Mistakes Wannabe Property Developers Make

Discussion in 'Development' started by MTR, 16th Oct, 2016.

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  1. MTR

    MTR Well-Known Member

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    Ok
     
  2. sash

    sash Well-Known Member

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    The secrets out...he is my mentor......
     
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  3. datto

    datto Well-Known Member

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    Crikeys. If he can do it so can I. I'm off to the Ferrari dealership tomorrow. I think there's one in the Druitt.
     
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  4. DaveM

    DaveM Well-Known Member

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    There was a yellow lambo at Bunnings Parafield last weekend. I assume he was there to buy 200m of plastic tubing, 100 extension leads, some nails and every quartz halogen floodlamp (none of this new fandangled LED tripe)
     
  5. Brady

    Brady Well-Known Member

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    Had a client last month who was developing, straight forward splitter block... thing was it made no sense at all.
    Deal didn't stack up - combination of overpaying for block and construction costs.
    He was earning >$150k+ and all his friends and accountant said developing is where you make money.
    Thing was that he was going to be making a paper loss of ~$50k
    I pointed it out when we ran some numbers and he just shrugged it off and wanted to go ahead
    He's thought process that he had two brand new houses... which would give good tax benefits....???
    Seriously though why not just go buy the houses brand new @ market value then, instead of costing yourself dollars.
     
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  6. Sackie

    Sackie Well-Known Member

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    Absolutely insane for the 'return'when considering all the risks involved.
     
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  7. willair

    willair Well-Known Member Premium Member

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    Try the Police Government Seized Auction in Brisbane ,a few seem to come up every now and again from the gold coast..
     
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  8. MTR

    MTR Well-Known Member

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    Totally, just buy new why bother.
    When markets change and developments no longer make sense, or profits are way to skinny best to move on. Also the values could drop further if building in declining markets so feasibility is close to useless anyway.
    That is why I love building/developing in strong markets as it reduces your risk.

    MTR:)
     
    Last edited: 18th Oct, 2016
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  9. Brady

    Brady Well-Known Member

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    I know it's nuts! Had clients before want to develop and happy to break even just because they want to learn the process, now I kind of get thats - but still could be an expensive lesson.

    So many people developing for the sake of developing. I seriously wouldn't build a single house if it wasn't going to make money - way too time consuming.

    It's a great pickup building in increasing market - I reckon I would be close to $50k up on each block (based on my OEV) just due to the market demand for that type of property in the area. Funny thing was there wasn't much in the area when I started and my valuations came back really low - now there's been around 10 sales that would increase the valuation by around $100k each
     
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  10. MTR

    MTR Well-Known Member

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    that is great:)
     
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  11. Pumpkin

    Pumpkin Well-Known Member

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  12. Blacky

    Blacky Well-Known Member

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    Cash flow is king

    For your first development (though any development really) you will use more cash than you can possibly imagine.
    It is highly likely that the development will take longer and cost more than you expect.
    If you don't have the ongoing cash flow to meet these delays how will you complete the project?
    I'm very cautious when I hear of people starting a development and using loan funds to fund ongoing interest and holding costs. There is a limit to how long this can and will last.

    Blacky
     
  13. M-THIS

    M-THIS Well-Known Member

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    What advise do you suggest for taking on a development? ie. At what level of profitability (and how to calculate the profit).
     
  14. Scott No Mates

    Scott No Mates Well-Known Member

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    Plot your monthly cashflow (excluding interest charges), do a dcf & review the results for the NPV & IRR (refer to excel functions). Use a discount rate which satisfies your risk eg (interest + margin).
     
  15. LMD

    LMD Well-Known Member

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    What structure would be apporpiate for first time developers?
     
  16. Brady

    Brady Well-Known Member

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    @LMD no such thing - would be dependant on your personal situation, so many variables. Family, income, selling/holding etc

    Thats exactly why @MTR stated employing the correct professionals - see accountant :)
     
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  17. M-THIS

    M-THIS Well-Known Member

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    In other words - 20% profit before tax on total costs (excluding interest)?
     
  18. MTR

    MTR Well-Known Member

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    I buy in a trust, but as OP mentioned seek accountants advice
     
  19. Scott No Mates

    Scott No Mates Well-Known Member

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    Discount factor is inclusive of risk and interest.

    upload_2016-10-19_16-10-13.png


    Play with your own figures
     

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  20. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    DCF is largely irrelevant to a build project life of 12-18mths. You arent building a tower or a tunnel.
    These forms of project evaluation can also be meaningless if you use little equity and borrow. Keep it simple and just look at real cashflows incl all holding costs. The interest on outlays in the budget is its own discounting factor. The reality is you may be putting down just a few K of your own money so the profit at 20-30% of total cost is far far more for the true amount invested. Your return may be 5000% on the few K outlayed.

    What discount are are you using ?? 18% ....Did you borrow from cash converters ?
     
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