Expected Returns on Development

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

Join Australia's most dynamic and respected property investment community
  1. whiteknight

    whiteknight Well-Known Member

    Joined:
    6th Feb, 2017
    Posts:
    78
    Location:
    NSW
    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

    Joined:
    31st Jul, 2015
    Posts:
    258
    Location:
    Australia
    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?
     
    ellejay and MTR like this.
  3. MTR

    MTR Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    27,786
    Location:
    My World
    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

    Joined:
    18th Jun, 2015
    Posts:
    2,561
    Location:
    Adelaide, SA
    $200k build costs how many sqm? Single or double story? Is that turn-key?
     
  5. MTR

    MTR Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    27,786
    Location:
    My World

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

    Morgs Well-Known Member Business Member

    Joined:
    7th Dec, 2017
    Posts:
    1,791
    Location:
    Sydney NSW
    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

    Joined:
    29th Jun, 2015
    Posts:
    1,895
    Location:
    sydney
    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

    Joined:
    24th Jan, 2016
    Posts:
    782
    Location:
    Melbourne
    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.
     
    the_Hero, The_Billy, ellejay and 3 others like this.
  9. whiteknight

    whiteknight Well-Known Member

    Joined:
    6th Feb, 2017
    Posts:
    78
    Location:
    NSW
    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

    Joined:
    6th Feb, 2017
    Posts:
    78
    Location:
    NSW
    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

    Joined:
    6th Feb, 2017
    Posts:
    78
    Location:
    NSW
    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

    Joined:
    25th Jun, 2015
    Posts:
    68
    Location:
    Brisbane
    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.
     
    Hungryforknowledge and Archaon like this.
  13. MTR

    MTR Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    27,786
    Location:
    My World
    This will make massive difference, infrastructure costs much higher in QLD
     
    Archaon likes this.
  14. Hungryforknowledge

    Hungryforknowledge New Member

    Joined:
    20th May, 2020
    Posts:
    1
    Location:
    Gold Coast
    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

    Joined:
    11th Jun, 2016
    Posts:
    1,149
    Location:
    Melbourne
    what have approx build costs been?
    Surely the 600k op is allowing is very very lean
     
  16. tedjamvor

    tedjamvor Well-Known Member

    Joined:
    22nd Oct, 2019
    Posts:
    218
    Location:
    Melbourne
    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

    Joined:
    24th Jan, 2016
    Posts:
    782
    Location:
    Melbourne
    I manage the subdivisions (i am a land surveyor). We dont get to see build cost.
     
    Silverson likes this.
  18. gach2

    gach2 Well-Known Member

    Joined:
    29th Jun, 2015
    Posts:
    1,895
    Location:
    sydney
    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

    Joined:
    12th May, 2020
    Posts:
    142
    Location:
    Melbourne
    Short answer for me is yes I would be happy with those figures.
     
  20. Brody Hales

    Brody Hales Active Member

    Joined:
    24th Oct, 2018
    Posts:
    35
    Location:
    Melbourne
    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.