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Contents Preface ........................................................................................................ 2 Bob Andersen’s Success .............................................................................. 3 How Property Development Makes You Money ........................................ 5 3 Reasons Why You Could Be A Property Developer .................................. 8 Build Your Portfolio While Maintaining A Day Job.................................... 10 8 Great Benefits of Property Development .............................................. 12 Why Now Is A Good Time To Develop Property ....................................... 14 Eliminating Risks in Property Development .............................................. 16 The 9 Biggest Mistakes Made By First Time Developers .......................... 19 How a Developer Makes $116,500 More Than A Retail Investor ............. 22 How to Create MASSIVE Wealth Through Property Development ........... 23 How to Earn $2,424 Per Hour From Small Development Projects ........... 26 How to get started with $80,000 Or Less ................................................. 29 How to make $8.58M in 10 years ............................................................. 30 9 Qualities Of A Good Mentor .................................................................. 35 You Too Can Be A Property Mastermind ................................................. 39
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Preface
Intelligent investors know that holding and accumulating well selected residential real estate is a proven, tax effective wealth creation strategy. Property investors these days are much more informed and astute than their counterparts of the 1980's and 1990's, and many are looking for 'an edge' to break them away from the pack and fast track their path to financial independence. Many of the country’s richest people made their fortunes from property – not by paying retail price like most investors – but by creating their investments at cost through property development.
Until recently this area was the domain of property developers and the very rich. The great news is that no longer do investors have to be multi-‐millionaires or full time property development experts to share in the massive financial benefits that property development can deliver. Traditionally, developers have been reluctant to divulge their techniques and secrets to the ‘common man’. Their attitude has been, ‘I’ve had to make mistakes and learn the hard way, so everyone else can do the same’. All this has changed with the introduction of the Property Mastermind – but I’ll tell you a bit more about that later.
Did you know that more than 85% of the world’s millionaires made their money from real estate?
“BRW Rich 200 Members have often turned to the property sector – and become substantially richer.”
Business Review Weekly 31 July 2008.
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Bob Andersen’s Success
Hi, My name is Bob Andersen and I am the a member of a select group of developers with over one billion dollars worth of projects under my belt. Yes, that’s $1,000,000,000. I have well over $100 million worth of projects currently in development nationally and I am mentoring other developers at the same time.
I have written a book about property development with my Son Luke, and am featured in Australian Property Investor Magazine (API) as their resident property development expert. The most successful API article ever published was the ‘Small Development Guide’, 12 episodes sharing some of my property development secrets.
When I started developing property in 1980 I was purely interested in using my development profits as a source of income. So on I went, making profits and paying income tax. By the late 1980’s I had learned a lot more about property investment. Finally the light came on. What I should have been doing is keeping some of my development product as a long term investment – obtaining it at developer’s cost, holding for growth and deferring the tax. Even while performing my own small developments I also had a corporate life during the 1980’s and 1990’s when I held both state and national management positions with some of Australia’s largest property development companies. I have developed high-‐rise apartment buildings,
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high rise CBD office buildings, shopping centres, retirement complexes, resorts, student accommodation complexes, land subdivisions, spec houses and townhouses. So over the last two decades I have fine tuned my systems and models for packaging and developing projects using a ‘develop and hold’ strategy. These days I operate two businesses: Positive Property Strategies (PPS) which is an innovative boutique property development business operating at the cutting edge of the industry. PPS partners with high net worth individuals, syndicates and other developers in the development of specific projects. Property Mastermind where I educate and mentor aspiring developers to create wealth and financial independence through property development and investment (this might be where you found this report).
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How Property Development
Makes You Money
WHAT IS PROPERTY DEVELOPMENT? Property development is the improvement of a building or a piece of land. The process becomes extremely profitable when considering renovation of an existing building, subdividing a piece of land, building a townhouse complex, building a shopping centre, or creating a master planned community. In this report I will introduce investment examples which will bring a minimum of $100,000 return up to $8.58 Million over a 10 year period. For the purposes of this report I don’t consider renovating a house or building a spec house on a single lot to be property development, although if you have successful experience in this area you are off to a great start. TYPES OF PROPERTY DEVELOPMENT There are several different types of real estate that may be developed. In this report I focus on residential property development in particular, although most of the principles and processes are similar when developing other types of real estate. Before I go any further, let’s take a brief look at the various types of real estate that may be developed.
