Rookie Developer article

[Feradd]

Hi,

I was reading the Rookie Developer article in the new Profitable Small Developments magazine (available only online) and was curious as to how his numbers worked. He purchased a property in Croydon North in Melbourne and built 4 townhouses. The total cost of purchase + build was $1.5m. The profit was $250k, meaning the margin on costs was 16% over 18 months. This seems like a low margin compared to what most people aim for being 20%. Does anyone know if this would be a typical return he would be achieving? Would this return be usual for small developments and would it be the larger developments of say 6 or more units that would return >20%?

Any of your thoughts or opinions would be greatly appreciated.


Cheers

 

[HD_ACE]

Hi,

I was reading the Rookie Developer article in the new Profitable Small Developments magazine (available only online) and was curious as to how his numbers worked. He purchased a property in Croydon North in Melbourne and built 4 townhouses. The total cost of purchase + build was $1.5m. The profit was $250k, meaning the margin on costs was 16% over 18 months. This seems like a low margin compared to what most people aim for being 20%. Does anyone know if this would be a typical return he would be achieving? Would this return be usual for small developments and would it be the larger developments of say 6 or more units that would return >20%?

Any of your thoughts or opinions would be greatly appreciated.


Cheers

Is that an on paper profit or after being sold and all costs accounted for?

cheers

 

[Feradd]

Is that an on paper profit or after being sold and all costs accounted for?

cheers

That's after being sold and all expenses paid for.

 

[HD_ACE]

Well its risk vs reward.

Maybe he felt he had all basis covered and it was an acceptable risk. 250k is better than a kick in the teeth.

Maybe the margin started higher and was windled away with unexpected costs or lower sales prices.

The size of the development doesnt decide the return. You can make more money with less risk in a quicker timeframe doing a duplex or triplex build than 6 or 8 apartments for example.

All just comes down to the numbers for the deal really.

Cheers

 

[oc1]

Just remember you bank "profits" not margins.

 

[Feradd]

Just remember you bank "profits" not margins.

How do the banks view funding a project with 16% margin? I thought they won't consider lending to any development under 20%. If the banks aren't comfortable with the margin prior to construction loan approval would the developer be required to put more of his own money into the deal to get it across the line?

 

[oc1]

How do the banks view funding a project with 16% margin? I thought they won't consider lending to any development under 20%. If the banks aren't comfortable with the margin prior to construction loan approval would the developer be required to put more of his own money into the deal to get it across the line?

The margin is only one factor a bank looks at. They also look at your experience as a developer, location of the security (land and new dwellings), your serviceability, your cash contribution and the list goes on.

So you would give up a $250,000 gain because it has a 16% margin?

 

[Feradd]

So you would give up a $250,000 gain because it has a 16% margin?

No not at all, that is a fantastic return. Just would'nt want to go down the path of buying a site paying for the professional fees to get DA approval and then get turned down by the bank for construction finance. I know you could potentially sell it as a DA approved site but the real money is in selling the finished product. I would prefer to know from the outset if the bank is prepared to fund it at less than 20%. I guess you don't know until the time comes to ask the bank for finance. Another unknown in the world of property developing.

 

[oc1]

No not at all, that is a fantastic return. Just would'nt want to go down the path of buying a site paying for the professional fees to get DA approval and then get turned down by the bank for construction finance. I know you could potentially sell it as a DA approved site but the real money is in selling the finished product. I would prefer to know from the outset if the bank is prepared to fund it at less than 20%. I guess you don't know until the time comes to ask the bank for finance. Another unknown in the world of property developing.

I always recommend my clients to talk to their mortgage broker and find out whether they have any financing restrictions. For example, the loan amount, number of dwellings one can borrow for etc etc. This would then tell you what sort of development block you should be buying. No point buying a 10 unit site if you can't fund it.

 

[negt]

:d:d !!!!!!!!sometimes tis way to funny.feradd most banks wont touch 16% rtn loan.tis risky and development is risky in general.I.E you have no control of sale price.16% can be turned into 5% in a matter of weeks.banks are not stupid.even tho some might encourage you do the maths real good.

 

[HD_ACE]

For smaller developments some lenders will lend to 90% or even higher lvr if you can service. So should speak to your broker to know all the options re: finance.

 

[Shahin_Afarin]

Some developers work off a 5% margin - depends on the size of the project and how well you know what you are doing/experience.

 

[Feradd]

Thanks all for your comments.

 

[oc1]

Thanks all for your comments.

Shahin arranges development finance.....maybe pick his brain

 

[troynbec]

Hi all
I wasn't aware the new website/mag had gone live yet, and havent seen the final article. I hope its accurate to the information I provided.
Great thread guys, well done.
Yes, that deal was a 'lower end' deal, but the writer wanted something at the lower end that is affordable, low risk & one that could be a good starter. This was it.
Most of my deals provide a much larger return, but this was a super safe one. I dont consider anything that has anything more than a minor risk to final profit, and never ever anything that has a risk of not going ahead or god forbid making a loss!
As has been stated previously in this thread, margin is only one thing banks consider. Risk, size, serviceability, pre-sales etc, the bank is always seeking to reduce their risk

for the record, my loans were 80% for land purchase, while for construction it was 70% of end value (80% of total cost) and i contributed the rest. one pre-sale was required. this is a pretty common lend, and available from a few different lenders

negt, you state that you have no control over sales price, while you are correct that yo cant manufacture a higher price just because you need it, thorough research & due diligence will ensure your sales prices in your feasibility will be highly accurate. 16% into 5% in a matter of weeks would only happen to someone shortcutting and creating their own risk. Done well, developing is a safe way to create profit without relying on the market to hopefully do so for you

good to see some 'clever cookies' here that know about developing who can assist on these forums. There's too much 'urban myth' out there misleading too many

 

[Blacky]

Tonynbec - what is your relationship to the deal in the article. Is it one of yours or a clients?

 

[Feradd]

Thanks for clearing that up Troy.

 

[negt]

people like nathan birch. simply buy and hold and are worth more.wid no headaches and no praying for sales.weather or prayin for council.

 

[Feradd]

people like nathan birch. simply buy and hold and are worth more.wid no headaches and no praying for sales.weather or prayin for council.

Nathan Birch is not the norm for the buy & hold strategy. Developing poses more hurdles but the results would be more satisfying to many.

 

[troynbec]

Blacky, it is my deal
Negt, there is many strategies. some suit some, others suit others, as pointed out by Feradd.

but just one point, I dont pray for anything. thorough, very thorough research & due diligence!