Speaker 1: Hello and welcome to today's episode of The Money Puzzle.
Speaker 1: I'm your host James Gerard, standing in for James Kirby
Speaker 1: this week. Today we've got a special episode plan which
Speaker 1: is going to be all about property development, but not
Speaker 1: your fifty story high rise skyscraper. We're talking about property
Speaker 1: development for the average mum and dad investor. So if
Speaker 1: you've ever considered diving into the world of property development,
Speaker 1: this episode is for you. We'll be breaking down the basics,
Speaker 1: sharing tips and tricks, and discussing the ins and outs
Speaker 1: of property development. So grab a notepad and get ready
Speaker 1: to learn how you can start your property development journey.
Speaker 1: And to help us with this special episode, we have
Speaker 1: an equally special guest, di Chi Samahara, property developer at
Speaker 1: National Buyers Agency firm Property Buyer. Welcome, Dichi.
Speaker 2: Hello, James, how are you.
Speaker 1: I'm doing well? Thanks for coming on today. So let's
Speaker 1: jump straight into it. Okay, So opening the lid on
Speaker 1: the word of property development. It's estimated that only two
Speaker 1: to three percent of all property investors engage in development activities.
Speaker 1: Why do you think that's the case. There's a lot
Speaker 1: of people that buy investment properties, but not many people
Speaker 1: that actually develop them.
Speaker 2: Two reasons.
Speaker 3: One is that investment and development they're completely different approach.
Speaker 3: So property investments is more passive and you're targeting mid
Speaker 3: to long term returns, whereas property developments is more coactive
Speaker 3: and short to medium term form of investments. Now, availability
Speaker 3: is another reason why there's only one or two properties
Speaker 3: out of every hundred sites that go off with sales.
Speaker 3: So just from the stuff, there is not many sites available,
Speaker 3: so that puts a limit on to how many people
Speaker 3: can actually make money as a developer.
Speaker 2: That makes sense.
Speaker 1: Yeah, And when you say a site, what do you
Speaker 1: mean is that like a raw block of land is
Speaker 1: at a house with a land that's conducive for development?
Speaker 3: Yeah? Yeah, So look how if you have a thousand
Speaker 3: square meter a lot with a small house at the
Speaker 3: front with a little space on the site, that's a
Speaker 3: potential subdivision site. If you see just another house down
Speaker 3: the road up for sale on real estate dot com
Speaker 3: that's really run down, but potential for renovation, that's a site.
Speaker 3: So yeah, we call these properties sites in general.
Speaker 1: Got it? And we see in the media almost every
Speaker 1: day about another construction company going under, and in fact,
Speaker 1: two thousand have gone bust. Over the past three years.
Speaker 1: So I'm just wondering his property development is still a
Speaker 1: profitable business and what's changed in recent years to cause
Speaker 1: all of these liquidations and bankruptcies.
Speaker 3: Look short aus is Yes, it's a very still profitable
Speaker 3: for certain products in certain areas. You're just going to
Speaker 3: be more careful what to pitch now compared to ten
Speaker 3: twenty years ago, because the building cost is hi.
Speaker 2: So whether you're.
Speaker 3: Building a house, duplex, unit, townhouses, they only work in
Speaker 3: the areas with mid to high medium prices. So if
Speaker 3: it's going to cost you, let's say five hundred thousand
Speaker 3: dollars to build in one suburb where the resale is
Speaker 3: a million, but the outer suburb you can sell it
Speaker 3: for two mil, naturally you will go two million dollars suburbs.
Speaker 3: So I'd go as far as Castle Hill to the
Speaker 3: west and Epping to the south. And if you're in
Speaker 3: that's that's if you're all targeting north apart of Ridge.
Speaker 2: But if you're in.
Speaker 3: The south apart of Ridge, I'd say you go as
Speaker 3: far as Stratfield to the west and Birdwood to the south.
Speaker 3: And generally speaking, you want to be targeting only suburbs
Speaker 3: with medium price above two mil and outside of these areas,
Speaker 3: resale values just don't stand. So I guess that's how
Speaker 3: you pick which areas to start your projects and to
Speaker 3: make sure that you make money.
Speaker 1: Got it, and say, folks, which is a term which
Speaker 1: James Kirby would say, dayti's talking about Sydney. I mean
Speaker 1: we do have listeners from all over the country, and
Speaker 1: in fact I know all over the world in places
Speaker 1: such as Dubai in Singapore, so we'll try and cover
Speaker 1: other markets as well. But at this stage it was
Speaker 1: Sydney that you were speaking about it, and that's where
Speaker 1: you're based. So why did you get into a property development.
Speaker 3: I've always wanted to become a developer, just simply because
Speaker 3: of the lifestyle choices that you will have. So my
Speaker 3: job is not nine to five, it's really twenty four
Speaker 3: to seven, but I get to choose when and where
Speaker 3: and how I want to work. Especially on post COVID
Speaker 3: remote work has been very popular. But even before that,
Speaker 3: I was able to live my lifestyle. So that's how
Speaker 3: I got into it. Well, that's the reason why I
Speaker 3: got into it.