COMMERCIAL Commercial property development is the development of real estate intended for use or occupancy by wholesale business (eg. office complexes). Commercial real estate falls
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somewhere between residential and industrial real estate. INDUSTRIAL Industrial property development is the development of real estate intended for use or occupancy by manufacturing or refining business’ (eg. factories).
RESIDENTIAL Residential property development is the development of real estate intended for use or occupancy by individuals and not business’. Below are the various types of residential property.
APARTMENTS – Apartments (also referred to as flats or units) are attached dwellings on community or strata title. Apartments are often attached to adjoining dwellings on both a horizontal and vertical plane (i.e. through the walls, ceiling, and flooring). In the industry we call it block and slab construction.
HOUSES – Houses are detached dwellings each on their own title. LAND SUBDIVISIONS – Land subdivisions are undertaken by dividing a parcel of land into smaller parcels of land each containing its own individual title.
TOWNHOUSES – Townhouses are attached dwellings on community or strata title. Townhouses are attached to adjoining dwellings on a vertical plane (i.e. through the walls). Two attached townhouses are referred to as duplexes or semi detached townhouses. Single level townhouses are referred to as villas.
SPECIALISED – Specialised includes all other forms of residential real estate including resorts, retirement, student accommodation, serviced apartments etc.
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RETAIL Retail property development is the development of real estate intended for use or occupancy by retail business’ for the sale of goods or services (e.g. restaurants, shopping centres). MIXED USE Mixed use property development is the development of real estate for use or occupancy by a combination of the above types. In recent times there has been a move towards mixing residential with commercial or retail. Several apartment projects close to cities now provide for commercial or retail premises on the lower levels and residential apartments on the levels above. WHY RESIDENTIAL REAL ESTATE DEVELOPMENT There are two primary reasons for selecting residential property development for your first project. SMALLER UPFRONT INVESTMENT Residential real estate development has a potentially lower financial requirement, particularly when contrasted to commercial, industrial, or retail development. Residential real estate development provides several entry level opportunities (e.g. developing a duplex, slider or splitter, small land subdivision) that require much less by way of finance than do entry level opportunities in the other types of real estate. A duplex in a capital city might require as little as $100,000 in equity to finance. FAMILIARITY We are all relatively familiar and comfortable with residential real estate, having spent our lives living in it. Many budding developers also own one or more investment properties and may have undertaken some form of renovation.
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3 Reasons Why You Could Be A Property Developer
You have searched the web for something to do with property development and located my website, THEN requested the report you are now reading – so you have now made your first step.
Firstly let me explain a few concepts.
Property development could be said to require a mix of 1) time, 2) money and 3) experience. It takes time to find a site and develop it, it takes money (some from you, most from the bank) and it takes experience to know what to do.
TIME One of the big misconceptions aspiring developers hold is the time it takes to develop a small project (say 2 – 4 townhouses). What you will see me repeat time and time again is that property development is all about ‘managing people and managing processes’. It is the ‘people’ (architect, engineer, builder etc) who put in the big hours – you just co-‐ordinate them. Later in this report I will break a typical project into the hours involved in each step – and you will be amazed. This means that in most cases you can still hold down a full time job and develop a project in your spare time. But beware -‐ after one or two projects the full time job soon loses its appeal. Particularly as the profit from a 12 month three townhouse project could equal 4 or 5 times the average wage.
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MONEY On a typical development loan you would be expected to put in 25% of the costs from your own sources (cash or equity in other property) and the bank will lend the other 75%. A typical 3 townhouse project might require you to put in $250,000 to $300,000 from your own sources. There are advanced strategies you can learn where your ‘put in’ could be less or even zero.
EXPERIENCE Experience comes from doing things – ideally successfully. But you have to start somewhere. That ‘somewhere’ comes from investing in your education in the subject of property development and getting alongside someone of considerable experience who can advise and guide you and who will let you leverage off their experience. In other words a mentor.
Bob gives a course full of detail on how property development really works, based on his many years of experience. The topics covered are relevant for both novice and experienced property developers, citing examples of both small and large projects. I have gained enormous insight, particularly with regard to due diligence, financial feasibility, and overall project management. Bob has a strong desire to assist participants undertake their own projects. I owe so much of my current success to Bob’s education systems.
Manuela Benson Canberra. See Manuela’s story in the January 2009 edition of API magazine.
