Thinking of getting into small development?

[Ace in the Hole]

After thinking about strategies on how to get an edge in property investing, I have decided that developing my own property will get me the best results.
The problem is, where to start?
There are so many things to consider and so many things can go wrong, but if you get it right, the rewards can be great.

So with no experience with developing, I started looking for sites suitable for multiple dwellings.
Started learning some basics, but nothing which would let me compete with the experienced players.
I'm very time poor too, so this didn't help my situation at all.
Over a short period of time, I made some contacts and learnt some more, but still wasn't getting very far.
Still had to find a suitable site for development, which would be feasible, and get someone to work with town planners, architects, builders and project manage the job to completion for me as I am very time poor, and still make a reasonable profit.
Luckily, I found someone who could do all of this for me, provide very personal, valuable and efficient service at a very reasonable fee.
I am now in the early stages of planning, since securing a great site, and things are looking very promising.
I'll put up some figures in another post.

Anyway, I was just wondering what has stopped others who have thought about developing, but didn't follow through with it.
I'd really be interested in the reasons others who have though about getting into developing, but didn't follow through with it yet.

And for those who have, what was the biggest factor which helped you get started.

Thanks

 

[Roachy]

Good Morning Ace,

I have recently involved myself into the developing game myself. Just a small duplex site. I tell you what its harder than it looks and depending on the council you are dealing with, it can be close to a headache.

I agree with your idea of surrounding yourself with knowledgable people. This will help you through the process. I would advise you to start reading local legislation/regulation etc into your site. This will make the process easier when it comes to making decisions.

I hope you go great.

Regards,

Roachy

 

[Philip Thomas]

Small Scale Development

Small-scale development can work extremely well.

Like any business decision I recommend you start by getting really clear on what you want and why you are doing it. Clarity around your goals is essential in many areas of life. Yet too many people jump in & buy a property then try to work out what to do with it. They didn't have clear objectives at the start & after jumping in still don't have clear objectives.

Before you buy the next most critical step is to do a full feasibility. This is not a back of the beer coaster Profit = Sell Amount – Land Cost – Build Cost. You need to consider all the costs (holding, fees, taxes etc).

You may also find that a develop and hold strategy may work very well over the long term, especially when you look at the rental yields over the total cost to develop, then deduct depreciation. So don't just look at the develop & trade model.

Also recommend if you’re considering development, then start small. This way you get comfortable with how it works & who does what. Remember structural renovation is development.

Finally once you find a site that’s feasible & suitable for you, then move thought the development process as quickly as possible.

Philip

 

[RumpledElf]

We did ours by accident cos it looked like it might be subdivisible although it technically wasn't.

Financially, buying that house was the best possible thing we could have done in our situation.

 

[MichaelW]

Philip is on the money but its not for the lighthearted...

Just kicking off my Mona Vale build now and the first provisional sum item came back with quotes $20K over the PS. Its a game of endurance and takes its toll.

Cheers,
Michael

 

[gooram]

I've just started a small subdivision. Initially thought I would subdivide, retain front home and build on rear, then rent out both properties.

However, now we've decided to "simply" subdivide and sell the rear block. We'll reduce the loan on the front home down to 90% and funnel the proceeds into our PPOR loan to reduce non-deductable debt.

If property prices hold up, there should be 70-100k profit in it, which is a 13-19% profit margin.

We're in the early stages of the subdiv, massive learning curve but starting to gain in confidence and believe it's achievable. A good QS to provide guidance is essential.

 

[Philip Thomas]

Look at the Total Value

I've just started a small subdivision.....

.....now we've decided to "simply" subdivide and sell the rear block.

Usually when you subdivide you add value to your development.

However, if you simple sell off your vacant block at the end of the subdivision, usually you’re leaving value on the table.

You see many people want to walk into a new home. They don’t want to go through the hassle of building. They can’t see the “vision” of a DA approved new home. They want to feel it. They want to touch it. They want to knock on its walls.

So if you are going to the trouble of subdividing your property, have a look at taking it to the next stage & adding the next piece of value by building a new home.

Philip

 

[Ace in the Hole]

Ok, so far the most common answer to the poll is:
Not enough experience to start yet

So the question is, if you don't have enough experience to start yet, how do you get experience if you don't start?

This is the reason I didn't hesitate getting into my first development.
You've got to start somewhere and it's probably best to learn sooner than later.
Although, I'm very confident working with someone who's holding my hand through this first 5 townhouse development.

Maybe some who answered Not enough experience to start yet, really meant not enough knowledge to start.
I still believe that real life practical experience is always the best and most sucessful way to learn.
Real life experience can be more costly, by making mistakes, than theoretical experience, but the lessons learned are so much more valuable in the end.

 

[gooram]

Usually when you subdivide you add value to your development.

However, if you simple sell off your vacant block at the end of the subdivision, usually you’re leaving value on the table.

You see many people want to walk into a new home. They don’t want to go through the hassle of building. They can’t see the “vision” of a DA approved new home. They want to feel it. They want to touch it. They want to knock on its walls.

So if you are going to the trouble of subdividing your property, have a look at taking it to the next stage & adding the next piece of value by building a new home.

Philip

Not sure we'll be in the position to do that now... but regardless, I was under the impression that if I had a piece of land worth 200k then built a house for 200k, in the current market I wouldn't be able to sell it for much more than 400k. I.e. there's no markup on the build price.

This is obviously not your experience, as I understand this is what you do and no doubt have economies of scale, but for the inexperienced 'mum and dad' developer, is it not the case?

