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Cash/Income Buffer For Developments

Discussion in 'Development' started by SerenityNow, 11th Jan, 2016.

?

Smallest cash buffer you've had before starting a development:

  1. 10%

    11 vote(s)
    50.0%
  2. 15%

    0 vote(s)
    0.0%
  3. 20%

    2 vote(s)
    9.1%
  4. 25%

    1 vote(s)
    4.5%
  5. 28%

    0 vote(s)
    0.0%
  6. 30%

    2 vote(s)
    9.1%
  7. 35%

    6 vote(s)
    27.3%
  1. SerenityNow

    SerenityNow Well-Known Member

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    @Blacky got me thinking about this when he mentioned a 30% cash buffer in another thread.

    What's the smallest buffer you've had when starting a new development, as a percentage of total development costs?

    Obviously, bigger is better, but it's not always possible.

    Would love to hear about folks' experiences, eg what gave you the confidence to go with a small buffer or vice versa.
     
    Last edited: 11th Jan, 2016
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  2. Blacky

    Blacky Well-Known Member

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    Hmm - I am a bit confused about what you mean by 'cash buffer'. I referred to 30% "cash injection" (that being the amount you need to fund - outside of bank funding).
    which is different to "cash buffer". Cash buffer being the amount you hold 'spare' just in case the manure hits this fan.

    I also think you actually mean Total Development costs.
    In general you will need a minimum of 20% of Land+building costs (assuming 80% LVR).

    By building cost I am refering to the builders contract cost.

    Total Development cost covers the total cost of the development - Land, building, buying costs, approvals, sub-division, connections, interest, finishing costs, landscaping etc etc etc. Some of which may (or may not) be included in the building contract - depending on how it is structured.

    Blacky
     
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  3. SerenityNow

    SerenityNow Well-Known Member

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    Since only two people have voted, I'm off to edit the question (hopefully correctly this time). I think this is one of those days for me...
     
  4. Leo2413

    Leo2413 Well-Known Member Premium Member

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    I took it to mean on TDC.
     
  5. Be Developer

    Be Developer Property Developer Business Member

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    I suggest keep 10% of TDC.
     
  6. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    20% for deposit and 10% of construction for contingency/buffer
     
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  7. theperthurbanist

    theperthurbanist Well-Known Member

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    So by this do you mean you would only keep a cash buffer to cover construction cost blow outs @Westminster ? Does this mean you don't think other areas are typically prone to blowing out? How about siteworks or delays that increase holding costs?

    I've heard people recommend a cash buffer of $80-100k for projects with a TDC of $800k-$1mil, which would be 10% of total cost @SerenityNow . That's certainly a lot more than 10% of construction though.

    I'm guessing these figures would differ depending on whether you are a 'one at a time' small scale duplex/triplex developer (me) or someone doing multiple large sites at any one time @Westminster , @sanj and others)? Perceived level of risk would surely affect the figure too.

    I have to say though I am quite interested in this post, as it is a question I have been grappling with myself as I work through how much cash/equity I require to do my next project.
     
  8. theperthurbanist

    theperthurbanist Well-Known Member

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    Another interesting question (more so for 'mum and dad' developers than professionalals) is what form that 'cash' buffer has to be in. Does it need to be completely in cash or can a portion be held in other 'semi-liquid' assets such as shares.

    For instance in the past (and I acknowledge this may be 'bending the rules' a bit) I have given myself fairly conservative requirements around how much buffer I have (say $75k for a duplex) but then allowed a portion of that (say $25k) to be held in shares. Ie if things get desperate and I need to call on the full $75k to complete the development, then I know can sustain that through selling down some shares, even if I would 'prefer not to'. Probably not very by the book, I know, so I'm happy for anyone to convince me this is a terrible practice and I should stop doing it immediately!! ;)
     
  9. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Hmmm well mainly because of the 'time poor' way I sometimes operate siteworks is included in my construction amount. So maybe I should change that to 10% of the HIA Contract (which includes siteworks, headworks and turnkey items).
    It is the provisional sums which are the ones which are prone to blowouts - and for me it's always the bloody earthworks - from massive rock to a road 500mm down!
    I wouldn't say it's needs to be an immediate cash buffer, sometimes it's just an awareness in your feasibility, eg factoring in some fat/contingency before accepting the margins. 20% ROI including contingency is always better than 20% not including contingency and needing the contingency

    So I use contingency in 2 different ways
    1. during feasibility to cover things I am guestimating
    2. during project to cover '**** happens'