Speaker 1: Got it. So I'm imagining in Red Ferrari pulling up
Speaker 1: to construction site, you pull out with your your chinos
Speaker 1: and boots wearing hard hat. Point in telling people what
Speaker 1: to do? Is that sort of the lifestyle of a
Speaker 1: property developer?
Speaker 3: Almost true, except not Ferrari or Lamborghinia. I'll drive a
Speaker 3: white Highlux. You know, I'll get to I've got to
Speaker 3: look at part as a developer.
Speaker 1: So I a driver, good, good, very very practical. And
Speaker 1: what about education? Is there anything in particular that you
Speaker 1: have done that helped prepare you to jump into property development,
Speaker 1: or anything with your career that helped move into property development.
Speaker 3: I think a lot of developers have one particular profession
Speaker 3: of their own. Otherwise, you know, you can't really get
Speaker 3: ahead of everyone else. My case, I started as a
Speaker 3: started as a real estate agent, so I was working
Speaker 3: for Ray White First National.
Speaker 2: Did it for a few years.
Speaker 3: Made you know, some seed money, but it was mainly
Speaker 3: getting that that practice and also experience in the real
Speaker 3: estate environment. But some other people, they could be a
Speaker 3: builder or train any kind of trade to have that
Speaker 3: sort of knowledge ahead of everyone else. You could be
Speaker 3: a banker or an accountant who will know the numbers,
Speaker 3: really will. So I think as long as you have
Speaker 3: that one particular profession. It doesn't have to be this
Speaker 3: particular profession. If that makes sense.
Speaker 1: Yeah, got it, that absolutely makes sense. Understanding where your
Speaker 1: personal straps are and then applying that to the property development.
Speaker 1: So next time, I'm curious about what type of average investors.
Speaker 1: So we're talking about mum and dad investors, what sort
Speaker 1: of characteristics or traits do you think they need to
Speaker 1: get started in property development. Do they need to have
Speaker 1: a high level of to tolerate risk. Do they need
Speaker 1: to have certain experience? Do they need to have a
Speaker 1: certain amount of backing but behind them? So you know,
Speaker 1: who's sort of suited for property development?
Speaker 3: I think someone who is proactive and once more control
Speaker 3: over the course of their investments and often in the
Speaker 3: shorten to around time. So if you invest in a properties,
Speaker 3: you know, two bedroom unit for example, there's not much
Speaker 3: you can do to you know, control this due course.
Speaker 3: Whereas property developments it's all about you know, making sure
Speaker 3: you control it really well so that it doesn't go wrong.
Speaker 3: So I think the approach, if you enjoy that proactive approach,
Speaker 3: I think you're suited to be a developer. And also
Speaker 3: that you need to have really thick skin on the
Speaker 3: face and also just tenacity to go for you know,
Speaker 3: one after another, so.
Speaker 2: Go get up.
Speaker 1: Yeah. Interesting, that's interesting about the comments about the thick skin.
Speaker 1: So what happens in the world of property development that
Speaker 1: requires you to have a thick skin? Is it dealing
Speaker 1: with people that you're buying the properties from. Is it
Speaker 1: dealing with the builders that you engage in? Curious about
Speaker 1: some of the stress points.
Speaker 2: Look, you deal with a lot of people.
Speaker 3: They I'll personally love of going direct to vendors instead
Speaker 3: of have gone through asians because I get quality sites
Speaker 3: that way, or at least I'll believe that when I
Speaker 3: go door knocking, and people usually don't like people hocking
Speaker 3: on your door, So you're gonna you're gonna have thick
Speaker 3: enough skin on your face to have the door slammed
Speaker 3: in your face every now and then. But also is
Speaker 3: just just talking to builders, you know that they could
Speaker 3: be really rough and they're good people, but they come
Speaker 3: across very aggressive sometimes, but so you've just got to
Speaker 3: deal with it.
Speaker 2: Not all of them, by the way, but.
Speaker 3: Yeah, generally stress tolerance level that's very important.
Speaker 2: So yeah, that's yeah, the think goes better.
Speaker 1: I think I understood and for someone who's wanted to
Speaker 1: get started out in property development. Is there anything that
Speaker 1: you had come across that would help any websites with
Speaker 1: useful information? And the YouTube courses are their template spreadsheets
Speaker 1: out there is anything to sort of kick start somebody
Speaker 1: who wants to learn more about this?
Speaker 3: Yeah, yeah, look, I mean there's not any particular course
Speaker 3: that you want to enroll yourself in, so it's not necessary.
Speaker 3: All the how to develop property one oh one type
Speaker 3: of videos are all over YouTube, So just watch something
Speaker 3: that's well edited and it makes sense to you what
Speaker 3: you enjoy. But I think practicing running feesos is better
Speaker 3: than any other training that you can get off these videos,
Speaker 3: to be honest with you, So start with a simple
Speaker 3: renovation job. Compare the buying price to the resale value
Speaker 3: and see if there's in you're not enough margin in
Speaker 3: it after considering not just build costs but GSD levees interest.
