Property Developments: The Only Strategy You Should Learn
Okay, let’s get an understanding of why you should learn property development? Why as an investor you should now look at becoming a property developer and learning property development. So let’s look at a few things. The number one reason is profit. When you develop your own project, you end up with townhouses or apartments at cost and I’ll explain that to you in an example a little bit later, which you can either sell in the market for instant cash profit or you can decide to keep the profit in your property or you can have a mix of both. So the number one reason nonetheless is profit. That’s why we do everything. That’s why we do business and property development is no different than a business. Every little deal is actually a business venture.
Deposit – you can use your profit or your equity as a deposit for your next investment property or your next deal because you’ve generated all this equity in your project and your holding it down so without actually even selling it you can use that extra equity as a deposit for your next venture or your next investment property.
Capital gain, the moment you develop there is instant capital gain. As you know, because you actually got it lower than the market there is instant capital gain when you do develop your own property.
Rental yield, your total cost of the development for your unit will always be less than the market value, which gives you higher rental yield. Now there could be somebody else who bought the house right next to yours and they paid full retail, let’s say $700,000, but you on the other hand only paid 550,000. So the rental yield is exactly the same because he’s got a 4 bedroom house and maybe you’ve got a 4 bedroom house and you both can rent it out and you get the exact same rent, however, because you’ve got it at a lower rate, your rental yield is always going to be higher than anybody else’s.
There’s also some tax benefits. If you develop and hold your properties, you can claim substantial depreciation. You can avoid capital gains tax if you are holding them for long term and if you hold them for 5 years, you don’t even have to pay GST on them. So, there are different tax benefits available.
Highest Return On Your Money
Higher return on capital, well because you leveraged off the existing equity in your property, the upfront payment is far less than the return. Therefore, your return on new capital invested can be in the range of 80% to 100% and I will show you an example very soon.
Portfolio explosion – When you acquire properties at cost you acquire a lot more properties in a shorter amount of time. That gives your portfolio an instant boost.
Greater savings if you are following a develop and hold strategy, you can avoid agent’s commissions, marketing costs, GST and all of which will add to your bottom line. This applies when you are actually holding them so there are no other extra costs associated with it.
Property Development Allows You To Acquire Property At Cost
Let me give you an example. So if you were an investor and you would have bought each unit at an average value of $700,000 or $651,000 for example, if you were to buy ah this as an investor and you would have paid full $700,000 for it, but as a developer because you got in the deal from the very beginning and you made everything happen, you get to keep your developer product with an average profit of almost $173,000.
Would you consider this a good discount for your next investment deal?
So these are the main benefits when property developing and each one of these, the rental yield, the capital gain and the deposit, they all help you really exponentially grow your property for portfolio.
Property Developments: The Ferrari of all property investment strategies
All right, welcome to another video from Property Development System, a course in property development. My name is Amber. Property Development is the fastest way to generate equity, amongst all property strategies. If you are looking to exponentially grow your property portfolio, the you should spend some time to learn property development.
A while back, I did a video on what are the benefits of property development and why you should … Being an investor, you should seriously think about getting into property development or even if you do a couple of projects just for yourself to generate that extra equity and get that extra growth for yourself and your family. In the previous video I discussed that there are benefits like profit, the kind of profit that you can make there, the deposit comes back, capital gain, rental yield, tax benefits, higher return on capital, portfolio explosion, greater savings, how you can acquire property at cost when you do property development.
If you haven’t actually seen that video, I would highly recommend that you go to my YouTube Channel and while you were there, don’t forget to click the subscribe button.
If you go right to the bottom of my playlist called “Free Property Development Course”, it was one of the first videos I released a while back named, “Why learn Property Development?”, or you just search on YouTube, Why Should I Get Into Property Development. This video should pop up if you haven’t already seen it.
Today I, actually wanted to build on that video and show you in terms of numbers exactly what it looks like if you were to get into property development or think about a property development as of a way to generate equity for your portfolio or use that money as cash, as profit, or you can use it in many different ways.
I just wanted to show you a financial feasibility on what it looks like if you were to do a 4 townhouse development and what kind of profit can you make? How does it look like, and how does it compare and contrast with a normal person who goes out, buys something and pays full price, retail value for the property and whereas you as a developer, you go there and manage to acquire property at cost.
