I want to build units. Am I dreaming ?

Hi forum.
I've been lurking here for a little time now and this is my first post. Hopefully the first of many as I begin my journey.

I have approximately 300k to invest. I envisage using that money to borrow for the construction of 3 or 4 units in the south eastern subs of Melbourne. I have no intention of living in one, or renting them out. I'm going to sell them either during the building process or after they are finished. I have no delusions about thinking this is something that is easy to do. I'm sure there are many hurdles and sleepless nights ahead when I get going, but I really want to do this.



I've found that getting information is quite difficult especially when it comes to financing this sort of project. What are the methods of finance best suited to this sort of project?

Is anyone able to recommend services or builders that specialize in these sorts of projects and are able to provide some level of a complete turnkey service?

Is anyone aware of any resources available in the way of calculating all the costs and potential profitability for construction projects such as these. I'm sure there are tons of costs I have no idea about.

Any help will be appreciated.

Thanks.

 

Just because you really want to do something doesn't necessarily mean its strategically the smart thing to do.

If you are just starting your investment journey and only have 300k (peanuts in the development world), I would say you're not ready to tread this path. Unless you are willing to accept an extremely high risk path. In which case, imo you'd be gambling with notoriously painful odds, rather than investing.


If you wish to persist, I'd engage with a finance broker to see if you are even able to get finance to undertake this kind of project. With only 300k, and assuming you don't have astronomical serviceability, I'd say you have no chance. Your soft costs alone will eat a big chunk of your 300k.


Back to your thread title , yes dream. Dreams are important and can be realised. But don't cross over into fantasy territory.

 

Hey. Thanks for the reply. I really do appreciate any information at this point. Even if its not exactly what I want to hear.

Since my interest in this, I can't help drive around and see all the new developments rising up.
Townhouse after unit after townhouses. What is it that separates them from me. It must be very profitable for most people?

 

Experience
The people that have done these are likely experienced in this sort of development, what looks easy often isn't, and just because someone else has built townhouses doesn't necessarily mean they made a profit either.
Even the ones that do make a profit it may only be between 10% and 20%.
I've seen some builders do really well out of them, as they're doing the construction themselves but they're mostly cashed up beforehand so don't need to borrow much if any.

Project costs can blow out quite easily, building variations for example, finance holding costs if you can't sell for what $ you thought you could or takes longer than expected (happens all the time) All of that can eat into the profit margin very quickly.
If intention is to build and sell it's likely going to be commercial funding, slightly higher interest than standard resi funding and lower LVR's means you need to front more cash.

Have you done a feasability study ?
Would be a good idea to have a chat to some people who have done them in your area, if that's at all possible, they could give you some good insight into the process etc

 

Hey thanks for the information.
In regards to the feasibility study, I admit that I'm limited by my lack of experience. I don't know if I'm putting in all the costs. Are there people that I can pay to do this sort of thing for me?

 

I thought a little about this once.
I think often people pay too much for the block of land looking at what end values can be.
In below link I have come to learn the builder had the cash to finance the project

as a start Would this development have made a profit? [WA]

$300k deposit maybe buy a house and value add and sell for a small profit

search for "profit" finds threads

 

Why?

 

Have a look at these figures from a builder in Melbourne. Realistic?

 

I built 4 townhouses as part of a JV and sold them last year, but it took me 10 years to get there.

Without building up experience/contacts/knowledge/funds along the way, I'd say its virtually impossible to jump in the deep end with a multi-unit dwelling and succeed.

Start small. Finance a renovation, do a simple extension DA, get to know what is involved in a CC and construction, go work for a developer, build a single house, contribute to a JV, read up on case studies - there's hundreds of steps you can take first.

 

Totally unrealistic figures.
It is Hard to buy a stand alone property that you can subdivide in 3 for $600k these days.
You have not allowed fees for
Architects
Engineers
Lawyers
Surveyors
Council contributions
Water contributions
Fire planning
Aboriginal planning
Landscape planning
Roads planning
Environmental planning
I would allow $200 thousand for these with the majority to the various council contributions.
Plus your interest costs would be in excess of $150,000 at a rate of 10-14% if you have such a small deposit.
You also have not allowed for
advertising costs of project
A fair commission for an agent handling the sales.
The payment of GST on the SALE price of the three units built.
Looking at this project, I would predict that with no finance, ie if you had all the money in cash it would have broken even.
If you had $300k and were somehow able to find money, expect to pay 10-14% plus and lose up to $150,000 based on the updated figures.
I am a private developer in Sydney and Melbourne with $53 million under construction as at today’s date and am currently semi retired. I have 41 years experience in the field at 60 years of age.