Speaker 3: You can find these on domain real estate dot com
Speaker 3: dot au and yeah, once you get used to it,
Speaker 3: then you know you can do one for new build
Speaker 3: and then duplexed, then maybe two to three subdivision and
Speaker 3: even if you have no idea about anything, now trust me,
Speaker 3: once you have run a hundred feesos and read through
Speaker 3: a few led p s DCPs. You will start feeling
Speaker 3: more comfortable in what you're doing and move on to
Speaker 3: considering the first real life project.
Speaker 1: Perfect. Yeah, so step by step, start with renovating a
Speaker 1: bathroom and then work your way up to doing a
Speaker 1: ten subdivision lot development somewhere.
Speaker 2: Yeah, that's it.
Speaker 3: Just just if it's just practice practicing fees it it's free.
Speaker 3: You don't losing your money, So that's the best way
Speaker 3: to learn.
Speaker 1: Yeah, it's a good point. Looking in your own backyard
Speaker 1: pun intended. So looking in your own property portfolio and
Speaker 1: seeing if there's any scope to improve the value of
Speaker 1: existing properties you have. So I suspect that you could
Speaker 1: have a look at things like can I build a
Speaker 1: grany flat in the back of an investment property? Do
Speaker 1: I have enough land to subdivide? Is it worthwhile doing
Speaker 1: a knockdown and rebuild or a knockdown and building townhouses
Speaker 1: on the site, or is it just worth maybe doing
Speaker 1: a renovation, and as you said, Dichi, looking at the
Speaker 1: cost of the renovation and then afterwards, what's that uplifting
Speaker 1: value of the property. And if you find that that
Speaker 1: worked well on your own portfolio, then maybe you can
Speaker 1: get started and looking for other sites to purchase, not so.
Speaker 3: Much your own portfolios. You do your practice rounds on
Speaker 3: looking for sites for sale on real estate dot com
Speaker 3: or domain dot com dot au because usually your portfolio
Speaker 3: is not necessarily suited for property developments. You got to
Speaker 3: for the development project to work, you've got to get
Speaker 3: it right from the start, at the buy in.
Speaker 2: So if you already have.
Speaker 3: An investment property portfolio, chances out it wasn't bought for
Speaker 3: development purposes, so you don't often find something profitable within
Speaker 3: your own portfolio. It's just going to start from the
Speaker 3: number one.
Speaker 2: Step one. It was just to find and buy the.
Speaker 1: Side, got it. So your suggestion is to be purposeful
Speaker 1: with it. Don't look at what you have and try
Speaker 1: and make a triangle fit into a square hole and
Speaker 1: develop your existing asset to start from scratch. Correct.
Speaker 2: Correct.
Speaker 3: The expression that I use always is that no matter
Speaker 3: how well you cook a rock, you can't make it taste.
Speaker 2: Like a steak.
Speaker 3: So you've just got to Yeah, the property the site
Speaker 3: has to be right from the start.
Speaker 1: Yeah, that makes sense, all right. Well, talking about property
Speaker 1: developments and the different types, can you run us through
Speaker 1: what the different types of property developments are that maybe
Speaker 1: an average mum or dad could consider. So I'm thinking
Speaker 1: about things like buying a vacant block of land. Is
Speaker 1: that maybe better to do? Should you buy something in
Speaker 1: an established area with an old house on it? Should
Speaker 1: you be looking at subdivisions, knockdowns? And there's a lot
Speaker 1: of different options or spectrum of options when you say
Speaker 1: the word property development. But for the average sort mum
Speaker 1: and dad investor, can you run me through some of
Speaker 1: the more common types of developments that they might be
Speaker 1: able to get involved in.
Speaker 3: Look everything you mentioned, renovation, new build, duplex, subdivisions, they're
Speaker 3: generally a good place to start because they're less factors
Speaker 3: that could go wrong. This is important because if the
Speaker 3: project does go wrong for some reason, why you have
Speaker 3: less to lose. It's actually very hard to lose money
Speaker 3: as long as you're only developing one or two keys,
Speaker 3: because these if you're only building one or two keys,
Speaker 3: the potential debt can be managed on the personal level,
Speaker 3: whereas if you had like five ten kids going at
Speaker 3: the same time, then quite often that's enough.
Speaker 2: To bankrupt you. So that would be where I'll start.
Speaker 3: If I was just starting out today.
Speaker 1: Okay, and then we're choosing a builder, which is central
Speaker 1: to development. If you're knocking down and you're building stuff
Speaker 1: over the years, how have you found a knack at
Speaker 1: picking developers? So, builders, what are you looking for with
Speaker 1: the builder themselves or through their company to have the
Speaker 1: best chance that they're going to complete the build in
Speaker 1: the time frame, in the budget, in the specs that
Speaker 1: you want.
Speaker 3: Look, I would be looking at not the cheapest. First
Speaker 3: of all, I'll run a tender always at least three.
Speaker 3: But someone don't necessarily go for the cheapest builder.
Speaker 2: I would go for someone that.