(To better understand the following section, watch the video above in HD)
This is a financial feasibility application. I call it the smart feasibility calculator, which I have recently replcaed with my Validation Feasibility. This is only to vet deals and all of my students have access to it, so I’ll just use the same application to explain to you how it’s done. If I was to do a 4 townhouse development, I buy, let’s say, for example, $800,000 land value and I’m going to put 4 townhouses on it. Don’t worry about the commercial leasable because this is a little bit more advanced stuff and this is if you are doing a mixed-use development, but let’s come back here and let’s look at the cost of construction.
I’m in Victoria, so I’m using some numbers based on Victoria, say, if I was to get a demolition done, it will cost me 20,000 and $1,400 a square meter in order to build this. Let’s say, all my townhouses were 175 square meters. There were 3 bedroom, 2 bathroom and 2 car garage. They will end up costing me $245,000 for the build price. I’ve got a 5% contingency on it, which gives me a $1,050,000 as the build price for my townhouses. Let’s say the end value of these townhouses for each one of them, I can sell them for … (which is a gross realization value), I can sell them for 675,000 each, which gives me a total GRV of $2.7 million.
Let’s look at the numbers here. This is a quick feaso and in this section, all I do is I do it based on per unit or per townhouse. Over here, I do for all 4 townhouses. This is for the whole project. This is for a per unit. I’ve put a stamp duty 6%, stamp duty in Victoria is about 5.5. I add a little bit extra. This gives me my total acquisition cost then I split that amongst the 4, and then I get the average cost of the building. It’s picked up at 0.25 from 1 demolition that I had here, so don’t worry about that. This is just a converter and the council land valuation is about 800, let’s say. My GRV per unit is about 675, land is 212, construction about 262,000 which includes the 5% contingency. For consultants, I’ve allowed about 5% of the cost of construction for getting plans, permit, SDA, and this going up to the working growing stage.
Council contribution in Victoria is, if I’m putting 4 townhouses about 4% of the land value, so I put 4% here. Then in GST, I am under the margin scheme and I can explain that in a different video some other time. Marketing cost, what am I paying to my agent, usually, normally, it’s about 2.2. However, the agent that I use, I put 1.1 because that’s what I’m paying. We work really closely with him, so he sells a lot of projects at the stage and we’ve got a mutual understanding of that right, so I put in 1.1. Miscellaneous legals, I’ve allowed about marketing or building permit and so on. I’ve allowed about $3,000 per townhouse for this. For marketing, I’ve allowed $7,425 as commission. I can pump that up to about 5 grand to get my drawings and everything. This, I will show you how we can calculate that. At the bottom, based on 80% LVR and that’s capital on the land and then 70% of the TDC. At this interest rate, my interest cost for this project would be about less 30,423, 30,000 per townhouse so that gives me about 21.76% of development margin.
This gives me a profit of 120,622.45 per apartment or almost half a mill on the whole project to do the 4 townhouses. In this calculator, I can put that I want to make 25% development margin and if I do that, it tells me that I shouldn’t be paying more than 745,000 for land, but I just want to put in 20% because this one, I wanted to make, I’m already making above that. I could put in 15% that tells me if I’m negotiating how much more can I pay and I still make 15% and so on, but I’ll leave that at 20% at this stage. All these sheet is telling me is that I’m making 120,000 if I develop this project by myself. Let’s look at the yield amount and that’s the main thing that I wanted to show you in this because that’s what you get when you do the development.
Let’s say, the phase 1 of total offer in investment would be 554,000 but depending on your service ability and the level of equity that you got all this can be leveraged, but for the sake of simplicity, all I’ve got here is what is the total cost of the project which is this is your total cost. This is coming in from my TDC which is Total Development Cost and that’s what my upfront contribution is. If I was to buy this, either this comes as a loan and I’ve taken out the loan equation from this because everywhere there are so many different variables, so many different ways to get finance and depends upon your service ability, depends upon your equity contribution and so on. It’s difficult to actually pinpoint a standard, so I’ve taken it out of the equation for this example.