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Build Your Portfolio While Maintaining A Day Job
PART TIME PROPERTY DEVELOPMENT Most novice developers, making the step up from investor to developer, start developing on a part time basis. Property development is all about managing people and processes. It is not difficult to manage at least one small project while holding down a full time job. This is particularly the case for investor / developers wishing to build their investment portfolio while maintaining their day job. Even if you’re planning to eventually become a full time developer, it would be wise not to hand in your day job until your project is about to produce its profit. This might mean you sell part of your project to give you ongoing income until your next project produces a profit. If you developed a three townhouse development you might decide to sell two units and hold one for your investment portfolio. The two sold might produce a taxable income of $140,000. This would give you an annual income of $70,000 for two years while you get your next project completed. SELL, HOLD OR A MIX OF BOTH? Most development companies are run as a profit generating business. They buy land, add improvements and sell – ideally at a profit. Generally they don’t hold their stock for investment purposes – but there are exceptions.
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Property development performed using a develop and hold strategy can be a great way of building wealth by accumulating assets acquired at cost. If you keep your day job and develop property part time you should be able to keep your stock as an investment subject to meeting end finance serviceability criteria. If you are developing full time you might be able to sell some stock for cash (income) profit and hold some for investment. This will depend to some extent on the size of your developments. Either way it can set you on your way to financial freedom and YOU decide how much time you can afford to commit.
We were about to give up on our dream. After two years of work, two DA’s from two different architectural firms and a not too favourable valuation for our proposed student accommodation project we didn’t know where to turn. But a chance meeting with a senior executive from a major financial institution turned everything around. He gave us Bob Andersen’s contact details. After an initial meeting Bob declared our scheme unworkable. Two weeks later, after brainstorming with his associates, we had a totally revised, simpler and far superior design. In effect Bob was able to reduce construction costs by 33% ($610,000), increase the on completion net rent by adding 28 bathrooms (up from 4) and thereby increase the end value by $570,000. That’s a $1,180,000 turnaround. He’s a genius. Learn from the best. Terence Munro. Brisbane.
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8 Great Benefits of Property
Development Most investors buy at retail price and miss the opportunity to build a substantial property investment portfolio through ‘wholesale’ development opportunities. These are some of the benefits you can receive by becoming involved at the ‘cost’ end of production and not at the ‘retail’ end like most investors.
PROFIT You have the flexibility of either making a cash profit by selling your property, or you can keep your profit in the property and hold it as an investment.
DEPOSIT You can use your development profit as a deposit to purchase your completed investment.
CAPITAL GAIN You do not have to wait for the market to rise because you can create your own capital gain up front.
RENTAL YIELD You can significantly improve your rental yield due to the lower cost of acquiring your investment property.
TAX BENEFITS You can gain the favourable taxation benefits of depreciation on new property.
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HIGH RETURNS You can obtain returns on funds invested of 80% -‐ 100% p.a. during the development, depending on gearing levels.
RAPID PORTFOLIO GROWTH You can acquire investment properties and build your portfolio much faster than you otherwise could by paying retail price.
SPECIAL SAVINGS You can save on stamp duty, GST, marketing costs, agent’s commissions – and you get to keep the developer’s profit.
This is just an outline of the technical, quantifiable benefits. The immeasurable benefit is the lifestyle – building control over your wealth… and therefore your life.
I have several investment properties but wanted to get involved in development. I did Bob’s education course. I had done others but this one leaves the rest for dead. None of the pretenders come up to Bob’s boot laces. I’ve since advanced my education into options and joint ventures with land owners and at a Platinum level I am nailing down my first deals. The confidence and results I am achieving in having access to Bob whenever I need him is beyond a dollar value. He sees angles and negotiating techniques to create a win / win outcome like nobody else. Julie Valetic. Melbourne.
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Why Now Is A Good Time To
Develop Property I’ve been involved in developing property since 1980 – that’s about four complete property cycles. Each stage of the property cycle has its own quirks to deal with but I’ve always made profits in all market conditions. As I write this report, it is 2010 and we have just survived the worst financial crisis in eighty years. In spite of this I have over $100 million of projects in the pipeline and I am investigating more. Some are showing moderate profits while some niche market projects are showing exceptionally good profits. It might sound contradictory but I don’t like boom times. I have always done better in non-‐boom times... in other words, in times like this ‘economic crisis’. During boom times development sites are harder to find, are often overpriced and often have to be purchased without suitable contract conditions. Development approvals take longer to obtain, building prices increase and interest rate rises are a strong possibility as the regulators try to take the heat out of the market.