Speaker 3: Can justify what they're charging for and how much. And
Speaker 3: because at the end of the day, you know, if
Speaker 3: you find a builder that is way cheaper than everyone else's,
Speaker 3: chances are they are trying to collect as much cash
Speaker 3: as possible before they fall, for example. So mate, you
Speaker 3: look at if you want to be very very diligent
Speaker 3: about it, you want to be just tracking how many
Speaker 3: jobs they have. You can even try trying to find
Speaker 3: out how much asset they have to assess the risk
Speaker 3: of them going bankrupt, which is probably not a silly
Speaker 3: thing to do in this market right now, that's.
Speaker 1: A good point. All right, Well, moving along to different
Speaker 1: budgets for property development. Some people listening might have five
Speaker 1: hundred thousand to invest into a property and the development.
Speaker 1: Others might have five million dollars. So could we maybe
Speaker 1: break it down to a few different price points they
Speaker 1: say less than a million dollars, then maybe one to
Speaker 1: three million, and then three million to maybe six million dollars.
Speaker 1: And if we could open up to around the country
Speaker 1: as well rather than just focus on Sydney, what type
Speaker 1: of property development would you suggest for each of those
Speaker 1: three sort of budgets. And again there's not advice to anyone,
Speaker 1: it's more just sort of ideas of, you know, where
Speaker 1: might be attractive with regards to the different types of
Speaker 1: property development that you could potentially do. So to recap
Speaker 1: listen a million, second category one to three million, and
Speaker 1: third category three to six million.
Speaker 3: Sure sure, Look, you're borrowing capacity and cash in hand
Speaker 3: at two different things. So I'm going to talk very
Speaker 3: generically to you because that million dollars could mean anything.
Speaker 3: So say if you had two hundred thousand dollars cash
Speaker 3: save up and then you can borrow let's say sixty
Speaker 3: percent of VR, that's three hundred K you can buy
Speaker 3: up to half a million dollars in property, but if
Speaker 3: you can borrow up to eighty percent in metro area,
Speaker 3: you can buy up to a million dollars in property.
Speaker 3: But I spoke about having the minimum threshfold a threshold
Speaker 3: for meeting prices earlier on. If we spent the whole
Speaker 3: two hundred k that you've saved up, you have no
Speaker 3: money left to even run. A DA should be your
Speaker 3: first step. So when you have less than say half
Speaker 3: a million dollars in cash, you can't really fund purchase
Speaker 3: of the property and pay for the DA on your own.
Speaker 3: So until you surp surpass that benchmark, you should really
Speaker 3: team up with someone. Otherwise you just can't get that
Speaker 3: traction you need. But once you hit that set of
Speaker 3: half a million dollars mark, then I would be looking
Speaker 3: at some suit of simple way to probably look at
Speaker 3: is if you're targeting its minimum two million dollars meeting
Speaker 3: miting price suburb and then if you have let's say
Speaker 3: less than million dollars, let's say your first cattery half
Speaker 3: a million dollars to million dollars, that will be enough
Speaker 3: to buy yourself let's say million, two million, one and
Speaker 3: a half million dollars property for subdivisions, So you could
Speaker 3: be targeting where would that be Earlwood would be would
Speaker 3: have that around sort of just or under two million
Speaker 3: dollars mark, so you will probably pick up a potential
Speaker 3: maybe a knockdown rebuild site in earl would to build
Speaker 3: one extra key on maybe two. But if you have
Speaker 3: one to three million dollars, then you can start running four.
Speaker 2: Different key four let's say four more than four keys.
Speaker 3: So you could be running a project that could that
Speaker 3: you build four townhouses in a medium sort of average area,
Speaker 3: or you can choose to run eight in.
Speaker 2: A cheaper area, or you can choose to run two
Speaker 2: let's say very expensive duplexes in more.
Speaker 3: Like eastern suburbs or lower north Shore.
Speaker 2: Three.
Speaker 3: When you have three to six million dollars, then you
Speaker 3: and if this was hash not your borrowing capacity, once
Speaker 3: you have three million dollars six million dollars, you start
Speaker 3: moving on.
Speaker 2: To sort of do you really want to be putting
Speaker 2: that three to.
Speaker 3: Six million dollars to run your own project? You could
Speaker 3: be better off maybe teaming up with a bigger developer
Speaker 3: and you go in as a potential equity partner to
Speaker 3: have them delivery let's say twenty thirty forty townhouses units,
Speaker 3: and then you can leverage off their professional experience and capabilities.
Speaker 2: So that does that make sense?
Speaker 3: You up to about three mil, you you will be
Speaker 3: you're you know, if you're a novous developer, then run
Speaker 3: your own project. But after three mel, you'll you know,
Speaker 3: you want to be working with bigger guys. That's how
Speaker 3: I feel.
Speaker 1: Yeah, that makes sense. And for everyone who's not in Sydney.
Speaker 1: Earlwood is a suburb that's sort of about ten to
Speaker 1: fifteen kilometers outside of Sydney b D. Did I hear
Speaker 1: you say something about keys. I think you said eight keys?
Speaker 1: What do you mean by by that? With regards?
Speaker 3: Yeah, look, Iran, people say it differently. I say keys,
Speaker 3: but if some people say sites per site or dwellings.
Speaker 3: But it's a number of literally a key to open
Speaker 3: the door. So if you say I'm doing eight keys,
Speaker 3: that means I'm dwelling building eight dwellings, or some people
Speaker 3: you know might just say, oh, I'm doing eight dwellings.
