Development joint venture

Hi all,

A close & trusted family member who is a retiree and have $400,000 cash wants to invest in a property. She is not likely to get a loan and also her choice not to have one.

Me, is thinking of embarking on the development journey (have been wanting to give this a try).

Coming into this situation, on top of my head I am thinking to go 50/50, 3 townhouse development (1 for each of us to keep under our own separate name and the other to sell), split the final before/after tax profit. We are in the position of trying to help each other in the best possible way.

The loan will be under my name.

Do you guys think that this is a good idea?

I am all target, shoot me with pro and con.

If this is a goer, I will have a lot more questions to ask.

Cheers

 

Loan will need to be in the name of the legal owners.

 

See
Legal Tip 111: Ways to Structure Joint Ownership of Property Legal Tip 111: Ways to Structure Joint Ownership of Property

 

Honestly?
No - I dont think this is a good idea.
You are talking about embarking on a project, which neither of you have any experiance in. Which carries a level of risk, which neither of you yet understand.
Im not sure of your salary level - or if you have any additional capacity as far as financials go.

Can you service the full debt of the proposed loan.
$400k sounds like a lot. However, even a small development will chew through that quicker than you can say "I have $400k".

Unfortunatly I am talking from experiance, where I started with a similar amount. Started a development, and hit some hurdles. I only managed to complete the development (5 or so years later) because I could fully service the debt. At the end of 5years, I think I broke even...just.
I did it on my own. With a business partner no doubt it would have torn the two of us appart.
I documented this on SS - feel free to have a read.

I hate to be a nay sayer, but I do not think this is a good idea.

Blacky

 

@Blacky $400,000 is just from her side, which I will match so that we are in equal position or perhaps more if it is needed.

Assuming that the land will cost me $600K, for a 3TH 3BR sub of 3x2x2, would a total budget of $1.3 be sufficient? Assuming it's all smooth sailing with DA, permits and build. With a timeline of 12-18 months to Occupancy. I will be doing this remotely so I will be needing those armchair developer services. Hoping @MTR , @Beanie Girl or anybody else who can give some input as well.

With end goal being 1 for sale, 1 in my name, 1 in her name. What will be the best way to do this. Perhaps a loan from her to me, or the 400K taken as a large deposit released from her to me for the OTP sale to her?

 

I suppose the first thing you should do is work out what areas and what the numbers are. Find an area that works, this can be tough but not impossible.

Also, like Blacky am bit concerned about JV and this is your first project.

Another issue is that markets are changing, sure there will always be opportunities but it still adds another layer of risk and this will be your first development.

But hey start throwing some numbers around at least 20% profit otherwise forget it IMO, just because as I said markets are changing.

Marisa

 

There is a million ways to skin a cat.

$1.3m sounds light on to me? maybe closer to $1.5m total dev cost. However, depends on a lot of factors - you would need to run the numbers.
At that level you will end up with a loan of $700k. How will this be serviced?

What structure should you use? Well - you need specific advice, and this needs to be sorted out before you even start looking for a property (and I would be supprised if doing it in personal name(s) is the best structure).
How will you manage GST? Or is it CGT? Who knows? (Ans: your accountant & @Terry_w)
Who will be responsible for what?
How will you document loans/agreements?
How will you protect yourself and your JV partner
How much buffer do you have? How much will you need? Is it enough (tip: more is never enough).
What are your mitigation plans? You say 12-18months (seems very tight - I would plan on 24months from date of purchase). What happens if (when) this blows out to 5years).
What happens if something happens to you half way through (lose your job)? Whats the plan?


Wow - you are talking about a $1.3-$1.5mil development, in a JV, doing it remotely as your first foray into developments? Balls of steel? Sure hope so.

The above questions, you may not have answers to right now - but if you are not already, you should be thinking about them.
Im not saying dont do it...nor am I trying to scare you off. I like the way you are thinking - you just need to tread slowly and carefully.

"Profit is the transfer of money from the impatient to the patient."

Blacky

 

@MTR, I do have some areas in mind and now it comes down to the issue of doing it remotely. You have some experience in this and I would value your input. How much involvement does the armchair service requires from you?

As for the issue of changing market, I think as we are planning to keep 2/3 of it or worst case all, we are not overly concerned. At the end of the day our goal is to get it cost price, as opposed to End Value.

 

In which case you are starting out with the wrong mindset from the outset.

Blacky

 

Are you not in Australia? That does add another hurdle - getting a loan when not living in Australia and/or foreign income.

I would probably start smaller. No need to jump straight into a 1.2-1.5m development.

 

@Blacky,

I appreciate your input, can you perhaps elaborate on what mindset I should be in.

 

Even if you are keeping stock, to reduce risk I would want the properties to provide cash flow on completion and to be able to access equity for your next project if applicable.

Personally I would only do this if I did not have the contacts, this takes time and networking with those that are suitable, honest, reliable etc etc, which I do have in the Melbourne market, I am from Perth.

Its taken some time to network with some good people to help me on the ground. I also fly over regularly to check on my projects and to meet up with my town planner, architect and builder.

I was not interest in Syd because I could not even get a builder to look at a granny flat conversion because they had too much on and again I have heard this is a tough gig. I could see this being very stressful and concerns I may end up losing money.

QLD - developing, infrastructure to costly for me.

Back to Melb this markets suits me, and of course Perth my home town, however this market is falling.

What market/s are you looking at for your first development?

Marisa

 

Sounds like you need some live examples and a solid plan with your estimated ROI, rather than just a stab in the dark "should I spend 1.3mill doing something" type of question. Some people on here have been burnt before and luckily for you they are willing to help so make sure you listen to everything they say

 

@Westminster ,

Yes I am not in Australia currently. I do have a few properties in VIC, and I just see it as a waste for me not to do a development at the moment. Unless I do my own development, I won't be able to achieve the yields for the areas I want to invest in. I am pretty sure I can deal with the funds as I have the amount available on redraw as well as LOC.

@MTR

I'm looking at Melbourne

@LifesGood,
Live examples are what I'm after. Costings are available online, but I am wondering how accurate they are.

 

Will pm you, I have an idea that may be worth looking at.

Marisa

 

I sense disaster written all over this. Just my opinion.

 

@Leo2413 can u elaborate more? Like I said, I am all target.

 

Developments arent easy - even when you have experiance.
Developments when you are not in the same state are even more complicated. Multiply that again when you are overseas.
This is your first devlopment
JV's complicate transactions further.

I dont know your financial position, but going into a 3x unit, $1.5mil development for your first development is a big call - and then you are multiplying the complexity further with the above factors.

People throw around the numbers of developments and make it sound easy. "I got this site for $500k, spent $1mil and threw a profit of 30% in 2 years" it makes it sound easy - when its just not.

Have a read of @MichaelW's Mona Vale thread, and my "Life - its not all beer and skittles" thread from SS. Both projects were finished, but it wasnt smooth sailings (Im pretty sure it was MichaelW anyway?). These threads will give you some good insite into just a couple of the challenges you may face.

Blacky

 

You need to be approaching this with the mindset of the actual risk you are entering into. This is a business transaction, and you need to have profit for risk at the forefront of your thinking.
Treating this as a risk, rather than purely a project to break even will help you find ways to eliminate some of the risks.

Im still interested in knowing what your contingency plan is.

Blacky

 

@Iamnumber5 for all the points @Blacky brings up mate. I'm the least pessimistic person you'll ever meet...I just don’t want you to lose a lot of money and more importantly a close family member. If your hell bent on doing it, make sure you have someone with some experience walking you through it in order to greatly reduce your risk.


BTW @Blacky you're authorised to speak on my behalf any time buddy