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The current state of the property market is very interesting. On the positive side; sites are available, interest rates are below the long term average, building prices have pulled back, finance is still available and there is a national and worsening undersupply of accommodation which has caused a substantial and continuing rise in rents. In other words, I haven’t seen a better time to develop property on a ‘develop and hold’ strategy in my 29 years in the industry. That’s why this is an excellent time to start developing your portfolio.
As an experienced teacher I understand the importance of quality content presented in an easy to understand format. Bob’s education material and personal mentoring is of the highest quality. Under his education and mentoring program we have now completed our third successful development at Maleny. His written material, audio and video material and particularly the level of personal contact at Platinum level have been a key ingredient in our success. Tim Bell Turner. Sunshine Coast.
The material and knowledge imparted in Bob’s course is incredibly inspiring to any aspiring developer. The credibility of Bob and his genuine interest in assisting others in becoming more astute developers makes the course extremely valuable.
Tino Filippelli Liberty Builders. Melbourne.
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Eliminating Risks in Property
Development Embarking on your first property development project carries greater risks than purchasing your first investment property. The numbers are bigger and more things can potentially go wrong. But the rewards are significantly higher too… and risks can be managed and minimised. By far the highest risk is Inexperience (lack of knowledge). However the good news is that help at the highest level, via education and mentoring, is available. With that as a platform the other risks are readily containable. Some of the common risks include: INEXPERIENCE A lack of knowledge, lack of education and failure to engage a professional mentor / advisor particularly on the first one or two projects will greatly raise risk and may affect the ability to borrow. Always follow Rule #1 – align yourself with a mentor and get educated. INTEREST RATE RISKS The interest rate on borrowed funds could rise during the development or long term holding of the investment causing increased development and holding costs. However, it’s not world shattering. Let’s say rates go up 1.5% gradually during a 12 month four townhouse project. The actual increase in interest
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would be $1,500 per unit. Of course rates can also go down creating more profit. MARKET RISKS Property values can fall as well as rise and there is no guarantee as to the market value of your investment on completion or the demand for your investment should you desire to sell it. Small, quick turnaround projects give market turnarounds less time to bite. Of course property values rise more often than they go down so over a longer period of time you will be in front, particularly if you are holding at least some of your product. On an average project, values would need to drop by 15% before you would lose your first dollar. CONSTRUCTION RISKS Construction costs can increase during construction because of disputes or unexpected delays caused by labour or material shortages thereby lengthening the construction period resulting in increased holding charges. Performing due diligence on the builder and using a lump sum fixed price and time contract can help minimise problems. APPROVAL RISKS The obtaining of satisfactory development approvals can be subject to time delays and unexpected costs. Councils could be slow or reluctant to approve an application. Extra consultants might be required to supply special reports and infrastructure charges might increase. Buying DA approved sites, subject to DA contracts and good pre purchase due diligence can help minimise this risk.
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FINANCIAL RISKS Undercapitalisation (not having spare capital as a buffer if costs escalate) or over gearing is a common problem with budding developers. Pre finance qualification, not borrowing to full capacity and having a contingency buffer is important. If it is your intention to become involved in property development you need to realize that there are potential risks. Successful development is simply a matter of understanding the risks… and managing them.
Bob saved my life and made me $400,000 profit when I thought I was going to lose $400,000. In spite of what I had learned I got too gung ho and bought a ‘lemon’ site – site unseen and interstate. Noisy, bad shape, road widening resumption to name just a few problems. Staring down the barrel of a potential sizable loss I joined Bob’s partnership program to give myself the best chance of recovering my money. Using Bob’s inner circle of associates (lawyer, architect, planner) and some great negotiation with Council by Bob we achieved an outcome that even shocked the planner. Bob is brilliant. He turned my lemon into lemonaide. Jack Pyziakos.Melbourne.
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The 9 Biggest Mistakes Made By
First Time Developers
STARTING OUT WITHOUT A MENTOR Rule #1 – you must have a mentor and be educated. There is too much money involved to hope for the best. This is a highly profitable enterprise and the cost of education and a mentor is negligible compared to what you could lose without one. Adhere to Rule # 1 and you won’t make the other 7 mistakes.
YOU DON’T KNOW WHAT YOU DON’T KNOW A case of a little bit of knowledge is dangerous. It’s usually only after you have received education and communicated with an expert that you realise how little you knew when you started. It’s a humbling experience.