Speaker 3: If I say four keys, I'm building full houses or units.
Speaker 1: Got it? That makes sense? There we go everyone, We're
Speaker 1: starting to learn the property development lingo keys. I haven't
Speaker 1: heard of that much.
Speaker 3: The keys are usually used to describe hotels and motels,
Speaker 3: but I started using this because a lot of people
Speaker 3: understand keys more than when I say sites.
Speaker 1: Yeah no, no, that makes sense. All right, Well, before
Speaker 1: we get into the nuts and bolts of the property
Speaker 1: development process, le let's take a pause for a break. Hello,
Speaker 1: and welcome back to the money part. As the Lame
Speaker 1: James Gerard, writer contributed to the Wealth section of the
Speaker 1: Australian newspaper and also Financial Advisor with Financial Advisor dot
Speaker 1: com dot Au. And this week on the show, I
Speaker 1: have die Gi Samahara, Director Property Developer and from Buyers
Speaker 1: agency firm Property Buyer. So now let's have a chat
Speaker 1: about the development process. But before we do that, I
Speaker 1: just want to remind everybody that what we're discussing is
Speaker 1: general advice. It's not personal advice. So please don't go
Speaker 1: out there and start buying properties and getting shovels in
Speaker 1: developing stuff. Go seek advice from a qualified professional before
Speaker 1: you do anything. All right, Diji, let let's jump into
Speaker 1: the development process. So can you run me through what
Speaker 1: a typical development process would be from the beginning stage
Speaker 1: to the finishing stage and then some of the common
Speaker 1: challenges that you would face in that. And let's maybe
Speaker 1: work off the example of let's say a Sydney or
Speaker 1: Melbourne thousand square meter property with an old house on it.
Speaker 1: The local Environment plan from the council is conducive to
Speaker 1: be able to knock down the old house and subdivide
Speaker 1: it and build two townhouses on separate titles there. So
Speaker 1: can you run me through from we've founded the property,
Speaker 1: we've agreed on the price, how do we get from
Speaker 1: that point through to the keys having these two townhouses
Speaker 1: and selling those off for a profit.
Speaker 2: Look, if I was to really broadly.
Speaker 3: Just ordered to process that will be acquisition which you
Speaker 3: just mentioned, you get the offer and acceptance exchange sets
Speaker 3: on it. Now you've got the DA process, So that's
Speaker 3: your development application. You want that approved body council so
Speaker 3: that you can build those two houses. Now you then
Speaker 3: move on to c C process construction certificate. So DA
Speaker 3: is an approval to build, the plan to build the
Speaker 3: construction stifficult, it is an approval to actually start building.
Speaker 2: What's on the planet, And what.
Speaker 1: About the private certifier? You would you typically try and
Speaker 1: go through a private certifier process or development application through council.
Speaker 2: Yeah.
Speaker 3: Yeah, Look, you know, if you if you're what you're
Speaker 3: trying to get approved is all compliant to the council rules,
Speaker 3: you should definitely go through private certifier. Saves a lot
Speaker 3: of time and money. But then if you want to
Speaker 3: do anything that is beyond the permissible rules or parameters
Speaker 3: that the Council give, which you want to be doing
Speaker 3: to turbo charge your value, you have to go through DA.
Speaker 3: But yeah, if you're just looking to sub bridge your
Speaker 3: backyard or renovate, yes, private certifier perfect.
Speaker 1: All right, So we're up to construction certificate which allows
Speaker 1: you to construct and then what happens from there.
Speaker 3: So once you have that construction certificate and pay your
Speaker 3: section fees levees, you get to the first.
Speaker 2: Draw down we call it is when you start. This
Speaker 2: is when everything starts. You can't go back.
Speaker 3: You've borrowed your first dollar from your construction financy and
Speaker 3: the construction starts.
Speaker 1: Now, okay, and sort of how long would that be
Speaker 1: from the day you've settled the property until you start
Speaker 1: to draw down on that loan to construct? Like, how
Speaker 1: long roughly is that approval process for a typical townhouse
Speaker 1: side in say Sydney or Melbourne.
Speaker 3: Look, the last subdivision that I've done two lots out
Speaker 3: in Kringai area that took me four months so and
Speaker 3: another suburban b graft that took me four months. So
Speaker 3: two lots subdivisions. It doesn't take as much as long
Speaker 3: as you know it's compliant. So you're looking at four
Speaker 3: to six months for the DA. Now you've got three
Speaker 3: months CC. Then after it depends when you settle. You
Speaker 3: can settle any time. You can choose to settle on
Speaker 3: DA approval or on CEC approval, but regardless, you want
Speaker 3: to be spending as little as possible from the time
Speaker 3: of settlement. So you start building because every day your interests.
Speaker 2: Are at it daily. So look, I would be targeting
Speaker 2: no more than a month.
Speaker 3: If I had, you know, if I have to settle
Speaker 3: on property, then start subdivision work. So yeah, and then
Speaker 3: once the building is complete, then obviously you've got your marketing.
