My not so successful first development project

Hi Fellow property investors,

Over last 3 years or so, I have learned great amount of knowledge from this (and somersoft) forum. So other than occasional posting to forum, I thought I should share about my first development project and share lessons learned.

Before I mention anything else, let me give credits to persons where its due. Apart from other people who have posted on this forum, 2 people I would like to mention whose posts has given me great confidence in starting this journey. Westminster – because of her post on somersoft, I found my builder – and MTR. Both are great inspiration to me and many others. Also, euro73, who sourced NRAS incentives for me.


Purchased property in Sep 2013 @ 495K in Balga, WA. Total cost including stamp duty, conveyancing etc. 515K

Assumption at time of purchase :

construction cost for 3 3X2 villas 540K.
Land area : 728 m2
Demolition, subdivision and utility cost : 60K
holding cost: 35K
Total cost : 1150K
End product value assessment by myself at time of site purchase: 1350K
End production valuation by bank at time of construction loan approval in August 2014 : 1350K
Tenanted till July 2014

Construction start : November 2014
Construction finish : December 2015
Construction cost including demo, subdivision and utility etc : 613K
Valuation by bank at end of construction : 1240K
Valuation by myself at end of construction : 1300K

Variance from initial assumption :
Construction cost more by 13K.
Interest cost was 7.5K more.

Lessons learned :

1. Market cycle or timing the market

Biggest lesson was to identify the market cycle for next 2 year. I entered at peak of the market and by the time construction was finished, it was almost 10% or so down. It took away almost all profit. Only good thing for me is that I have got NRAS for all 3 units and I am keeping them. Each of the 3 units are cashflow positive to the tune of 9K pa (net, after tax) so total 27K pa positive geared. But that is due to NRAS and not due to development profit. If I had knowledge of different market cycles at different time, I would have done this project in Sydney and not in Perth. I have learned firsthand that timing the market is more important than time in the market.

2. Read the contract

I had great builder who did everything for me i.e. demolition, utilities, subdivision etc. However, I did not read contract properly and he was charging me 20% margin for all these works. It wasn’t his fault but I was under impression that he is doing it for free. Had I known it before, it would have saved me 9.5K.

3. Good accountant matters

I did not know that we can claim deduction for entire depreciation report value write off when we demolish the property. This is possible only if property is tenanted at both ends of demolition i.e. before demolition and after construction of new units finished. Paul who is also active on this forum, found it for me and got confirmation by checking with other professionals as well. I could claim 89K in deduction because of this.


I am currently doing a 4 TH project in Hawthorne, Brisbane with others. Hopefully, DA should come this month. I think I have applied these lessons learned in that project. Will share that project as well once its finished.

Happy investing,
Rooky

 

Awesome write up, thank you. I appreciate the honest recollection of numbers - some seem to think that development always works.

Be interested to see how you go in Bris, might be a different point in the cycle there. Did you source it yourself or did you use BA? Is someone up there keeping an eye on it?

 

Thanks for sharing Rooky, good for you.

NRAS a stroke of genius, great cash flow

I only found out about the depreciation write off after reading Paul's post on SS last year. Excellent post.

Pretty close to mid 2014 started seeing an oversupply of villas in Balga. Unfortunately as developers we are at the mercy of markets turning, agree timing is everything.

On the flip side you only learn by getting your hands dirty.
You don't have to sell as its cashflow positive...nice

All the best with your next deal

MTR

 

You know what? It's not 'costing' you anything for that education and it's putting cash in your pocket. I would say it's a cheap lesson

I always appreciate honest numbers, so well done regardless of outcome.

 

Hey @Rooky whilst it's not a shining beacon of success, thanks to NRAS you can afford to keep it until the market rises and that's fantastic.

Combining different strategies like development and NRAS can really give you the icing on the cake and a buffer against market directions such as rental downturn that Perth is currently experiencing.

On the "read the contract" part I do agree with taking some things out however I have seen cases where the builders experience or better buy price has enabled them to do it cheaper than I can and it easily enables it to be rolled into the construction loan. So it is a suck it and see what you can do better, what is worth your time and what they can do better than you can.