NO STRATEGY OR PLANNING Some new developers just go out and buy ‘a development site’. Before you even start looking you need to know the type, size and ideally the location of your proposed development and what constitutes market value.
POOR DUE DILIGENCE This is related to #2. Effective due diligence needs to incorporate many aspects relating to town planning, engineering and financial analysis. You don’t want to buy a lemon. Having a comprehensive due diligence checklist is essential.
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OVER-‐PAYING FOR THE SITE There’s an old property saying ‘You make your profit when you buy the land’. While not technically 100% correct it reinforces the importance of buying well. Market savvy, particularly regarding site values and an ability to negotiate and structure deals are great assets.
UNDER COSTED FEASIBILITY Related to # 2. It’s not all that hard to get a handle on the income side of the feasibility – the sale prices – from agents, valuers or recent sale data. Nailing the costs on the expenditure side can be more difficult – particularly for beginners. You need to know all the costs that relate to the project and how much to allocate to each one.
INCORRECT OR LACK OF STRUCTURE Setting up the right structure before even looking for a site is critical. Your preferred strategy on either holding or selling will affect the structure. Different structures will have different outcomes on taxation issues such as income tax, capital gains tax and GST. An inappropriate structure could cost you plenty of $ in the short or long term.
UNDER CAPITALISED Before looking for a site you should know your borrowing limit and work within it leaving a buffer. I have seen so many beginners borrow to their full capacity and have no room to
MY SECRET SITE FINDING WEAPON I rely on a special tool to drastically cut down the time I spend locating hot development sites (or for that matter hot investment deals). For further info on the tool I used to slash my average site finding time by 60% -‐ click here.
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manoeuvre if interest rates went up, sales slowed or construction took longer.
UNQUALIFIED FINANCE Further to #8, I have seen people spend time nailing down a deal only to have finance rejected and lose the deal to someone more organised. Recently I bailed out someone who had purchased a large site, spent over 2 years and $140,000 getting one DA then a second improved DA and then could not finance the project.
As head of an investment syndicate I joined Bob’s Gold level education and mentoring program prior to commencing a substantial development project. Armed with a huge increase of knowledge I joined Bob’s partnership program when it came time to undertake the project. The way he taught me to deal with financiers, consultants etc was awe inspiring. His connections within the industry are at the highest level and I can attest to the fact that his guidance and skill made us tens if not hundreds of thousands of dollars in extra profit. Colin Minter. Sydney.
Excellent course! Highly recommend it for people like us who want to get into property development but don't know where to start. It's given us the confidence to get out there and get started on our first project.
Peter Kasten Perth. Also featured in the API magazine.
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Example: How a Developer Makes $116,500 More Than A
Retail Investor As a property developer you have the choice of selling your product on completion and realizing a cash profit or holding as a long term growth and income investment – or you could do a combination of the two. Below is an illustration of the cost savings of acquiring property as a developer at cost price, as opposed to acquiring property as an investor at retail price. For example this could be one townhouse in a 3 or 4 townhouse project. Developer Investor Market value 500,000 500,000 Less development profit* 80,000 0 Less marketing costs 20,000 0 Purchase price 400,000 500,000 Plus stamp duty 0 16,500 Total cost of property 400,000 516,500 Net equity 100,000 (16,500) * These numbers are based on a project showing a return of 19% on costs. As you can see, if you were the developer you would have acquired your own investment property $116,500 cheaper than a regular retail investor. A basic triplex – three townhouse – project would save you $349,500.
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The rate at which you can expand your property investment portfolio over time through property development is even more startling. Regular retail investors build their portfolio by waiting for values to increase organically over time. When they have built up enough equity from organic growth they refinance, extract the spare equity and use it as the deposit to purchase another property, subject to the financier’s serviceability criteria. As a developer you can create instant equity (profit) and can therefore acquire more properties earlier. This means you can build a much larger portfolio, and reach financial independence much more quickly through being a property developer, because you are buying your own properties at cost meaning your borrowings are less and your affordability is greater.
How to Create MASSIVE Wealth Through Property Development The accumulation of income producing residential real estate is a proven, long term, tax effective strategy of building wealth, and statistics back this. Just have a look how residential property in Australia fared compared to shares in the current financial situation. Developing your own property investments at cost simply means you can massively enhance this proven strategy and build a bigger portfolio sooner. There are several ways of looking at this. Using our previous example of paying $516,500 retail versus paying $400,000 by developing, we can calculate that at an annual capital growth rate of 7%, the developer is immediately accessing 3.6 years (1,314 days) of growth on day 1.