Speaker 3: You can choose to market your property before construction is finished,
Speaker 3: so off the plan. This really helps you obtain well,
Speaker 3: at least you can set your price. You can you
Speaker 3: can sleep at night knowing that it's all sold. But
Speaker 3: some people choose to build finish complete building first then
Speaker 3: cell because it has that wow factor when it's presented
Speaker 3: to the market and you can often get higher price.
Speaker 3: If your finance allows you to build first, then you
Speaker 3: should in my opinion. But if you're just really really.
Speaker 2: Leveraging a very high amount, you might.
Speaker 3: As well just get it done and going to sell
Speaker 3: before it start complete and just just cashing then once
Speaker 3: it sorely have your settlement. And that's that's your normal,
Speaker 3: typical process of doing something like this.
Speaker 1: I understood it sounds like a piece of cake, but
Speaker 1: sometimes it isn't. So what can go wrong or what
Speaker 1: have you found can go wrong typically in that process
Speaker 1: that you've just described, To.
Speaker 3: Be honest with you, what could go wrong or unforeseen problems?
Speaker 3: You know they're unforeseen because I can't think of it now, right,
Speaker 3: So you always assume that there's going to be a problem.
Speaker 2: Right.
Speaker 3: I haven't seen a single development that didn't have one
Speaker 3: a problem. Right, So you want to look, we spoke
Speaker 3: about the acquisition process, you said, start off this conversation.
Speaker 3: Let's say we agreed on a price, YadA yadaya da.
Speaker 3: But personally I feel that the process starts majority of
Speaker 3: the development process is in the purchasing stage, because there's
Speaker 3: a saying in the industry that in property development, the
Speaker 3: profit is earned on the purchase, not the sell.
Speaker 2: So if you don't pick the.
Speaker 3: Right project from the staff the right price, it's already
Speaker 3: game over.
Speaker 2: And you want to be.
Speaker 3: Making sure the building escalation contingency project contingency. You want
Speaker 3: to put in about ten to fifteen percent of the
Speaker 3: total project costs towards your contingency. Otherwise you just don't
Speaker 3: have enough to deal with those problems that it's guaranteed
Speaker 3: to arise. But as long as you have that contingency,
Speaker 3: you're always safe. That's how will medium my risk?
Speaker 1: Got it? And do you micromanage each project? So for example,
Speaker 1: if the I'm not sure what they call the concrete,
Speaker 1: a person who lays a slab, if they say the
Speaker 1: slabs meant to be X number of inches deep, but
Speaker 1: they do it y number of inches deep, which is
Speaker 1: not deep enough and it needs to be rectified, and
Speaker 1: then that causes delays and stuff like that. Do you
Speaker 1: try and inject yourself into each of the development to
Speaker 1: sort of be there to oversee and make sure people
Speaker 1: are doing the right thing, or do you have to
Speaker 1: employ someone what they called a site manager.
Speaker 2: Site manager, project managers.
Speaker 3: Yeah. Look, when I was starting, Yeah, I was trying
Speaker 3: to save every dollar. I had more time on hand,
Speaker 3: so I was trying to do everything myself. From getting
Speaker 3: DA for renovation, you build subdivision work. But you get
Speaker 3: to the point where that's probably where you don't want
Speaker 3: to be spending your money on.
Speaker 2: And also the biggest.
Speaker 3: Thing that I've learned was if you pay someone and
Speaker 3: get the professional to do it for you, when there's
Speaker 3: a problem you actually have, you can legitimately blame upon
Speaker 3: a finger sound that person and blame blame it on him.
Speaker 3: It's his insurance, it's his responsibility, it's not it's not you.
Speaker 3: That that is very important. And if you can get
Speaker 3: that responsibility and potential liabilities risks off your back for
Speaker 3: the cost of thirty forty fifty growing, you might as
Speaker 3: well pay. So that's that's that's you look at. You
Speaker 3: weigh up how much enjoyment you want to get out
Speaker 3: of managing it yourself too? Okay, really, how much risk
Speaker 3: should I be mitigating?
Speaker 1: Yeah? Good, good point. All right, Well, before we get
Speaker 1: into the million dollar question of how much money can
Speaker 1: be made, from this, we're going to take a pause
Speaker 1: here and stop for another short break. Hello and welcome
Speaker 1: back to the money Pazzal. I'm James Gerard, contributor in
Speaker 1: the WORL section of The Australian and also financial advisor
Speaker 1: at Financial Advisor dot com dot au. And today I
Speaker 1: have Daichi Samahara, property developer and director at Buyers Agency
Speaker 1: firm Property Buyer Okay, So as discussing before the break,
Speaker 1: let's chat about the numbers. Let's get down to the
Speaker 1: nitty gritty. I've heard that an average property development a
Speaker 1: good rule of thumb return is thirty percent gain. Is
Speaker 1: that sort of the industry rule of return? In terms
Speaker 1: of how much it costs you to buy the property,
Speaker 1: all of the associated costs like stamp duty, all of
Speaker 1: the construction costs, interest on the loan, agenc fees to sell,
Speaker 1: you should end up with about a thirty percent return.
