Development joint venture

Ha - sorry. I wasnt meaning to speak on your behalf. But I agreed with you, so thought I would throw in my 2c (which is probably about all its worth).

I think we are on the same page though... I like the way @lamnumber5 is thinking, Im just not convinced of the soulution being proposed.

Blacky

 

@Blacky no mate i was only messing with ya and i agree with all the points you raised too.

 

I don't want to derail this thread, but perhaps this is relevant... In your Beer and Skittles thread, you said: "I jumped into developments too early in my investing career. I should have built a stronger capital and income base before taking the first step - but the numbers just looked too good to resist."

What sort of capital/income base would you (or anyone else reading) recommend someone have before moving into developments?

 

Good question. And I guess everyone will be different. To me... "more is not enough"

You need at least 20% of hard costs (assuming you borrow 80%LVR). That is 20% of the land value and 20% of the building contract.
All other costs which you need to fund probably equal somewhere around 10-20% of total costs.

Assuming your total development is $2mil you are looking at somewhere around 30-40% or $600-$800k. If you can only borrow 70% add in another $200k. to those figures.
If you are funding interest from capital (not cash flow) add in another couple of years interest cost.

Working off memory my development cost was $2.5mil. Cash injection was around $750k (Im working off memory here, so numbers may not be perfect). Thats right on 30% (I borrowed to 80%LVR).

The BlackMinster JV will come to just under 30% (at this point). However, it was already a vacant site with a lot of connections in place. We also funded under commercial terms which means we can fund some items outside of the building contract.

I wouldn't want to have anything less than 40% before starting. At that should be available funds (not equity). Plus a good cash flow to fund additional delays.

Others experience may be different to mine.

Blacky

 

Thanks for the reply, it's really helpful to hear from someone who's gone through it and paid for all the "contingency expenses"... I've had an informal chat with a banker who funds developments, and I was surprised at how much they were willing to lend to a novice (even without OTP sales).

I have approximately 20-25% of potential land+build costs as cash in hand But enough income to hopefully cover another 10% or so of costs, so maybe it'll work out similar. At this stage though, my numbers are still very vague and I'm hoping they work out.

 

Thanks for all the reply guys. I think I get what you are all trying to say. Finance however is not so much of a problem for me as the money is sitting lazily in the offset account, financially I am ready even doing it solo with enough buffer. I have very low LVR on my investment.

I guess that is the reason where I got the idea to start with, financially ready, and wanting to move forward on my investing journey.

Doing it remotely is something that gets my attention though, it is indeed a risk for me being a newbie. Need more research before committing to one.

 

@SerenityNow and @Iamnumber5 besides having the finance.. I have found that you really make most of your money when you buy a site... so would be a good idea to familiarize yourselves with doing a quick feaso and also how to do a more in-depth feasibility. Its one thing to have 30% finance but ultimately the site you finance and what you build on it has to stack up for an end profit, eg Total sales - Total development costs = Gross profit.

Its little use to have the finance to fund the development but in the end there is no profit because the margins are just too small.

 

I'm doing similar 4 units JV development in Melbourne at the moment. However, my broker advised my serviceability already hit the wall after APRA changes. Hence construction funding would be cash, so no reason to keep me in the rat race and I'm quitting to focus on development management. On bright side, I'm registered architect that allow me to control the design and construction on my site which save me some margins. From my experience, you will need a very competent PM to make project run smoothly, all the risk to be agreed upfront with your partner and a larger contingency.