And if not the case, what IS your typical markup on the build price, say for the above example.

Maybe I should buy your book?

 

[Philip Thomas]

Pricing the Market

I was under the impression that if I had a piece of land worth 200k then built a house for 200k, in the current market I wouldn't be able to sell it for much more than 400k. I.e. there's no markup on the build price.

Maybe I should buy your book?

Hi gooram,

Property prices depend on what comparable properties are selling in the same area, within the same market. This may vary sometimes if you can offer something unique or different to a market that is under serviced.

Try looking at what the market wants & at what cost, then works out a way to profitably service that market. This is market driven costing.

You may find after doing your research that new houses in your area are selling for $400k. OK if vacant lot costs $200k, how can you build a home on it & return more that 18% return??? Can you build a $120k home? Can you build 2 x $100k duplexes & sell then for $240k each? Can you build something smaller or less expensive? Something that is faster to build, therefore cheaper? How about something prefab like an IKEA flatpack home? How can you cost effectively meet the market???

look at it this way, if you could buy a finished new homes in an area for $400k, then why would people go to all the trouble of buying land & then building for the same cost??? If this was the case, there may not be a market for $200k vacant land.

Finally get trapped thinking that just because you build you will make a profit. You need to assess the market & work out in advance your feasibility, then determine if the risk & return are acceptable to you. After all the timing may not be right & you may need to look in a different area.

Philip

 

[jsoe]

can't wait to jump in

hi guys,
This is an interesting thread.
I"m the one with "financing" problem. Just bought my little unit as PPOR 18 months ago and now I'm itching to get into development! I can't wait! I've bene reading books, going to seminars, watching educiational DVDs about developments, etc. etc.
But $$ is my hinderance at the moment. I've listened to Carly Crutchfield's seminar recently and know that there's a bit of hope for people like us with no $$ but who's keen to do research and deals. So, I just gotta be patient I guess. Oh, I can't wait to get my hands dirty and make a few mistakes! Give me those headaches! I want them! At the moment, I'm getting migrains from a lot of researching on the internet.

 

[JohnJC]

For us it's just getting the finance. We are pretty much maxed out with one commercial and one residential investment.

It's very frustrating as my clients get me to crunch the numbers for them and I watch them make the money! I'm almost to the point where I'm thinking of selling one investment to fund a development as I believe I can make more out of one development a year than I would capital growth/neg gear out of the resi investment.

I'll keep procrastinating for the time being and hope some long lost relation that I don't know, leave's me some cash!

JC

 

[Sailesh Channan]

I have helped many investors to adopt property development strategies over the last ten years. I did the property expo tours in the early years to educate the public on such strategies. In 2004 I established Developers Edge and started my own business to help investors. We have helped many investors since and a few have been through this forum.

We have been very diligent with our recommendations and all our clients have profited from their investments. The toughest time we encountered was when we had one client develop fourteen properties and had to sell then in 2006 when the market had a lull. We tried everything to help move the properties. We even managed to secure a three page free editorial in the local newspaper to help sell the properties. In the end we managed to use a property marketing firm to sell the remainder. The good news is that despite the hassles the client still walked away with a tidy profit.

Right now, we are finding it harder to get the feasibilities to stack up and hence we have not been actively recommending properties. Those of you that have contacted us for advice we are not ignoring you. Please be patient I am sure the time to get in will come around again soon.

However, those that are prepared to get in now and land bank then now is a great time to do this as there are some good bargains around.

 

[Ausprop]

Finally get trapped thinking that just because you build you will make a profit. You need to assess the market & work out in advance your feasibility, then determine if the risk & return are acceptable to you. After all the timing may not be right & you may need to look in a different area.

Philip

exactly - small developments can still lose BIG $'s

 

[Brady]

Assuming that someone has voted in this poll which is odd...

But good thread to have been dug up.

Ace have you created a thread since talking about your developments? I recall you have posted a few comments stating different things.

Interview perhaps??

 

[Teshy]

I did as I was reading old threads on small developments.

Interesting read, I've also went online an purchased Philip Thomas' book and can't wait to read it.

 

[Ace in the Hole]

Hi Brady,

I don't think I did proceed with a thread on my developments, just didn't get around to it.
The original post was 4 years ago.....

Have done a 5 town house and 6 townhouse development in Brisbane now.
the 5 completed about 2 years ago and the 6 about 1 year ago.

My risk profile is high and cashflow situation was good, so I just went ahead and had a go, 2 at once!
Jason from www.ultraproperty.com.au helped me so much and I can highly recommend his services.

 

[Teshy]

Hi Ace

How did you find them? I'm thinking of doing something similar in Melbourne.

Cheers

 

[Ace in the Hole]

Hi Teshy,

Jason from the link above found the sites for me.
I just make the decisions and say yes or no.

I'm sure there are plenty of services out there who will assist less hands on developers, but just got to watch out you're not getting taken for a ride.

I had decent amount of practical building experience and reasonable property investing experience, but just too time poor running a full time business to be able to run interstate developments too. So this was a great way to do it passively while remaining in complete control.

 

[Neptune]

Glad this thread has resurfaced.....I'm looking at purchasing a couple of properties at the moment that can be subdivided in the next few years.

Never done one before but will most likely subdivide my PPOR probably next year and learn from that experience.

Happy to make the mistakes with that one as there is no real time pressures or holding costs. I can then take that experience and attempt a couple of subdivisions afterwards.