Speaker 3: Yeah, look, thirty percent sounds great, but first you need
Speaker 3: to understand the difference between your profit margin and return
Speaker 3: on investment. So profit margin is that's probably what you're
Speaker 3: talking about, is the ratio of the net profit over
Speaker 3: to total stop the project. But this includes your cash
Speaker 3: and the loan you get so whereas ROI, on the
Speaker 3: other hand, is the ratio of net profit over actual
Speaker 3: cash use them. So for example, if you make two
Speaker 3: hundred k profit by spending a mill to buy a
Speaker 3: site and build including alone, your profit margin is twenty percent. However,
Speaker 3: feel only spent two hundred K of your own cash
Speaker 3: and borrowed the other eight hundred k, your rois one
Speaker 3: hundred percent.
Speaker 2: Right.
Speaker 3: So to answer your question, James, that that thirty percent
Speaker 3: is good if it was a profit margin, but if
Speaker 3: as an ROI, it's probably not. Because if you put
Speaker 3: your cash in the bank term to positive get five
Speaker 3: percent per aandum. If you put it in debt funds
Speaker 3: you'll get five to ten. Invested in equity funds you
Speaker 3: should earn about sixteen to eighteen percent. But if you're
Speaker 3: not just risking your cash but taking on debt project
Speaker 3: risk everything, you want to be clearing at least sixty
Speaker 3: percent per anum on your cash. So that's sixty percent
Speaker 3: in ROI.
Speaker 1: Just to be clear on that, it sounds like to
Speaker 1: maximize the profit on a property development, you should minimize
Speaker 1: your own cash that you put in and borrow more
Speaker 1: from the bank so that the return that you get.
Speaker 1: The gross profit, as you put it, is enhanced due
Speaker 1: to the level of leverage or geary that you've had
Speaker 1: over that investment slash development. Is that correct?
Speaker 3: Slightly different topic, but it is correct in a sense. Yeah. Look,
Speaker 3: if you can borrow more, yeah, you know you should
Speaker 3: borrow more. But if you don't have to borrow more,
Speaker 3: if you have enough cash, you you know you don't
Speaker 3: want to borrow more. There's there's pros and cons, but
Speaker 3: I was more talking about the perception of that thirty
Speaker 3: percent that you've mentioned so as a profit. So let
Speaker 3: me finish explaining. So profit margin, right, this assesses the
Speaker 3: feasibility of the project itself, and the target profit margin
Speaker 3: ranges anywhere from fifteen to thirty five percent, and this
Speaker 3: depends on the length of time requires to complete the project.
Speaker 2: So if you're only.
Speaker 3: Building a house which takes twelve months to complete, then
Speaker 3: you're okay, were ten to fifteen percent profit margin. But
Speaker 3: if you're building multiple keys and it takes twenty four months,
Speaker 3: you want to be aiming for twenty five percent. If
Speaker 3: your land sub that takes three years, you want to
Speaker 3: be targeting thirty five percent. On more so, probably the
Speaker 3: best way to measure your profit margin if it's above
Speaker 3: the board, is you want to clean. Let's say twelve
Speaker 3: and a half percent per annum would be a good
Speaker 3: benchmarked to clear for your profit margin.
Speaker 2: So if it takes two years twenty five.
Speaker 1: Percent perfect that that's great. And then adding in the
Speaker 1: capital structure of cash versus debt, what would be the
Speaker 1: typical mix. So from say, let's just pick some random numbers,
Speaker 1: a million dollars property purchase for the site, how much
Speaker 1: of that would be typical from a developer to put
Speaker 1: in his cash. How much would they borrow of that?
Speaker 1: And then when you come to the development, let's say
Speaker 1: it's you're going to build two townhouses on the site
Speaker 1: and they're going to be five hundred thousand dollars each.
Speaker 1: So for that second million dollars for the development cost,
Speaker 1: who pays for that? Is that from the developer pays part,
Speaker 1: the bank lends all of that. What's the typical cash
Speaker 1: freest and s debt ratio with that example?
Speaker 3: Okay, very broadly speaking, you're filling the metro area. Banks
Speaker 3: are generally happy to lend you up to let's say
Speaker 3: seventy five percent of the value. So if that million
Speaker 3: dollars was in Sydney Metro, that you'll put in two
Speaker 3: fifty of your own cash and you're borrow seven fifty.
Speaker 3: Whereas feel in the rural area, let's say you're around
Speaker 3: on the Lake Marquori, they'll banks will only give you
Speaker 3: sixty percent, so you will have to come up with
Speaker 3: four hundred thousand dollars of your own cash and two
Speaker 3: fifty and yeah, that's number sort of you know, stays
Speaker 3: the same from mortgage to construction finance, so that will
Speaker 3: be your rough deposit or cash. I should say that
Speaker 3: you should can set up setting.
Speaker 1: Up okay, and then on the construction side of things,
Speaker 1: correcting me if I'm wrong, but using the same metrics
Speaker 1: Sydney Metro, say seventy or eighty percent loan. Because the
Speaker 1: property today is only worth a million dollars as is,
Speaker 1: the banks are taking a view that after the two
Speaker 1: townhouses are on, the site is going to be worth
Speaker 1: two and a half million dollars, So they'll lend the
Speaker 1: construction loan based on the completed value of two and
Speaker 1: a half and lend seventy or eighty percent of that
Speaker 1: for the construction finance, but at a higher interest rate
Speaker 1: compared to the first loan to acquire the property.