To get started, try finding a property first, then look for a partner who will fund you for a profit split. Have accurate profit and loss ready to show them. Those I mentored have approached me in that way in there 20s with an offer to split the profit 50/50 if I provide the finance. 8-10 years later two of the three are multi millionaires. The third only started a year ago. There are many people looking to fund young go getters with talent in many different fields.

 

Hey @Sky High

I love the question. They are the sort that get my mind whirring on how to best respond.

FIRST
I’m reading this as:
How do I find the deal.
Fund the deal.
Build the deal.

Too long a question for a forum.
Not enough cash in hand to pay someone to do it for you.

There’s a much longer path to this, as stated by @Mel Morgan.
The following is more to give some insights.

MONEY IS CHEAP!
You’ll quickly find that is a very limiting belief. One held by a LOT of people.
The funds you currently have in hand are somewhat irrelevant.

We are in a very interesting moment in history.
Money is FLOWING. There’s so much of it around. Cashed up people / institutions and no idea where to send it.

Had breakfast with an acquaintance a month ago. Was putting $200k into what he thought may be a ponzi scheme. Why? He was bored, curious, and that was blow money. For him, it was nothing but a cheap thrill.

Now, there are a lot of ways to finance these deals without using your own cash.

Examples:

1. JV with the owner of the property, bring in money partners.
2. Option the property, use your $300k to complete the DA, on-sell the deal for profit.
3. Want it all for yourself? borrow on private finance. Need $3M? Sure, give me collateral and 24% interest. Done. Leverage it against the bank to complete the transaction.

Why borrow on 24% interest?
Well…

Rough numbers on a friends recent deal.
12 months to complete a DA approved site.
$1.6M purchase.
$1.6M construct.
$0.3M other costs
$5M sale.
= $1.5M profit.

Say $1M down. Rest borrowed from the bank at 5%.
What is 24% interest on $1M… $0.24M.
What’s $0.24M when you will still clear $1.26M.

*disclaimer* deal structuring is way more complex than this and you would best talk to a mortgage broker such as @Morgs .

So if money is so easy, why doesn’t everyone do it?

PROVEN TRACK RECORD
Here is $5M cold hard cash.
What now?

Do you know how to source a deal?
How will you get the DA across?
Do you know how to structure the deal?
Have you ever seen a 4-pack construction?

Without a PTR, you are blowing smoke.
So how to build up a PTR…

MENTORSHIP / SCREW UP
Be mentored, or lose money trying to do it yourself.
There are no shortcuts here. You gotta put in the hard yards.

There are a lot of ways to find a mentor and gain experience, plenty of posts on this topic already out there so I won’t elaborate much further.

I'm not talking paid mentor. I mean someone who will keep you accountable, and or bring you in on deals.

Volunteering your time to someone who has already cut their teeth, what do you have to offer them? How will you add value?

PRO-TIP
Aim sky-high!
You are on the mark.

You can spend the next 2 years learning how to do a $1M duplex deal, for a 25% profit margin.

You can spend the same 2 years learning to source a 100-acre site for rezoning and take a 2% commission on a $60M base price. Then smash out several in a row as they don’t require any of your own funds.

Money is limitless, your time is not.

TAKE A PUNT
I love the question because it sounds like you’re stretching. Spend enough time with people doing these deals and you’ll pick it up via osmosis. You won’t be able to help but stretch yourself.

 

Love that advice!
Also I think any developer needs a great deal of ambition, persistence and perseverance.

Btw I think you're trying to tag @Morgs

 

Couldn't find his name. I forgot his handle.

 

In current environment hard to source finance for 4 units and above

 

I love your dreaming / ambition. As others have said, maybe a tad unrealistic, but don't ever lose that dream.

 

I appreciate your input everyone and I recognize there really is a great deal for me to learn and consider. I'm really excited about all of this.

Now I'm thinking a JV is the way forward for me!

So now I'm busy reading up about how I'm going to position myself to get in on this game.


What is the most important factor that would attract prospective money partners? / Builders?

 

IMO it sounds like you are eager to part with your 300k permanently. Why would you risk all your equity on a venture which at the best of times is moderate high risk? How do you even know the venture is worth investing in if you don't know how to do basic development DD? Listen if that's your risk profile then fine. Just be sure you understand the risks, which are plentiful and high. It may sound like I'm a conservative party pooper but I'm actually not. I can just see what's likely to happen with your 300k (which really is miniscule when it comes to development) if you go down this path at your current stage with RE. Not to mention the time wasted.

Maybe have a read of these books to get a basic starting point to increase your knowledge.


My 1.5 cents.

 

Hey thanks for that. No I'm not really eager to part with my equity thats for sure, but at the same time I'm conscious that to get anywhere I have to take on some reasonable amount of risk. That's just the way things go.

I'll check those books out.