Positive or Negative Development

Use other people's money.
Use other people's time.
Use other peoples experience.

Of the top of my head, I can think of 4 friends doing around 8+ projects between them using other people's money as JVs.

These are their first deals. All found and started within the last 12 months.

Or sell.
Or rent by room.
Or start a business.

There's always something to do to move forward. "Be like water" Bruce Lee.

 

See if we reduced the budget to say $300,000, that person I doubt will find a reasonable dual property for that amount.
If someone is a low income/low budget person, they will have to wait almost a decade if not more for a sub $300,000 property to be even anywhere near the 10% positive margin.

 

It's not a straightforward question. I will have to think about it.

 

@TheSackedWiggle & @Kangabanga & @dabbler =all people I read a lot = any thoughts?

 

Here's a question.

What are their results?
Are these the results you are hoping to achieve?
Are you able to emulate their starting position/actions?

This applies to anyone. I have no idea what they have achieved.

These are questions I always ask, aside from assessing wether given advice is logical.

Will their results going to get you where you want to go.
Or is it a case of the blind following the blind.
Or, in your case, are you seeking validation for something you've already done, or are about to do.

 

Actually I thought up this idea. To begin with, it just seemed simple maths to me, then did further research on the risks/anecdotal chats to people & here we are now.

One last thing too, to me JV's are usually way more riskier than this idea. I have much more control in this idea & not everyone has the contacts to simply start up JVing.

 

6% per annum is actually extremely average, if not even poor for long-term growth rates. Indeed if the suburb grew faster than that then this proposal only makes more sense as you will become positive even quicker.

 

So validation.

I've been there. Frustrated. Wanting to move forward. Start getting creative. Keep getting holes punched in my ideas. More frustrated.

This is the time to take a step back. Take some time off and do something else. This is the emotional state that has you loose money or screw up years of portfolio building.

Come back with a clearer head, in a week/month/year, look at your end goal, the en ask "what will get me there?", "who has gotten there?", "can I emulate that?".

 

Are you doubting that it can be done?

 

Making a loss on a development?
No. That can easily be done.

Hitting 6% growth when average is 2.2-2.7%. A little harder, and very much out of my hands.

Becoming financially confident, and independant. 100% possible. IF you put the work in. Real work. Not road runner, fast moving legs yet going nowhere work.

What ARE you wanting to accomplish, and by when?

 

If you think 6% growth is not possible, you are too Sydney & Melbourne focused/short termist.

40 year long term growth rates of houses in most suburbs in Geelong is 6%.
In Inner Melbourne it is more like 9%.
Hobart currently grew 12% last year, two years of that in a location & you would have made a profit already with the scenario.

I can show you data if you don't believe 6% is easily possible.

An example of this strategy in action=one of the top of my head=Glenorchy in TAS=many new builds there completed a few years ago when the suburb median was well below $300,000. Even if the developer was a builder (thus could squeeze costs), 10% margins seem unlikely=RP Data map confirms no sales.

 

As @NHG implied, I am the blind.

I really suck at handyman skills and have no idea how even a deck is build.
I have never done a buy split build, just a couple of renovations and a construction and it was a nightmare and was taken for a ride.

Purely from risk perspective,
Even if I could I will not undertake any development project in a down turn.
Given the headwind, I will not touch Frothy cities now, may be in 2021.

Irrespective of cities,
Why do you think 6% growth YOY is possible in an environment where credit is getting scarcer and debt ceiling is getting enforced across the board (at least for next 5 yrs)?
Ability to borrow in such credit env is an asset, use it wisely and when blood is on the street.

Let say you have made up your mind, convinced about growth and want to jump in now,
Instead of buy one, split and develop another(400k + 350k + transaction cost)
I would buy two with future potential to split/develop (400k + 400k + transaction cost), simply because the total debt in both scenarios are not far apart and later option has better growth potential.

 

I never said it wasn't possible. You should see what my Sydney properties achieved. For the sake of proving my point, (stomps foot), let's only look at 2012-2017 (mic drop).

Should i therefore use that figure for my 30 yr projection? Or should i look at long term historical, which is still not a perfect indicator.

Why is it most investors have 2 or so properties, and a handful own entire streets?

I strongly believe Taz and Qld will have 10%+ growth for a year or two. Then what? This is a 30+ yr game. Why you sacrificing your queen so soon? And for a loss?

 

I like your idea of buying two, but I am wary of whether a bank would lend/could afford to hold two if both negative cashflow.
In answer to your 'why do you think' question, Australia is not one property market. Even with APRA, Brexit etc. I think what most agree on this forum is there will still be areas that grow at least a fine 6% over 5 years-remember it doesn't need to be 6% every year, merely divided out over 5 years.

Well if Inner Sydney suburbs have like Inner Melbourne suburbs been achieving a 9% p.a. 40 year growth rate, then surely asking a conservative 6% or even 5% over the next 10 years is not unheard of. I too don't totally rely on historical performance but if we take Tas as an example, same thing there-long term 30 year growth rates are around the 5% or 6%. They've gone into negative before and they've gone into 20% also, but 6% is the long-term average.
If you are only getting like 4% then you are barely beating inflation, why would one bother to capital growth invest?

 

Awesome. Now apply that logic to a profitable investment methedology that you can rinse and repeat.

VS one where you need to wait several years to even get into your second deal.

In the former, you'll benefit from that capital growth EXPONENTIALLY more.

Anywho. I'll let someone else put in their 2cents.

 

If this is what your strategy boils down to then, why not just buy two properties? That's basically all your calculations come down to.

Under that modelling, why not buy literally anything and then apply 6% PA growth to it? Bonus growth because the more you spend, the more growth you get!

Anyway, you have experience investors and developers here telling you that it doesn't work that way and you should be aiming for every advantage you can get - including aiming for considerable profit when developing.

 

Sorry bud but this makes little sense.
If all your using is growth then why develop?

Just buy two properties at FAR less RISK and FAR FAR less effort.
I have never in my life of property heard of someone not developing for a profit from the get go...
In your CGT example All you have done is use less leverage in the first example which means less compounding so ofcourse it will come out less.
Do the maths again but this time just do it using the same amount of initial leverage (could even be done using 1 property!).

The only benefit in your strategy is the cash flow but I can promise you if you have never developed but that small advantage won’t be.

 

I don't think this is a good idea at all, but let's put that aside for a second.

How would you fund this?
You're stating you can only really afford a $400k property at the moment so I don't see how you could afford to do it.
Banks are going to be very cautious about the end value and I'd suggest you'd have to front up a lot of your own cash to be able to complete it and get the positive cash flow you're talking about

 

I think I said this in post 2 or 3

 

Build to manufacture equity. Use those numbers to justify your returns. I always see capital gains as a 'bonus'.