Speaker 3: Is that correct? Combination of both? So if the resale
Speaker 3: value gross revenue we call it is you said two
Speaker 3: and a half MILLI yes, So if it's two and
Speaker 3: a half meal then and let's say if it's in
Speaker 3: Sydney metro area, the banks will probably lend up to
Speaker 3: eighty percent. So they'll go, yep, we can lend up
Speaker 3: to two million dollars. But then they also look at
Speaker 3: how much cash you have put in competed at two
Speaker 3: million dollars loan, So they go, well, look, you know
Speaker 3: eighty percent of gross revenue two mil. But of that
Speaker 3: have you how much have you put in? Have you
Speaker 3: put in two hundred thousand dollars?
Speaker 2: No, that's enough.
Speaker 3: I want to see let's say thirty percent ut least,
Speaker 3: So they'll probably ask you to put in let's say
Speaker 3: six hundred thousand dollars cash. So to figure out how
Speaker 3: much you need to come up with, you have to
Speaker 3: calculate from both angles, and typically you know you can
Speaker 3: only borrow the lesser figure out of the two.
Speaker 1: That makes sense, Yeah, no, that absolutely, that makes sense.
Speaker 1: All right. Well, last question overall is what are some
Speaker 1: of the tips and tricks that you've learned, is there
Speaker 1: anything that through your experience you would you go, geez,
Speaker 1: I wish I knew that my first developments that you've
Speaker 1: only learned over experience, over time, and anything else that
Speaker 1: you have to say to anybody who's interested in doing
Speaker 1: a property development.
Speaker 3: Look, there is no particular suburb or product your guarantee
Speaker 3: to make money on. But if you must rup the
Speaker 3: diligence and method to do the volume, your guarantee to
Speaker 3: find one or two potential opportunities for every hundred sites
Speaker 3: to you assess. So with a you do this for
Speaker 3: your your yourself will pay someone to do it for you.
Speaker 3: Know that this is the only way for most people
Speaker 3: to break through.
Speaker 2: Otherwise you just.
Speaker 3: Waste too much time dwelling on property or sites that
Speaker 3: don't even stack up. But because that's all you have,
Speaker 3: you go, oh, look at if I reduce the build
Speaker 3: costs by ten gram per square, would to work? See like,
Speaker 3: that's that's the common trap that a lot of people
Speaker 3: newbie's falling to. So just just that that will be
Speaker 3: my number one comment. But also getting started isn't hard.
Speaker 3: It's not different to committing yourself to going to the gym.
Speaker 3: So I'd actually go as far as saying, succeeding on
Speaker 3: your first project is not that hard because most people
Speaker 3: are sensible enough to only take on projects that can
Speaker 3: go that can't go wrong, even if the profit margin
Speaker 3: is very small. But it's usually the second or the
Speaker 3: third project that slows you down or worse, knock you
Speaker 3: out of the race completely if you don't have the
Speaker 3: right guidance from someone with experience. So I've seen too
Speaker 3: many people ruin there what could have been a brilliant
Speaker 3: property development career by getting comfortable way too early and
Speaker 3: making silly but fatal mistakes. So where the it's your
Speaker 3: business partner or consultants or business coach, work with the
Speaker 3: mental We can guide you through the first project with you,
Speaker 3: not just the first one.
Speaker 1: Very good tips and advice, and thank you Diji overall
Speaker 1: for everything you've said today. It's been great to open
Speaker 1: the lid and look inside of the property development world
Speaker 1: and hear it from somebody who's actually doing property developments
Speaker 1: and been successful at it. So Diiji Samahara, property developer,
Speaker 1: Director at Buyers Agency firm Property Buyer, It's been fantastic
Speaker 1: having you on insights have been great and I hope
Speaker 1: our listeners have learned a lot about the basics of
Speaker 1: property development. Thank you again for coming on.
Speaker 2: It was my pleasure.
Speaker 1: Thank you, James, no worries, and to our listeners, thank
Speaker 1: you for tuning in to today's episode of The Money Puzzle.
Speaker 1: Send us your questions and mister James Kirby will be
Speaker 1: back next week to answer them. But you'll have me
Speaker 1: again for the next episode. We'll be having an account
Speaker 1: ten end of financial year tax session with an accountant
Speaker 1: to get the inside scoop on tax planning and also
Speaker 1: have a chat about accounting and tax advice that you
Speaker 1: might hear at over the barbecue or at a pub
Speaker 1: or from the back of a taxi and whether or
Speaker 1: not those things are accurate. We'll run through some common
Speaker 1: situations and get whether they're true or false. You can
Speaker 1: tweet us your thoughts just use the hashtag the Money
Speaker 1: Puzzle or one word, or email us on the Money
Speaker 1: Puzzle at the Australian dot com dot au. Until next time,
Speaker 1: I'm James Gerard. Talk to you soon.