
5. Construct duplexes in the right locations say one per year initially working towards two maximum.
6. Sell the investment to fund all expences during the process.

If you were in my situation, what would you recommend in terms of approach, the right finance structure vehicle and company v PAYG?

I understand that I would be living off my capital in the hope that my return will exceed total costs,but unfortunately cannot see any other option.

 

[Peter_Tersteeg]

Hi DT,

You've got a lot of equity available, so there's a lot you could do.

I would however advise you to start small. I'd look for a new job and then look at finding a site for development. Get that done first then review your strategy given what you learned from the first project.

One of the things lenders look for when considering development applications is your experience. Realistically speaking, from your post, you don't really have any.

With yourself working, you could get a standard residential loan to purchase a site and then build on it. You've also got an income to support you, rather than spending equity to do this.

The plan you've outlined is acheiveable, but I'd suggest it's also highly risky. This means higher costs from lenders, and costs from possible mistakes. Unfortunately you don't know what you don't know.

 

[chran]

+1 to PT_Bear's post - it's risky. Plus I don't think it's nice to use your dad's property when you have a lot already.

 

[alexlee]

DT, with all due respect, you have a PPOR (which I assume you spent many years paying off), you have one IP (purchased recently) and all of the equity is in the PPOR.

Just on those facts, it suggests that you don't have much experience with property.

I want to get into property development too, but my plan is to keep doing buy and holds, keep my day job for a while, and get a few projects under my belt (while still working) before going into it full time.
Alex

 

[Donald Trump]

Thanks Peter,

I have previously completed two investment properties, each to the value of $400k on construction where I project managed both to completion. From managing timelines, all sourcing, payments to contractors and managing relationships I also developed checklists on the process as my thinking is quite systematic and locical.

Unfortunately this was difficult to do as I was employed F/T as PAYG and would now like to develop full time as it will provide me with a flexible lifestyle with which to spend time with a young family. I am also very commercially astute and drive a fierce negotiation when required.

I would welcome your thoughts on the structure of my proposal and the financial vehicles that would best be suited to facilitate the required outcome.

 

[grossreal]

hi mr trump
I don't wish to put a dampener on your deas as ideas are the most important part of developing.
but its not all roses in the developing world and there are alot of developers that are out there at the moment that wish they were not developers.
for me you should first secure your position not risk it.
If I had that type or size of equity and were looking at going into investing I would look at secure 5 x 5 year commercials in the cbd of sydney melb bris or perth.
I would equity lend to secure the property reval and leverage off those.
developing is fime but you have to understand the margins involved and have a secure postion to leverage off.
using others equity is fine as long as the end result is quatifiable and secure and going into developing because it seems like a good idea is not the way to go for me.
at the moment the commercial is well out striping the resi market and all major cbd have seen an increase of over 20% and if you can get a 20% margin on a development off the bat you are doing very well.
I would tread very carefully if I was going to kick off into deveolping unless you jv with a builder for a bit more security but even then I would be looking very closely at the margin of return and get some one with a very sharp pencil to look at it.
I have seen lots of developments that when you run a pencil over it the returns looks like a 20% but in reality is really a 5 to 10% and that just to thin for me.
just my view

 

[Donald Trump]

DT, with all due respect, you have a PPOR (which I assume you spent many years paying off), you have one IP (purchased recently) and all of the equity is in the PPOR.

Just on those facts, it suggests that you don't have much experience with property.

I want to get into property development too, but my plan is to keep doing buy and holds, keep my day job for a while, and get a few projects under my belt (while still working) before going into it full time.
Alex

Alex, the investment I currently own is my third as the first two were buy/construct/sell and these placed me in the situation I have currently ie ZERO debt on my PPOR. Not bad for not much experience with property.

I would like to learn from your vast experience and look forward to your detailed reply to my initial request for feedback on the structure of my proposal.

