Cash/Income Buffer For Developments

@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.

 

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

 

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...

 

I took it to mean on TDC.

 

I suggest keep 10% of TDC.

 

20% for deposit and 10% of construction for contingency/buffer

 

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.

 

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!!

 

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'