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That’s a fabulous start. Let’s examine the capital required to purchase the same property by both methods using 80% LVR finance. Buying a $500,000 property at retail price would require an input of $116,500 ($100,000 for the 20% equity and $16,500 for stamp duty, plus loan and legal costs). The loan would be $400,000. Developing and holding a $500,000 property which costs $400,000 would require no input. The loan would be $400,000 which would pay out all the development costs. The investor who paid retail price has to wait some years for the property value to grow to a point when he can refinance and extract the increased equity to put down as a deposit on the next investment property. The investor who developed his own property has put in no equity into the end purchase – the 20% deposit was funded by the project profit. So he can immediately go and develop another project and repeat the process – balancing the holding / selling ratio to suit his personal long term financial strategy. This ability to do one multiple investment deal, extract your cash, and move on and use it on the next deal is what enables you to turbo charge your acquisition rate and potentially build a massive property investment portfolio quickly.
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THE COST OF HOLDING A TOWNHOUSE So what would be your ‘out of pocket’ cost if you developed and held a townhouse described above? Based on July 2009 Australian tax rates.
Assumptions Expenses
Purchase Price 400,000 Interest 24,000
Loan Interest Rate 6.0% Rates 1,500
Borrowing Costs 900 Body Corp 1,200
Total Loan 400,900 Repairs, Maintenance, Ins 575
Letting Fees 2,140
Salary Income 50,000 Total Cash Costs 29,415
Weekly Rent 475 Depreciation 13,500
Annual Rates 1,500 Borrowing Costs (over 5 yrs) 180
Body Corporate 1,200 Total Tax Deduction 43,095
Letting Fees 2,140
Repairs & Maintenance 300 Gross Income 73,750
Insurance 275 Less tax deduction 43,095
Depreciation Yr 1 – estimate only 13,500 New Taxable Income 30,655
Tax payable without property 9,509
Income Tax payable with property 4,067
Salary Income 50,000 Tax saved – refund 5,442
Rental income (50 weeks) 23,750 Plus rent received 23,750
Gross Income 73,750 Total Cash Income 29,192
Less total cash expenses 29,415
Annual Cash Deficit* 223 ($4.30/week)
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How to Earn $2,424 Per Hour From Small Development
Projects
What better way to illustrate a point than to use an actual example of a typical investment. Normally when I perform a financial feasibility analysis on a project I judge its profitability on the profit margin as a percentage of costs and the internal rate of return. Financiers do the same. However it is an interesting exercise to examine a typical small project and calculate the annual return on funds invested, and even the hourly rate earned. So I chose a recent 4 townhouse project to use as a sample. One of the startling things new developers discover is that you don’t put huge hours into a small development. Property development is all about managing people and processes. It is your people (team) such as the town planner, architect, engineers, builder and marketers who put in most of the hours. These are the hours I put into a recent 4 townhouse project. My architect packaged the DA process by coordinating the other consultants.
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Stage Hours Site location 22 Due Diligence 9 Finance 13 Acquisition 3 Development Approval 15 Building Approval 10 Tendering & Construction 47 Marketing, Sales & Settlement 13 Total 132 Based on the profit from the earlier project of $80,000 x 4 = $320,000 the hourly rate earned during the project = $320,000 / 132
= $2,424 / hour And that’s by selling the project. If you held the townhouses on completion with no marketing costs the hourly rate would be $3,030. Financing the project on a standard 80:20 loan the equity requirement would be $320,000 ($400,000 x 4 x 20%). The annualised return on funds invested ($320,000) on this 12 month project is (320,000 / 320,000 x 100%) = 100% Sounds good? In fact it can be better. What if the project was an eight townhouse project instead of a four townhouse project? What would be the differences? COST. It would cost almost twice as much to develop. I say almost because there would be some economy of scale cost savings with the professional fees and the building contract, but let us assume it is double.
