Bigger development or few medium ones?

Just wondering how many of the developers here if they are not already, plan to do larger developments.. say 15-20mil total development cost. Or do you think its better to manage the risk with say 3 projects totaling 20mil TDC?

Would love to hear/learn some ideas/plans about this and also risk managment rashionale.

Thanks in advance.

 

lol..Gigger should be Bigger

 

Hmm tricky one.

I think once you move into the 'commercial' space (+4) the larger you go (generally) the better the economies of scale. However, your risk profile, tolerance and capability needs to be able to handle the larger developments.

If I had the $20mil capability I wouldnt limit myself to making the 'either/or' decision until the deals started to present themselves. I wouldnt rule out 2x$10mil, 4x$5mil, just because "im a $20mil developer".
However, would I look at say 10x $2mil developments? probably not. Mostly because the workload for a $2mil development is probably similar to a $5mil development. So trying to do 10 of them at once would be too much effort.

Of coarse the above assumes 'ceterus parabus' (all other things being equal). Which they very rarely are.

It would be a case by case basis.

Blacky

 

Thanks Blacky for your response mate. I guess if the deal stacked up beautifully well it would be hard to turn down say a 15mil deal, especially if your finances and risk profile allowed for it...I do like the sound of 4 x 5 mil or 2 x 10mil though...Do you think its a reasonable risk management strategy to diversify your developments in different states, eg rather than do 20mil all in Brisbane for example, choose 2 states where it stacks up and do 10mil approx. in each or some kind of similar combination..?

I do agree with you re doing 10 x 2 mil projects... not sure I would want to PM on so many different projects...

Another thing with the larger developments I would think is that there is less competition for them than say duplex developments...

 

Pros and cons to each.
1x big development is 'all your eggs in one basket' so to speak. If (when) it goes wrong it goes wrong in a big way. Also on a project that size the time lag between cash out and cash coming back in is significant. If you have the capability then sure, why not. If its a stretch and you are just doing it to brag at the pub about how big your D...evelopmnet is - well... one should questions oneself a little closer. (Im not for one second saying this is the case, its just an example).

Doing say 4x $5mil deals they can be staggered between, purchase, DA, Construction and completion. You have one being completed at the same time as one is being purchased. Incoming cashflow is more regular (though smaller).
Plus - work loads are spread out. Risk is changed (note - not neccesarily higher/lower - just changed).

It would be nice to think a larger development means higher % returns, means bigger profits. But its not that simple. Every deal will be different.

It all depends on your strategy and capability. For example I would be suprised if someone who has the capability to take on a $5mil deal would look at a retain and build on a duplex site. The time and effort for return (even at 20%) isnt worth the effort.

If $20mil is a stretch for you. I dare say a $15mil deal would be better suited... or a number of smaller deals. However, again, it depends on your risk profile, the deal, and your capabilities.

"risk management" by "diversifying states" is an interesting term of phrase.
Are you really reducing risk? or just changing the risks?
You go from the state you live in, which you know intimately with industry contacts at a site you can - if need be - visit at any hour of any day.
To one where your market knowledge is lower, a long way away from you, where you are relying on a third part to watch over progress. Albiet the risk of market conditions changing maybe be softened.
Its a bit like people saying entering into partnerships/JV's to 'reduce' risks. I would argue you arent reducing the risk..but rather changing the risks. The 'lower' risk is due to having less money on the table (as opposed to doing it 100% yourself) however, likely increasing the chances of something going wrong.

Again, you would really need to look at each deal on a case by case basis.

Blacky

 

Certainly is as @Blacky has said the bigger the deal the longer it will take unless you go and buy 20 blocks in a new land estate and build 20 x million dollar homes.

I think there is a natural progression as you learn and get better at it to go for something bigger/more complex.

I would think the only time you would do this is to keep the money rolling/trickling in whilst your $5m deal is getting off the ground. If it's going to be 3-5yrs to come to fruition you may need some smaller deals to keep the coffers going.

 

[QUOTEBlacky, post: 129091, member: 1029"]Pros and cons to each.
1x big development is 'all your eggs in one basket' so to speak. If (when) it goes wrong it goes wrong in a big way.
Yeah makes sense.. I think also the pressure would also be intense perhaps..

Also on a project that size the time lag between cash out and cash coming back in is significant.
yeah would have to make sure cash flow for the entire project would be ok..would probably need a buffer but also I guess the PM fee you will be drawing as being one of the consultants should help a little..

If its a stretch and you are just doing it to brag at the pub about how big your D...evelopmnet is - well... one should questions oneself a little closer. (Im not for one second saying this is the case, its just an example).

Yeah I agree definitely not something I care about. I don't really care about doing bigger just for the sake of it. Just trying to work out the best way for me to do a larger project whilst reducing the risks.