In phase 2, you’ve got a development margin and return on equity. Let’s say, your instant development profit that you make if you develop it by yourself is 120,000 because all you’ve paid is the cost of full development. This is going by each townhouse, so all you have paid is the cost of building and cost of doing the development by yourself. You’ve made a development margin on 21.76 and your upfront equity and cash contribution was 287,588.71 and where is that coming from, it’s coming from because she’d also calculate the approximate equity that you would need to be able to put a development like that. Your return on equity is about 41.94% which is basically the amount that was required to acquire the site then take it through all the way to permit and then all the way to building permit, and then all the way through construction. That was the total equity that was required for you to pull off project like this. It costs you 41.94%, not cost you, it will actually give you a return on the money that you actually put in.
The phase 3 comes in, so if you were to develop this and hold this townhouse that will serve as a long-term investment, let’s say, the area that this was being developed had a capital growth rate of 3.4%. This is the annual capital growth rate. All these data is actually available and the value of the property was 675, and you had a return on equity of 41.9 focusing on that. Now, this is looking at in 2016 then 5 years from then, and then another 10 years from 2016, and then another 15 years from 2016. If we are looking at the first year and the first year you made 120,622.45 as you have developed but let’s look at what happens to 2021. As per the capital growth rate, you enjoy the capital growth rate after the 5-year period at 3.4% per annum. This gives you a growth in your equity and it pushes that up to 243,000 from another 120,000.
If you were to do a development in this suburb which had a 3.4% capital growth rate, your equity in 5 years time from 120,000 would have been another 120,000 on top of that. That’s your profit at this stage. This is what you’re making all up. Then in 10 years time, you would have made 388,000 in equity and in 15 years time, your 120,000 equity would have been 560,000 in equity. This is considering that you pay down your debt as you were going along. In phase 4 which is the rental yield, let’s say you would rent this house. Let’s look at if you can rent this out for $410 a week and you have a CPI which is the Consumer Price Index and you can push the rent up 3% every year. That’s what you [assumed 00:12:30] in 2016, ’17, ’18, ’19 and so on.
Every year, it actually pushes the rent up by 3% from 410 starting price, so there’s nothing in the first year and that’s what’s going on, so less outgoing in presenter’s less out just put a 9% which includes my agent’s commission for property management and I pay rates, and I pay insurances and so on. You can push this up to about 10% and see what it looks like. That’s what it would look like. All I’m doing is I’m taking all this out and getting a net rental income and net rental yield which is about 2.87, 2.99, 3.14 and so on. You will say, “This is too low.” You do have a really good capital growth rate in this suburb. Remember that capital growth rate and rental yield are always going to be, they’re always inversely proportioned to each other. If you are enjoying 2 great off cap, a really good capital growth, your rental yield will be very low.
In some areas where you want to enjoy the capital growth that high, your rental yield would be very high. Look in [money towns 00:13:44], there’s hardly … I don’t think there’s been any capital growth there, only at the time when there was a boom in that area, but I think everyone is in a negative right now whoever ever been to at money towns but the rental yield was really, really high in that area. That’s what the whole point is just to explain you that. If you were to develop this and hold this, in 5 years, you would have collected about 109,000 in rent. That would have given you about 3.16% average rental yield per annum. In 10 years time, you would have collected 148 which would have given you 4.31 average rental yield and so on. If you look at the growth chart, this is what I wanted to explain to you, these are the 3 drivers of exponential growth that you get when you develop.
If you were a normal investor who came in and paid for someone else’s development margin, you would have been buying the appropriate right here, right at the top here in paying both the cost and the developer’s margin to the other person, but because you do all of it yourself, in the first year, you make that 120,000 and pocketed that in equity. In 5 years time, what happened was you had the development margin already then you enjoy the rental income for 5 years, and then you enjoy the capital growth for the 5-year period. That happened in the 10th year and after 10 years, that’s what it looked like, and after 15 years, that’s what it looked like. If you look at this point, this is almost doubled, more than doubled right here, just right here it’s more than doubled. If you just look at this dark blue bar here which is basically all your cost and you put it here in 10 years, this has already gone more than … This is also more than doubled.