 

[Donald Trump]

hi mr trump
I don't wish to put a dampener on your deas as ideas are the most important part of developing.
but its not all roses in the developing world and there are alot of developers that are out there at the moment that wish they were not developers.
for me you should first secure your position not risk it.
If I had that type or size of equity and were looking at going into investing I would look at secure 5 x 5 year commercials in the cbd of sydney melb bris or perth.
I would equity lend to secure the property reval and leverage off those.
developing is fime but you have to understand the margins involved and have a secure postion to leverage off.
using others equity is fine as long as the end result is quatifiable and secure and going into developing because it seems like a good idea is not the way to go for me.
at the moment the commercial is well out striping the resi market and all major cbd have seen an increase of over 20% and if you can get a 20% margin on a development off the bat you are doing very well.
I would tread very carefully if I was going to kick off into deveolping unless you jv with a builder for a bit more security but even then I would be looking very closely at the margin of return and get some one with a very sharp pencil to look at it.
I have seen lots of developments that when you run a pencil over it the returns looks like a 20% but in reality is really a 5 to 10% and that just to thin for me.
just my view

Wondeful feedback, the commercial 5 x 5 is being considered as a good option.

 

[alexlee]

Alex, the investment I currently own is my third as the first two were buy/construct/sell and these placed me in the situation I have currently ie ZERO debt on my PPOR. Not bad for not much experience with property.

I would like to learn from your vast experience and look forward to your detailed reply to my initial request for feedback on the structure of my proposal.

I apologise. When people tell me they have a fully paid off PPOR and one IP with little equity, I tend to assume they've spent years paying off the PPOR and only started investing in IPs recently. Isn't always the case, as you can see.

Though I would ask: why did you choose to pay off the PPOR loan? Surely holdinig the properties you built would have increased your asset base?
Alex

 

[stumunro]

Though I would ask: why did you choose to pay off the PPOR loan? Surely holdinig the properties you built would have increased your asset base?
Alex

This question came to my mind too! Except i wont make assumptions... lol alex

(stupid word filter won't let me say a s s by itself)

 

[redsquash]

I suggest you read as many past relevant posts by Grossreal for a good insight into development.
It seems what you have done in the past was successful but .............was this due to good luck or despite your expertise.
the tone of the replies seems one of concern and caution.
My 2 cents worth is ...will your project be successful if things go wrong or are delayed, causing the project to be completed 3 6 9 or 18 months later.
ie will you have the cash flow to survive at your expectation level.

I to am surprised you have accumulated so much equity in your PPR. That seem like a great waste without knowing the facts.

 

[WinstonWolfe]

first up, find a builder prepared to carry materials costs while you carry land holding costs....otherwise, the reward won't justify the risk.


as some builders aren't that good at finding sites, I'd also focus on knowing the town plan back the front, then sourcing sites. No point sourcing sites before you know the town plan, cos someone who does know it will out negotiate you every time.


Finally, don't wait for sites to come on the market.

 

[grossreal]