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TIME. This is where the saving is. Would you spend twice as much time on the larger project? Definitely not. Most of the time elements would be the same with the exception of construction which would be about 1.8 times longer. PROFIT. The 8 pack profit would be two times the 4 pack profit. The consultants (architect, engineers) might spend a bit longer on the design – but that’s their time, not your time. You have more on site meetings with the builder. In fact you can engage a professional to do that, lose a little profit to pay him, and reduce the 85 hours to about 10 hours. Remember it’s all about managing people and processes. Let us revisit our earlier table. 4 Pack 8Pack Stage Hours Hours Site location 22 22 Due Diligence 9 9 Finance 13 13 Acquisition 3 3 Development Approval 15 15 Building Approval 10 10 Tendering & Construction 47 85 Marketing, Sales & Settlement 13 20 Total 132 177 So if the 8 pack profit from selling is $640,000 and the hours worked are 177, what is your hourly rate? $640,000 / 177 = $3615.82/ hour.
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I should point out that the curve does flatten out somewhat with larger and more complex projects. If a 4 pack is too big for you to get started, you could start on a duplex (2 attached townhouses). Your profit margin as a % of costs might be a little lower, but it is the start of a long term wealth building strategy.
How to get started with $80,000 Or Less
Surprisingly, you don’t need to be a millionaire to get started in property development and acquire investments at absolute developers cost. Typically you will need to put in equity (deposit) to cover approximately 20% of the costs for a duplex. The financier will put in the other 80%. Your 20% equity does not have to be in the form of cash. It could be in the form equity you are holding in your house or other investment properties. Let us take a look at how much equity you would need to get started in what I would call an entry level development project – a duplex – sometimes called a dual occupancy or semi detached. Basically it is two attached townhouses or villas with a common wall. On completion the two dwellings could be held on one title or separately titled. The cost of developing a duplex would vary depending on the geographic location – with the land value causing most of the variation. In a capital city the land and building cost per dwelling could be in the range of $300,000 to $400,000 per dwelling.
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Regional areas could be less. On the other end of the scale I have a friend developing an ocean front duplex on the Gold Coast with each dwelling worth $7,500,000. So if we say the cost to develop a typical duplex is between $300,000 and $400,000 then the equity required would be between $120,000 and $200,000 (average $160,000). Let us say you own a house worth $450,000 with a mortgage of $150,000. The available equity to put into a development, subject to serviceability, would typically be $210,000 ($450,000 x 80% -‐ $150,000). Of course if you didn’t have access to the full $160,000 you could consider doing a joint venture with a relative or friend, in which case your required equity would be $80,000 or even zero depending on your negotiation skills and you would get to keep one of the dwellings at cost.
How to make $8.58M in 10 years
A wealth creation plan should have a goal and I will show you that it is entirely possible to make $8.58 Million in 10 years, in fact I am being conservative in my calculations.
s
We will look at undertaking one small project (3 – 4 townhouse) every second year for ten years. That’s five small projects over ten years. Just about anybody could do that while holding down a full time job.
Property investment is the vehicle but property development is the supercharged engine that
drives the profits.
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YEAR 1. Assume a three townhouse project where two are held and one is sold.
YEAR 3. Assume a four townhouse project where three are held and one sold.
YEAR 5. Assume a four townhouse project where three are held and one sold.
YEAR 7. Assume a four townhouse project where four are held.
YEAR 9. Assume a four townhouse project where four are held.
We will adopt the figures from the chapter ‘Developer Investor vs Retail Investor’ using our standard $500,000 townhouse.
To refresh your memory those figures are:
Value of townhouse on completion -‐ $500,000 Cost to develop each townhouse -‐ $400,000 plus $20,000 selling cost Profit if selling one townhouse -‐ $80,000 Profit (equity) if holding one townhouse -‐ $100,000
In the following table I have set out what the equity, debt and value would be over a ten year period for each of the five projects being developed in years 1, 3, 5, 7, and 9. I have assumed capital growth of 10% per annum and interest only finance on the investments held.
I haven’t taken into account the profit made on the three townhouses sold. I will assume that helped you drive a good car and enjoy some great overseas holidays. Of course you could have used the after tax profit to reduce the debt.
Your ability to hold stock will be subject to the bank’s normal lending criteria.