The whole point of me explaining you this is to show you that the fastest way I know of to generate equity is to do a property development. You could put together a summary page but I just wanted to show you a comparison. The total investment and development project was 554, but if you would buy this upfront, you would have paid 675 which would have required you to put in an extra 120,622 which was your profit basically. If you were to buy this, just go out, pay 675 and buy this, you’ve just have operated your developer’s equity and your developer’s margin on cost. Then you’ve got an upfront and equity contribution which was 287 if you were to develop this but your upfront equity contribution in this scenario would be 80% of that which is 540,000. Again, capital growth 3.4, so if you look at this, you basically lost. If you look at the return on equity and what you were getting if you were going to develop was 84.65, 135.13 and so on which is almost getting halved as the time goes on.
That’s what I wanted to explain. I’ve done a lot of property development and other property courses when I started out over 4 years ago. I studied a lot of other developers, other property investment experts who are doing developments and plus I’ve done my own developments. Property development is the fastest way to generate equity for ourselves that I know of. I hope you enjoyed the video.
Don’t forget to subscribe to my YouTube playlist called “Free Property Development Course“.
Property Development Vs Property Investment
Hi my name is Amber Khanna. I help property investors become property developers. Even if they've got no prior experience but not how you might think. To find out more all you have to do is go to pdsblueprint.com.
People come to me because they want to fast track their investment goals in the shortest amount of time. Even though they're just starting out with a small amount of equity, or cash, or have already one or more investment properties and they are really dedicated to getting results.
They can't seem to get off the ground or take the next step because they feel stuck. Either they've got no knowledge, or the tools, or they've got no idea where to start, or they've got investment properties but they can't move forward because they're all dead latent and they are not happy with the return that they are getting.
They tell me this makes them feel frustrated, overwhelmed and sometimes even cheated. Especially if they've been to expensive seminars and have no results to show for it.
All this is happening because of this paradigm shift in property investment. As a saving investor you need to learn how to take advantage of this paradigm shift. By the way if you want to find out more, all you have to do is go to pdsblueprint.com. It's pdsblueprint.com.
If this sounds familiar to you, by the way you're not alone. A lot of people go through this. I have gone through this when I was starting out myself. I can totally relate to this. How can you not feel overwhelmed. There are so many things to learn. The cost of making a mistake is very high.
Anyone would get nervous. Have I got the structure right? Have I got the numbers right? Have I chosen the right location? Have I accounted for all the costs that I was supposed to account for? Is my equity injection going to cover the whole development?
Just when you thought that the recent seminar you attended gave you everything you needed, you find yourself holding the shorter end of the stick. It just goes on, and on, and on. The lack of knowledge, uncertainty and the cost of making a mistake can be overwhelming.
Before I forget make sure you download the blueprint from pdsblueprint.com. It's pdsblueprint.com.
Before we get into the paradigm shift in property investment, let's find out the difference between the conventional and the contemporary property investment.
Conventional Property Investment
Here's how the conventional model works. The conventional way of investing is basically you buy the property at 20%. With 20% of your own money or your equity. You borrow 80%. That is 80% of the debt. Then you wait for some organic growth to occur. You then use your organic growth from the first property as a deposit to purchase your second investment property and pile on more debt. Then again sit and wait for the organic growth to occur again. By the time you're buying your second investment property, which by the way only a few people manage to do, you're again using the organic growth from your second property and first property as a deposit for your third property.
I don't know if you've noticed. I see a lot of red. Red for me is debt. Debt that I don't want to have but there's a better way. The PDS way. I can't say anything about anybody else but this is exactly how I've gone about acquiring my investment properties, which by the way I'm not only positive but I also have access to my equity so I can rinse and repeat.
Here's How The Property Investment Model Works Via Property developments
Here's how my students are doing it. This is exactly how I've done it. You start with any amount of equity or cash that you bought. It could be 50K or 100K. All you seek is a return on your equity from your first project, which if you're developing can range from 20 to 50 percent. By the time you're doing your second project, you have grown your equity. Then you invest that equity in your second project and get another 20 to 50 percent return on your money.
Depending on what you started off with, by the time you're doing your third project, you are in a position to be able to roll over your equity into the third project and be able to hold one of your developed units as an investment property. If you notice, in project number three, you have essential reversed the debt position. Your investment properties positively geared. You have access to your equity. Your service ability isn't impacted. All you now have to do is rinse and repeat.