hi all
I will give you all a bit of a history lesson and its the reason that I am in developing now.
and if mr trump you have built in the last 4 years you will be in this group.
in 2002 there was a mass of development in sydney and as I told westpac and anz that at that time they would lend to a dog to be a developer.
and they did
a dog to me is someone who has no clue about developing and but has a good job and saw hyper prices rises and the sun was never going to stop shining so they built bigger and bigger.
so they were doing duplex and started to do three storey walk up jumping from 1 mil projects to 9 mil project in the space of 12 months.
the banks saw it as a win win and fell over each other to lend.
no need for those silly things like have you built anything before.
or whats the margin.
and as for is anyone going to buy them.
no problem the market is flying ( very similar to what I see in perth now)
asset backed no problem the market will take up the gap.
so the market chugged along until this big other train came at it in the form of 2003.
and then there was a smash.
and in came me
not because I wanted to but because I had to.
to help out groups of builders that had lots of projects that
A could not finish.
b could not get funding
c had houses and live line on the ropes and we are talking about guys that have been building for 30 years and set up small groups that went out to do as they had done ( only trouble was that they didn't know what they were doing and had the same view sorry to say mr trump as you that they would just get into developing as it seemed a good thing to try).
I rearranged the loan structures via the banks.
I rearranged the financial terms with the banks.
I organised the on selling and delaying and organise a marketing plan
so off load the properties and at the same time hold off all creditors and saving the houses( main aim)
went into bat with some very nasty bank managers using solicitor and barristors( and some of those were the guys who thought they would be developer)
and had to explain to lots of then that it was in some respects there fault.
because there lending criteria
required they do due diligence.
and where were the margins.
where were the exit stratigy.
where was the has this person got the ability to do this project.
there were no crosses on these items.
from 2003 to today and thats 4 years I have got rid of my dogs and no houses lost ( so that a win for me)
It has rippled two of my business(cash flow was used to fight of others creditors and guarentee loans) and destroyed three building families, two of which are 60 old and have been in the building industry for over 30 years one of which has lost everything except what we could save.
there are a couple of dogs out there currently that have site with a loan base of 5.4 mil and a market value of 1.8mil today and can't sell unless they take the hit and ppor is on the line (not in my group)(a group of barrister and they are not the silliest people on this rock)
I have on my desk 6 properties that are all being held by banks and they are all dogs.
and am exchanging on a couple.
I have lent hell of alot about developing in this 4 years and hell of alot about lenders.
and when you have to do a job (because no one else will steep up to the plate)and you have to get a result (because you see family fall around you)you learn very quickly.
this market place as I have said many times is good for me.
why because I have learnt what to do and what to look for.
I have learnt what lender want and what can be achieved.
I am building up an equity not a loc and using the best vehicle that I can see to do that comm property.
to use for the next 2003 and my crystal ball says 2010.
I set up my deals that as sea change says that little if any of my money is in the deal and that my margins are over 21%
the one I am doing right now is 35% with an lvr thru out the construction of 60% and no money in.
If I was starting doing developing again I woulkd jv with the land owner and builer and do 40% 30% 30% split with no money in.
just remember history does repeat.
this is all for the history lessen

 

[willair]

to use for the next 2003 and my crystal ball says 2010.
I set up my deals that as sea change says that little if any of my money is in the deal and that my margins are over 21%
the one I am doing right now is 35% with an lvr thru out the construction of 60% and no money in.

grossreal,i always like to read your posts, could you post some photo's of your developments as you seem to doing quite well with those 35% and no momey down ,every time i ask that question all i get is blank looks on their faces..well done..willair

 

[Donald Trump]

hi all
I will give you all a bit of a history lesson and its the reason that I am in developing now.
and if mr trump you have built in the last 4 years you will be in this group.
in 2002 there was a mass of development in sydney and as I told westpac and anz that at that time they would lend to a dog to be a developer.
and they did
a dog to me is someone who has no clue about developing and but has a good job and saw hyper prices rises and the sun was never going to stop shining so they built bigger and bigger.
so they were doing duplex and started to do three storey walk up jumping from 1 mil projects to 9 mil project in the space of 12 months.
the banks saw it as a win win and fell over each other to lend.
no need for those silly things like have you built anything before.
or whats the margin.
and as for is anyone going to buy them.
no problem the market is flying ( very similar to what I see in perth now)
asset backed no problem the market will take up the gap.
so the market chugged along until this big other train came at it in the form of 2003.
and then there was a smash.
and in came me
not because I wanted to but because I had to.
to help out groups of builders that had lots of projects that
A could not finish.
b could not get funding
c had houses and live line on the ropes and we are talking about guys that have been building for 30 years and set up small groups that went out to do as they had done ( only trouble was that they didn't know what they were doing and had the same view sorry to say mr trump as you that they would just get into developing as it seemed a good thing to try).
I rearranged the loan structures via the banks.
I rearranged the financial terms with the banks.
I organised the on selling and delaying and organise a marketing plan
so off load the properties and at the same time hold off all creditors and saving the houses( main aim)
went into bat with some very nasty bank managers using solicitor and barristors( and some of those were the guys who thought they would be developer)
and had to explain to lots of then that it was in some respects there fault.
because there lending criteria
required they do due diligence.
and where were the margins.
where were the exit stratigy.
where was the has this person got the ability to do this project.
there were no crosses on these items.
from 2003 to today and thats 4 years I have got rid of my dogs and no houses lost ( so that a win for me)
It has rippled two of my business(cash flow was used to fight of others creditors and guarentee loans) and destroyed three building families, two of which are 60 old and have been in the building industry for over 30 years one of which has lost everything except what we could save.
there are a couple of dogs out there currently that have site with a loan base of 5.4 mil and a market value of 1.8mil today and can't sell unless they take the hit and ppor is on the line (not in my group)(a group of barrister and they are not the silliest people on this rock)
I have on my desk 6 properties that are all being held by banks and they are all dogs.
and am exchanging on a couple.
I have lent hell of alot about developing in this 4 years and hell of alot about lenders.
and when you have to do a job (because no one else will steep up to the plate)and you have to get a result (because you see family fall around you)you learn very quickly.
this market place as I have said many times is good for me.
why because I have learnt what to do and what to look for.
I have learnt what lender want and what can be achieved.
I am building up an equity not a loc and using the best vehicle that I can see to do that comm property.
to use for the next 2003 and my crystal ball says 2010.
I set up my deals that as sea change says that little if any of my money is in the deal and that my margins are over 21%
the one I am doing right now is 35% with an lvr thru out the construction of 60% and no money in.
If I was starting doing developing again I woulkd jv with the land owner and builer and do 40% 30% 30% split with no money in.
just remember history does repeat.
this is all for the history lessen

