Profit Margins

[Francesca C]

Hi Everyone

Just wanted some advice because I feel stagnate at the moment and do not want anymore buy and holds.

I have done a couple fo little subdivisions, ie splitting corner blocks and retaining house, knocking down house and splitting into three lots

I do top down analysis and factor in 20% profit (project 12 months) I am pretty firm with my profit margin.

I have not been able to find anything in Perth like this in my scope for 12 months. I keep looking at properties and going to home opens to put in offers of 100k+ less than the asking price.

If you started looking at projects that were 4 months, would you annulise the expected profit to around 7%?

Any thoughts would be appreciated?

 

[kph]

Can you clarify what you mean by a 4 month project and how this relates to 7% annualised ? ie.. do you mean a 7% return on the project in 4 months which equates to 28% annualised?

I started out doing duplex and triplex strata and green title subdivisions in Perth, then moved onto building new houses on land in new subdivision ( same or beter return without the neighbour and council hassles) and then onto land subdivisions and then concentrated in regional areas where the 'boom' continues due to ongoing shortage of quality housing.
Then we put together groups of investors to tackle larger projects.

I guess what I am trying to say is that its is difficult to find a decent return in Perth and has been for awhile, especially for smaller developments ( too many small 'developers' in the market and asking prices seem to reflect the profit margin already built in!!), so maybe you have to move out of your comfort zone and try something different ?

kp

 

[Francesca C]

Hi Kph

Thanks so much for you response.

Sorry, wasnt very clear. I usually work to 20% profit in previous projects that last 12 months.

I am unable to find anything that fits this criteria now... I have been looking for a while... some of the projects i look at now, I would be able to turn around in 4 months and would make 8%... which is the around the same as my 20% profit margin an on annual basis. I am just wondering if any experienced people would think that is acceptable?

That is exactly right, the profit margin on the asking price is already factored in. I am constantly explaining that to agents and how I arrive at my figures. I also never over inflate what my end product will be worth or bank on CG. If i get CG then it's a bonus.

Yes, I do have to move to the next level...and must admit I am a little nervous about which way to go. I am glad you pointed that out to me...

I will need greater capital to do bigger projects and dont feel confident enough heading a project using other peoples money. Losing my money is one thing, but not other peoples.. Sigh.

 

[Perp]

Francesca, I don't think it matters so much how long the project takes, you still need to make a minimum of 20% (some developers use 25 or 30%). You may want a higher return for a much longer project, but I don't think you can drop lower because of the minimum buffer necessary to give you an acceptable return for taking on the risk of developing.

If you are 99.9% sure that you'll simply fill in some paperwork and the development will be approved and on-sold in your planned timeframe, then perhaps you could consider a smaller profit margin. But it seems to me that very, very few developments work out that simply!

The risks in a shorter project are really about the same as with a larger project - in some ways they're bigger, because it's easy for 4 months to double to 8 months due to a Council delay, whereas a 5 year project is less likely to blow out to 10 years. Therefore I think that your 20% margin still has to be there, even for a shorter project, unless it's extraordinarily straightforward. Even then, I'd maybe relax it to 18%, but I certainly wouldn't dream of taking on the risk of a development for an 8% return! Why would one do that rather than take on an investment instead? There are areas that are experiencing capital gains of 32% per year, with very little risk or effort involved.

Just my opinion, of course - but I'm interested to hear what others think.

 

[Francesca C]

Hi

That's why I asked, wanted to know your opinions. Completely agree wtih your comments ozperp, that you cannot guarantee sales and time blow outs reduce your profits. I am just wondering what other small developers do and what they expect to make in a 4 month turnarounds?

The current market here is not allowing me to repeat my stategy and I have to change but dont know where to...

With the static development calcs, it allows 20% for 12-18 month projects.. you would get the same returns if you did 3 of the small projects a year.. am I making sense? so rather than making 200k per 12-18 project, you will make approx 70k.. so in the end, the same amount.

What do people making renovating on an normal basis?

 

[Aimjoy]

What do people making renovating on an normal basis?

Francesca,

Most renovators look for every $1 they spend on a reno to give them $1.50 to $2.00 on the end valuation and generally limit the reno to 10% of the purchase price.

e.g. $200K purchase
$20K reno
$230 - $240K final val.

Works fine for buy & hold but in a flat market is no good for flipping as transaction costs in and out & holding eat all the profit up.

Cheers,
Aimjoy

 

[Francesca C]

Francesca,

Most renovators look for every $1 they spend on a reno to give them $1.50 to $2.00 on the end valuation and generally limit the reno to 10% of the purchase price.

e.g. $200K purchase
$20K reno
$230 - $240K final val.

Works fine for buy & hold but in a flat market is no good for flipping as transaction costs in and out & holding eat all the profit up.

Cheers,
Aimjoy

Wow, how do you make money with in and out costs plus holding fees for the length of the project.

How long do you hold them for? I have heard its only good to buy a reno project in the suburbs with the highest sales in the last quarter and to get in and out within 6 weeks.

I dont know much about this strategy.

Thanks

 

[Aimjoy]

Wow, how do you make money with in and out costs plus holding fees for the length of the project.

Well IF it is a flat market - you cannot. Unless you buy, reno & hold. Then since you are holding you can refinance the equity created out.

How long do you hold them for?

Plan is FOREVER

Aimy

 

[Francesca C]

Oh OK, I thought you were renovating for cash flow :>

 

[sue78]

what about buying interstate?

 

[Francesca C]

Hi Suzie

Sorry, I dont understand your question?

 

[stumunro]

Hi Suzie

Sorry, I dont understand your question?

You said it was hard in Perth atm, and I think Suzie is implying you look for deals interstate. Obviously a bit harder to project manage but i guess not impossible.