If this is something that you would like me to help you out with, all you have to do is go to pdsblueprint.com and download my 65 page content rich property development blueprint.
The Two Things That Make You Money In Property Developments
Two Things that make you money in Property Development.
Morning everyone. A beautiful, sunny morning in Melbourne just after the long weekend. I wanted to talk to everybody today about the 2 things in property development that will make you money. Everything else in between is a cost. The 2 things are innovation and marketing. No matter what you do in property development there’ll be just 2 things that will make you money in property development, innovation and marketing. What do I mean by innovation?
Innovation could be in the way you structure deals. Innovation could be in the way you get your finance. Innovation could be in the way you negotiate your settlement terms & conditions and innovation could be in the way you design your stock or townhouses or apartment that you are about to develop, the one that you want to sell.
Innovation in finance is the way you get your finance or the way you get your funding. It could be set up in so many different ways. It could be a JV with the landowner, it could be a JV with the builder, and it could be JV with the money partner. It’s the way you source finance, different kind of finance … Sorry, different ways to finance your deal.
You’ve got to be really creative with all of this and the only way you can be creative with all of this is if you know all the rules, if you know all the strategies, if you know how the mechanics of these deals work. You can innovate in finance, you can innovate in the way you structure your deals. This is related to financial structures and you will need to consult your accountant in order to do that but you’ll have to also determine what your end purpose is, what you really want to do when the project is finished. That will determine the structure and you will need to get advice on it from your accountant. I know that there are some really innovative ways to structure a deal.
The third thing is terms and conditions. You could basically ask for anything and negotiate anything. It all boils down to you being innovative enough to be able to negotiate the kind of settlement terms for your property development project that are most favourable to you. For example, no matter what I do I always, even if I buy something with plans and permit, I always make sure that I’ve got … I always make sure that I’ve got enough time so I can go out and sell my project before I settle so I can save on interest and all those things.
The fourth way you can innovate in property development is the way you design everything. It could be something, which is environmentally sustainable, or something that’s created with good energy rating, for example solar.
The second way is marketing and the reason I say marketing is because you’ve got to really make something that you can sell. If you develop something that you can’t sell it’s going to be a problem towards the end of your project because the only time you actually get your money back is when you actually sell your stock.
Marketing, my friends, is very different from just engaging an agent, any more. The reason for that is the lenders and the banks are actually getting stricter and stricter with the amount of pre-sales they want, the amount of debt they want to cover before they can let you start construction. Marketing comes in a lot earlier than it used to. When it comes in earlier that means you’ve got to have, you’ve got to sell everything off the plan. Imagine you going out and buying something off the plan, which has not been built, and you’ve got to be really certain about so many different things. You got to make sure that you’ve got a good builder. You’ve got to make sure that you’ve got favourable terms. If the project is good, then everything boils down to the actual product. Can they actually see the floor plan? Can they actually see what it’s going to look like? Are the renders good?
Of course you can go and get some cheap renders done from overseas but are they going to do justice to the product that you’re selling? I tried to cut corners when I started and said, “Yeah, no problem, I’ll go overseas, get some really cheap renders done.” But in this industry you basically get what you pay for. If you’re offering peanuts you’ll get monkeys.
Don’t do that, just make sure that the kind of product that you are selling … If you’re selling something for $200,000 I’d say don’t bother with the render because it doesn’t work but anything above 500 and above 600K that you want to sell as your product towards the end of it or even off the plan you got to make sure that you’ve got some really good renders. It is difficult for people, people who have been in the industry can visualize what it would look like but people who are getting in, buying your stuff, they won’t be able to visualize it. They really have to see what it looks like.
Marketing involves material and finishes schedule. You give them a schedule what the colour schemes going to be like, what the materials you’re going to use. I even go out and get a materials board done so people can touch, feel the tiles, the floorboards, any kind of stone tops or anything. I have a sample of it stuck on a board that people can touch and feel and say, “Okay, this is what I’m getting into.” Those are the 2 things that will make you money. Everything else in the middle of your property development project is going to be a cost.
If you can really nail the 2 ends, this is the front end and there’s a back end and the front is innovation and creativity and the backend is marketing, making sure that everything that you’re developing is saleable, you’ll be a good property developer. I’ll see you next week.