Grossreal,

This is an excellent overview of pitfalls and minor success's and I thank you for the lesson. I do respect your opinion and understand the warning signs as there are huge risks as I remember when the GST was introduced which placed many a builder/.developed against the wall and out of this business, some were lucky to keep their house.

If you have read my note and interpreted that I wish to be a developer, I have sent the wrong message and I do apologise for the misdirection as it is easy to interpret that "here's another person who wants to be a developer as it is all glitz and glory"

I will give you an example of what i am trying to achieve.

Over a week ago I met a man who lost his job and also had considerable equity and some cash, so he decided after 22 yrs of PAYG with no experience in real estate to start a company with a partner who was cashed up and get into developing.

He was kind enough to provide me with his costing and boasted about the GM of 265k on a project with a cost base of 1.2m. After reviewing his costs, i descovered that there was no allowance for the margin scheme, company tax nor a proper underatanding of GST input's. I presented him with my revised numbers and he will pocked 34k on this cost base and after a 14 month cycle. to say he was devistated is an understatement and he is now a living example of your history lesson.

My aim is to undertake full feasability unterpinned by a financial structure that is the best product for my situation/circumstances and review my result on paper thus avoiding this pitfall. This I have completed and do realise that my financial structure is eroding my capital and is directly impacted by three key variables which will minimise my profit ie Project cycle time, construction cost and actual market price. Certainy, having no real income during the project cycle and relying on this finance vehicle to cover all costs after the sale is a risky strategy.

Every learning tells me to buy and keep using leverage to increase your new worth over time.

Let me pose this question to you.

If you were in my situation with this equity, what would you do and what financial structure would you apply to support your lively hood during the presale cycle?

 

[jrc]

You've done very well. But what is your strategy going to be if the market changes, if it takes longer to get development consent, if it takes longer to sell when completed etc. As an employee you had greater freedom to wait longer for a good site.

If you go commercial the time frames will probably be longer.

I'm not trying to put a dampener on you, just saying you need to analyse your risks properly. You need to be very much a realist and your wife needs to appreciate the worst case scenario as well.

What is the worst case - possibly that both you and your father's house have to be sold. By the way you need to look at the effect on your father's pension of him transferring his house to you.

If you and your wife can cope with the risk and you have proper risk management worked out then what you want to do might be worthwhile doing.