Thanks for sharing.

 

@Rooky Really appreciate you sharing your experience. Very much looking forward to seeing your Brissy development and eager to learn from your journey on that one. Would love you to start a thread on that one too.

Thanks again for sharing.

 

Hi DT,

We bought it ourselves site unseen. Bought last year in September, it has been tenanted and we are going there for first time in March. Hopefully we will have DA by then. I am planning to start thread about that development once DA is there.

Rooky.

 

Hi westminster,

I was able to roll all other expenses into construction loan as you have stated. That was great thing. Also, i am sure i would have stumbled somewhere and made mistake as i was doing it for first time. So 9.5k extra but it had some positive side to it. But it did still hurt me when i saw that i paid 9.5k extra. More hurtful was the fact that i did miss on checking about it and came to know at last after construction was over. Only myself to blame there.

 

Curious, with your new deve site in Hawthorn, Brisbane, where is this market? Is it early stages of rising market? I don't know this area?

MTR

 

Hi @Rooky, are you looking at building something similar to this stock for your Brissy dev?

Sold Price for 3/42 Philip St Hawthorne Qld 4171

Sold Price for 3/14 Mullens Street Hawthorne Qld 4171

 

Good job... glad its working out for you - another example of the value of NRAS and it's associated cash flow... buys you time.

I think your thread subject is a little harsh on yourself......

 

@Rooky - Thank you for sharing. Reading your post I cannot see how you can say that it was not so successful based on your initial assumptions and results. There are a few points I would like to ask about:

This variance is less than 1% of your total cost. This very small - did you calculate a % variation in from the start (typical 10%)? Why?

While I agree with you about timing the market I believe that even if you have used your own valuer it may still be different from what the bank would valued it at - aren't they always more conservative?
Did you calculate your expected profit margin in from the start? Why?
Will be interesting to see if you use the QuickFeaso calculator today, what the results would look like and what the calculator says about the project's feasibility:
QwikFeaso - Feasibility & Construction Cost Calculator

 

MTR,

I think its stable market at the moment. It had good growth in 2013 and 2014. I think it has grown around 7% in 2015. I guess, 2016 will be same. More or less, it will mirror growth for entire Brisbane. I am still not good in picking winners in terms of rising market.

Rooky

 

Spot on.

 

I was expecting 200K margin from start. Did not target any %ge figure as such. My logic was even if I do not make money, it will be good experience to start with. Agree that 13K is not too much for entire project but my build contract was covering everything - which had fixed price component of 540K and i assumed variable cost items like demo, subdivision will cost 60K. Its this 60K component which overshoot by 13K. This was partly due to 9.5K for builders margine for variable items like demo etc. and 4.5 was variation I did in original building plan.

With regard to valuation, I agree that banks are always conservative.

 

I think the total build cost etc good price if it includes all the fruit, ie good specification

I was looking at a 3 villa development in Balga when the blocks were around 390k, and I recall I would be lucky to make 20%, at that time

Perhaps we are working on different end values?
I worked on lower end values because there are too many villas in Balga. When markets turn these areas are likely to fall as buyers have too much choice

MTR

 

@Rooky

Thanks for sharing your journey with us.

Could I ask a few questions.

1. What was the original intention to sell or hold?

2. What did it cost you to buy the NRAS allocation?

 

Yes, this was good specifications - aircon in living area, 30 course ceilings throughout, stone benchtop, recessed ceiling in living etc.

I did not target specific %ge but it was coming at 17% gross. I know its lower margin but I wanted to get experience about development. My location was right next to park and in nice part of Balga. So I was expecting 450K end value(there were some sales of 430-440K in not so nicer part of Balga at that time) at time of starting construction and it was validated with same end product valuation by bank. But then market turned.

 

Intention was to hold from beginning.

Will send you pm about NRAS.

 

@Rooky

Thanks for sharing Numbers and overall honest picture.

Few things to consider for future project:

• 5% contingency of construction cost. (our feasibility calculator automatically adds that figure)
• Allow of longer holding cost.
• Pay/engage someone experience to go thru building contract.
• Avoid expensive designs, Every sq counts