Which development strategy would you choose?

Discussion in 'Investment Strategy' started by Jmillar, 20th Sep, 2019.

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Which development strategy would you choose?

  1. Development A, 2 year project, 20-25% profit

    6 vote(s)
    66.7%
  2. Development B, 1 year project, 10-15% profit

    3 vote(s)
    33.3%
  1. Jmillar

    Jmillar Well-Known Member

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    Hi all,

    I'm looking into development opportunities at the moment and wanted to pose a question. I have a friend who is a developer and is doing some townhouse developments with 30-40% profit which is incredible, but out of my range. He believes in my price range he sometimes comes across sites with 20-25% profit, however they take 2 years to get approvals, build and then sell. 20-25% is attractive but 2 years is not, given a lot can happen in this time. My preference is usually to get in and get out as quickly as possible.

    My question to you is this: If you had the opportunity to do a development which produced a 20-25% profit but took 2 years, or you could do one that would only spit out a 10-15% profit but took 12 months, which would you choose?

    There are obviously more in/out costs doing 2 projects rather than 1. Obviously more work too, but for the sake of this question, ignore the amount of work involved and purely look at the numbers.

    Thanks!
     
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  2. Scott No Mates

    Scott No Mates Well-Known Member

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    DCF & IRR each project, excel has the function.

    Don't just look at the absolutes.
     
  3. Jmillar

    Jmillar Well-Known Member

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    I need to learn how to calculate DCF and IRR properly. Don't suppose you have a simple feaso study you could share?
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    10% profit leaves little room for errors or blow outs.
     
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  5. Westminster

    Westminster Tigress at Tiger Developments Business Member

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  6. thatbum

    thatbum Well-Known Member

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    Neither? Can you hold out to find something with 20% to 25% that would only take a year?
     
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  7. Morgs

    Morgs Well-Known Member Business Member

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    Got any details on what & where these deals are? I'm struggling to find anything at 20%.
     
  8. Scott No Mates

    Scott No Mates Well-Known Member

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    A very simplified DCF/IRR - google the guru Norman Harker

    Essentially the project lays out the time cost of money and brings that back to today's values.
    Depending on the project Time = months or years, outlays are +ve (purchase, design, SD, selling costs etc)/income is -ve (eg sales or rent), Discount factor is your percieved expectation of profit (risk). Keep all your units consistent ie monthly cashflow requires a monthly discount or risk rate

    upload_2019-9-20_23-44-54.png
     
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  9. Erica

    Erica Well-Known Member

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    Personally, I think 20% over 2 yrs is the safer option. Like Terry said, 10% can easily disappear with cost blow outs.
     
  10. Scott No Mates

    Scott No Mates Well-Known Member

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    Is that 20% pa, 20% overall or other?

    What is the opportunity cost of doing each of the projects?

    What will be the return on year 2 if you do a one year project is what is done with the proceeds?
     
  11. Jmillar

    Jmillar Well-Known Member

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    Let's assume comprehensive DD is completed and realistic contingencies are taken into account though.

    Sure, costs can still blow out and 10% could become 7%. But the same thing could also happen to the 2 year project (maybe more likely?) and 20% could become 14%, right? It's not like the 2 year project is immune to blowouts.

    20% overall is what I was referring to.

    Let's assume if you did the 1 year project you could roll onto a similar project with similar returns (therefore doing 2 of these in the time it takes to do the 2yr project)
     
  12. Sackie

    Sackie Well-Known Member

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    I wouldn't touch anything less than 30% gross profit over 12-15 months.

    Unless the risks are very, very small, then I'd consider a smaller percentage.

    The worst thing you can go though is spending 2 years on a project and make no money at the end. Or even worse, lose money.

    It's definitely worth being extremely picky at the beginning so you reduce your chances of suffering less at the end.
     
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  13. Jmillar

    Jmillar Well-Known Member

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    Hi Sackie, my understanding is you're probably playing in a different price point to me, where there might be a bit less competition. I find that a lot of people in my price point are happy to pay a premium for development sites as they either don't do their DD, or assume it will make money, or are happy to hold and wait for growth before developing.

    Do you think that 30% profit deals exist when you're looking at a buy-in price of $500-700k?

    I'm aware that doing a JV would allow me to jump into a different price point where juicier deals can be found, but would like to do smaller ones by myself for now.

    Thanks
     
  14. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Don't forget that @Sackie used the word gross. A 30% gross deal might well end up as a 15% nett deal or less.
     
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  15. Archaon

    Archaon Well-Known Member

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    Rough numbers
    In progress
    Bought a property 450k 1267m2 near hospital services etc
    15700 stamp duty
    25000 subdivision 503m2/764m2
    350000 dualkey build
    40000 landscaping retaining walls

    End values estimated 650k and 450/500k.

    20%, will retain for cash flow, looking to sell the existing house, 764m2 corner block still.
     
    Last edited: 25th Sep, 2019
  16. Jmillar

    Jmillar Well-Known Member

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    Nice one. $25k subdivision sounds cheap - my contributions were $20-25k on my previous subdivisions! Where is this?
     
  17. Jmillar

    Jmillar Well-Known Member

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    For clarity, what does everyone classify as 'gross'? Is this before GST and tax?

    Assume it includes purchase costs (SD, legals etc), holding costs, construction costs, contingency?

    I assume it also includes sales and marketing costs?
     
  18. Archaon

    Archaon Well-Known Member

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    Contribution is 7.5k, the rest are townplanner fees DA etc.
     
  19. Jmillar

    Jmillar Well-Known Member

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    No cost to connect newly created block to services?
     
  20. Archaon

    Archaon Well-Known Member

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    I kinda included that in landscaping, but looking to rip up old sewer and replace with PVC, not sure on actual costings yet, over head power lines, will be included in the build cost.

    The actual tender is 315k, and landscaping is a high estimate for retaining walls etc, only 600mm high and concreting will be through parents company, hoping to get away for a lot less tbh.