Expected Returns on Development

Discussion in 'Development' started by whiteknight, 14th Feb, 2020.

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  1. whiteknight

    whiteknight Well-Known Member

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    Hi All,

    I am contemplating my first development project and I would like some general advice on expectation of returns.

    The example is as follows:

    Site costs: $600k (land purchase and holding costs)
    Construction costs: $600k (to build 3 townhouses)
    Total resales of 3 townhouses: $1.8M

    Profit after all expenses (GST, transaction costs): $300k

    Return on investment: 25% over a 3 year duration

    Is this something that is aspirational? I believe it is achievable, but is it worth the risk compared to your traditional buy and holds?

    I know that this is general in nature and that every investment proposition is different for everybody, but just wanted to throw this out there as an example. Appreciate all your feedback in advance.
     
  2. FireDragon

    FireDragon Well-Known Member

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    Does it take 3 year to build 3 townhouses...? I am planning to do one with 7 townhouses / units and the time frame from purchasing the site, applying for DA and construction is around 2 years.

    Do your costs include the all the professional fees, project management fees, interest expenses, authority fees, land tax, etc?
     
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  3. MTR

    MTR Material Girl Premium Member

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    Risk is market conditions which you cant control why feaso so important

    i am looking at similar numbers on my project, very hard to achieve in perth market

    have you included everything?
     
  4. Brady

    Brady Well-Known Member

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    $200k build costs how many sqm? Single or double story? Is that turn-key?
     
  5. MTR

    MTR Material Girl Premium Member

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    Can u share where location????
     
  6. Morgs

    Morgs Well-Known Member Business Member

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    As an example those numbers stack up alright - but the devil is in the detail with developments so you really need to do a detailed feasibility. There are so different elements that need to be accounted for or mitigated else the risk is that an attractive profit margin can be quickly eroded (into the negative).

    Is it worth it? Without doubt if you can create a 25% return it is! (note: 3 years is too long - on what looks like a basic product based on price point should be less than half that timeline).
     
  7. gach2

    gach2 Well-Known Member

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    Your expecting market to remain constant

    If so buy and hold would not make a cent while here you have made 300k
     
  8. lixas4

    lixas4 Well-Known Member

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    The last couple of two/three lot townhouse subdivisions ive managed, ive checked the start date (original survey date) to the date ive released the subdivision plan to the conveyancer for lodgement. They have each been about 26 months. Add another month for prep, and another month for the conveyancer to lodge at titles office, and issues new titles, and all up its taking about 28 months. This is in melbourne.
     
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  9. whiteknight

    whiteknight Well-Known Member

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    Hi FireDragon, thanks for your reply. I am using 3 years as a proxy to take into account time to build and sell the 3 townhouses. Whether i discount final profits by the time value of 2.5 years or 3 years it is not going to make a significant difference to my final return figure.

    I have all these fees modeled and summed up into my cost base.
     
  10. whiteknight

    whiteknight Well-Known Member

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    I'm using proxy numbers here. Have not finalised what I want to be doing yet. Once I have a firmer idea I will update this thread. The intention of this thread was to sound out / gauge how much profit margin investors would accept for the risk of building and selling 3 townhouses and whether 25% over a 3 year period made sense.
     
  11. whiteknight

    whiteknight Well-Known Member

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    I don't have a defined location set in stone yet - looking at several places, potentially Victoria and QLD.
     
  12. LJW

    LJW Well-Known Member

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    If you're making $300k profit, your total investment would be $1.5m wouldn't it? (site costs + construction costs + other expenses) i.e. 20% return on investment.
     
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  13. MTR

    MTR Material Girl Premium Member

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    This will make massive difference, infrastructure costs much higher in QLD
     
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  14. Hungryforknowledge

    Hungryforknowledge New Member

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    Hi LJW,
    I would like to connect with you. Are you able to please contact me on my email: [email protected]
    Regards,
    Jayden
     
  15. Silverson

    Silverson Well-Known Member

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    what have approx build costs been?
    Surely the 600k op is allowing is very very lean
     
  16. tedjamvor

    tedjamvor Well-Known Member

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    Not necessarily. Costs such as GST and Agents Fees come out of the sale, not directly out of your pocket.

    Additionally, if you use loans to leverage equity, you could arguably have $800k in the project with the remaining upfront costs paid by the bank with interest capitalised.
     
  17. lixas4

    lixas4 Well-Known Member

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    I manage the subdivisions (i am a land surveyor). We dont get to see build cost.
     
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  18. gach2

    gach2 Well-Known Member

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    For a single storey 600k can get you far
    Double Storey quiet lean although possible (specially if only 120-130m2)
     
  19. Spiralkut

    Spiralkut Well-Known Member

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    Short answer for me is yes I would be happy with those figures.
     
  20. Brody Hales

    Brody Hales Active Member

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    As a investor I never got in to development- can someone who ‘been there’ gimme tips on what to do to get into the property development game?

    Starting with small development example and how you went about it.