If I were you I would have a sole director company operating as trustee of a family trust

 

[grossreal]

hi willair
I am working on this project and have been for the last 3 months.
its a very complicated project and is a mix of vendors and solicitors
and I currently have them all happy but that changes daily.
unfortunatly I won't be posting details on this project a bit to sensative at this stage but if and when its completely over the line will be happy to post.
it is a work in progress and from what started out as a small project has moved very quickly into a bit of a monster.
I am and have been for last 3 days been doing nothing but chasing people. for paperwork to be signed and proceessed.
I have just had a chat with a vendor and have been told that his solicitor is very busy and can't do his as well.
simple change solicitor.
I have two of the major four wanting to lend on it and have three builders wanting to build it.
but as dazzling says its all in the detail of the contracts.
this one is raw so have to do the da and unlike my others is not in any form of recievership.
its more a case of one of my real estate guys looked out side the square and put up this idea and I am running with it.
for me and a couple of other companies if we can get what we want will be ground breaking in developing and I for one hope we win it thru.

 

[grossreal]

hi Donald Trump
I would for a start work on getting the income level correct
to do this you can do it a couple of ways as has been mention in this post.
managed funds, +ve resi, shares, or comm
for me managed does not give the same return as direct investing,
+ve resi is to hard to find.
shares know very little about them and to many to choose from
have a few but not my main vehicle
so that leaves comm and the comm is moving very quickly
now here is the issue in the market at the moment
the vacant comm is alot more expencive the the leased and the lease is around 9% return and if you look around you will find you can get some cheap comm finance at the moment
so return covers interest and cash to you.
I would build up my cash flow and equity as well ( but in your case the equity growth is a bonus) buying comm make sure that its min 3 x 3 prefer 5 x 5 and a 5% annual ratchet or cpi which ever is the higher
once the case flow is in place then look at developing.
with regards to structure that I don't post as they are individually made but I would look at a unit trust with a company and attached to the unit trust
a dt trust as one of the unit holders and that is the superfund for later on. but thats very generic and you do need to organise one for yourself
having money while developing is not a problem if the margin is high enough as the lender will fund you while its being developed thats very dependant on the margin.
the other thing with the comm as it grows
your over all lvr is dropping so if you hit a problem your lender will sit back a bit and give you alot more air to live.
I for one would not at this stage in the cycle start to develop in sydney unless the market that you are aiming at you think will grow after 2009
unless it is a duplex site which can be build in 12 months
as I see high growth to 2009 and a correction in 2010 my current project is not aimed at the resi market.
again all of above is not advice and should not be take as any form of advice.
and is only a view ( don't wan't to get into any hot water)
I see equity the same as cash.
and you can trade equity this is a very different question.
and as you have asked if I was in your shoes what would I do.
for me thats very simple I would trade the equity.
I would look for a developer that needs equity to get his project over the line.
I would take his information and check if he is going to get a 25% margin for his development.
I would then lend him the equity with a second mortgage over the project and sit there as a form of mezz lender and take my profit out as end product fully settled waiting for occupancy.
I would then have the bank the builder and the developer sign a tripartate agreement adn tie all the assets of the developer to you as well as the bank.
and limit my equity guarentee to a fixed amount.
get the qs to relay as a lender all draw downs and % complete figures to you.
you still have to organise income and there are lots of ways to do that and would take me about 5 pages to list them all.
you can charge a interest rate for the use of the equity thru the project there are lots of ways.
but the above gives you an idea of what I would do with my equity if I was you but as in the case of the hotwater this is not advice.

 

[knightm]

DT

Above posts are all useful.

One thing I would suggest - you have found a model that appears to work for you - the singe house construction model. Why don't you just keep doing more of the same. The way to success is to get good at one thing and do it 100 times, not do 100 things one time each. The question of whether that will support you right away or whether you need some JOB income for a few more years is up to you and your risk models. If it were me I would get a job for a time limited season (say 4-5 yrs) Leverage of the (considerable) equity to buy several blocks of land and do the construct project management - keep doing what you are doing. If you want more time to focuss on the project management get a less demanding job, maybe even part time. simple.

When you have "enough" equity that you are comfy to quit - quit, there are thread debating the living of equity concept so wont repeat, either you can borrow it or convert it to high yeild assets that spin off enough income. How much is enough? only you can answer that.

 

[tubs]

Consider (VERY carefully) not including your father's house in your deal.

If you &^## it up, he stands to get kicked out of his house. Thats a hell of a risk you're taking.