Doing say 4x $5mil deals they can be staggered between, purchase, DA, Construction and completion. You have one being completed at the same time as one is being purchased. Incoming cashflow is more regular (though smaller).
Yes this is a good model Blacky.. the only drawback I see (perhaps being too aggressive) is that the equity/profits will be realized in stages and slower... but the advantages are reducing the risks all at once and also better cash flows.


If $20mil is a stretch for you. I dare say a $15mil deal would be better suited... or a number of smaller deals. However, again, it depends on your risk profile, the deal, and your capabilities.

Yeah we are leaning towards 2-3 smaller deals to make up the total amount we're after.. only thing is do we stagger them out or all at once...realistically they would be staggered out at least to some extent because the reality that they would all start building at the same time.. I think would be difficult to get all the timings right.

"risk management" by "diversifying states" is an interesting term of phrase.
Are you really reducing risk? or just changing the risks?
Well different markets are affected by different factors so perhaps it may mitigate some economic risks...

You go from the state you live in, which you know intimately with industry contacts at a site you can - if need be - visit at any hour of any day.
Well I try to build teams in a few states. Like in Sydney I have a good team now and Brisbane as well. When I go to Perth I intend to put a team together from good recommendations and would definitely have a chat to Myf for advice/help...but I get what your saying regarding easier access in the state you live. With my Brisbane development and in the past when I had a partner, he would fly to Brisbane every 2 weeks and it worked well. So I was thinking to make regular trips to my sites..


Its a bit like people saying entering into partnerships/JV's to 'reduce' risks. I would argue you arent reducing the risk..but rather changing the risks. The 'lower' risk is due to having less money on the table (as opposed to doing it 100% yourself) however, likely increasing the chances of something going wrong.

Totally agree. JVs are really tricky to get right and while I have had good experiences on smaller projects, I don't think I would want to go into one on a big deal.

Thanks again @Blacky ..you've given me some things to think about mate.

 

This is our feeling too... we just want to do it in a way that we think we can manage the risks best..its quite scary to be honest..putting in say 6 mil of equity in 1 go more or less, not gonna pretend its not.

 

I guess it also depends on how many project a certain individual is able to manage at any one time.

Just out of curiosity, what do PCers normal expect as a return for a $5m/$10m/$15m project?

 

Yeah great question.

I don't think I would get into any deal for less than 20% return on TDC but the time factor is also important.. I mean if you could get in and out on a quick subdivision in 4-6 months then I would be OK to accept say 15-20% on TDC. But for 5-15mil... would have to be 25%plus I would imagine.. needs to be good fat in there for screw ups...as well as the risk factor.. I don't think I would be comfortable if the numbers looked good at say 21% for a 10mil deal.. too close for my liking I think...but would love to see what others think on this

 

My magic rule of thumb is 20% is ok for up to 2 yrs, for every year a project may take after that it needs another 10%. So for a 4yr project it needs 40% gross profit to make up for the time taken to get that money.
I have a 4yr project in it's beginning stages and that was our rule of thumb.
For longer projects you need to consider not just ROI but CAGR (Compound
Annual Growth Rate) to work out how time fits into returns.

http://www.investopedia.com/articles/analyst/041502.asp

 

Your talking about return on total cost right, not on equity. Correct?

 

Yeah I always get confuse if people are calculating based on equity or total cost. As a rule I tend to calculate both but tend to quote the ROI on equity more often.

 

I always do my calcs based on return on Total development cost. I think return on equity alone does not take 'reward for risk' into account enough. But that's just how I personally feel about it.

 

I agree with that one, I would definitely first look at it based on the total development cost but it helps to use ROI based on equity when try to sell the idea to potential partner? haha (shaddy investments going on here)

 

haha... or perhaps having to sell it to the wife...

 

But surely the cost of a development and the time for completion are not always directly proportional. If I'm doing a project of a rough cost of $5-10m how long would that usually take? Would 2-3 years be sufficient?

 

The cost of the one I am working on is around $18-20M. If I am doing it full time it probably will take around 6 months for the DA, 6-8 months for CC and 18-24 months for the construction. My one is a bit tricky as it requires three levels of basements. If it's only two levels, the construction can probably be done in 15-18 months.

 

Would love to hear more details about it if your happy to share mate.

What kind of return are you projecting for?

Cheers

 

My one is quite interesting. The site is a block of retail shops and my family bought the site 20 years ago for around 1.6-1.7M. The rental return was pretty good back 20 years ago (around 15-20%) but the land tax increases to around 100K last year. In addition the building is getting old and maintenance cost is increasing, as a result we would like to rebuild the site.

I managed to get the DA approval for 50 units + 6 retails. We had an offer of 16M few months ago for the site but if we sell it now we will be paying large CGT. As a result my family would like to develop ourselves and keep as many units as possible. The agent estimated the building will worth around 46-47M after completion. this is probably over estimated, but I think we should be able to achieve around 40M. Rental estimate is around 1.8M a year.