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THE TEN YEAR PLAN The table below shows us the equity, value and debt on our growing portfolio over a ten year time span. E = equity (profit in year 1 then growth. E=V-‐D) D = debt (assume interest only) V = value of units held (assume 10% pa growth) Numbers are in $,000’s
Year 0 1 2 3 4 5 6 7 8 9 10
E1 200 300 410 531 664 810 971 1148 1343 1558
D1 800 800 800 800 800 800 800 800 800 800
V1 1,000 1100 1210 1331 1464 1610 1771 1948 2143 2358
E2 363 544 744 963 1205 1471 1763 2084
D2 1452 1452 1452 1452 1452 1452 1452 1452
V2 1815 1996 2196 2415 2657 2923 3215 3536
E3 440 659 901 1167 1459 1780
D3 1756 1756 1756 1756 1756 1756
V3 2196 2415 2657 2923 3215 3536
E4 708 1062 1451 1880
D4 2834 2834 2834 2834
V4 3542 3896 4285 4714
E5 857 1286
D5 3428 3428
V5 4285 4714
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At year 10: Total Value = 18,858 Total Debt = 10,270 Total Equity = 8,588 LVR = 54.46% NPV* = 6,582 * Net present value. The value today if the equity in ten years time is discounted back by average inflation of 3% per annum That’s right! In ten years you could have accumulated equity of $8,588,000 or $6,582,000 in present day dollars if discounted back for 3% inflation. You would also have a portfolio of 14 investment properties. But what’s different about building your portfolio through development is that you don’t have to wait for organic growth the increase the value of your portfolio to then refinance, pull out the extra equity and use it as a deposit on the next new investment. At the end of each project you have an immediate 20% deposit. You don’t have to wait two years for organic growth so you can accumulate properties and equity so much faster. Sure this might sound theoretical but how reasonable are the assumptions. I have used projects showing a 19% return on costs (ROC) which is fairly average. I have allowed one project to be developed every two years. Typically such projects would take 12 to 15 months to develop. I have used 10% growth which is around the 30 year average. We’ve already seen you can do at least 1 project while in full time employment.
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You only need $300K to start – either your money or someone else’s. So what if you only develop projects with a 15% return on costs and growth only averages 7%? Well you’ll still be rich, a little less so perhaps, but you would still have a great lifestyle and retirement. Of course you could keep going and add another project in year 11 and so on. My question to you is what if you do nothing? In fact even if you stopped developing at the year 10 mark, by year fifteen your position would be: Value : $30,371,000 Debt : $10,270,000 Equity : $20,101,000 LVR : 33.8% Such is the power of property investment through development and compound growth. This is the principle I have used over the years to accumulate wealth. These days I tend to do larger, high yielding projects with investors but the principle is exactly the same. So what have we learned so far? We know we can start developing small projects with say $160,000 to $240,000 equity, possibly using the equity from your home. We know it is possible to develop a small project while holding a full time job. Experience is the only skill you are lacking and this can be gained through a mentor.
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9 Qualities Of A Good Mentor
A good mentor takes pride in your success and can mean the difference between great profits, or none at all. The 1st rule of successful property development is to find a mentor who will help to educate you in all aspects of the investment such as risk assessment, site selection and financing options. I have seen some real disasters where beginners have gone out under-‐educated and with no ongoing expert advice. I have also saved a few from extinction. Look at any of the public property forums and you will see newbie developers who have gotten into trouble, some seriously, seeking advice from what is often equally dangerous and ill-‐informed individuals. If only they knew the value obtaining expert education and mentoring. To help you in your quest for the best property development mentor I have set out below the essential elements you should be looking for. I have also included a table where you can compare ‘applicants’ for your mentoring position. It’s your money – don’t be afraid to ask the hard questions.
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9 Essential Elements Your Mentor Must Possess
LONGEVITY It is important that your mentor has successfully developed through the ups and downs of at least two full property cycles. That means at least 14 years of property development experience.
BE A REAL DEVELOPER A real developer is someone who controls all stages from site location, analysis, acquisition, design, approvals, finance, construction and sales. Some would be mentors don’t even develop property but make their money from seminars etc. Others passing themselves off as developers include renovators, ex real estate sales and marketing people, consultants (architects etc). Many have developed nothing or at best a few houses or duplexes.
PAST DEVELOPMENTS Your mentor should have at least 14 years experience as a real developer and therefore should have an impressive portfolio of past projects. They will need to have controlled all aspects of the development of those projects as either the developer or development manager. I suggest the present day value of such a portfolio of projects should be at least $150 million. Ask them for a list.
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PRESENT DEVELOPMENTS Ideally your mentor should currently be involved in the development of projects in order to be up to date with current trends, designs, market intelligence, finance and marketing strategies. I suggest a minimum value of current projects to be $15 million covering 30 to 40 dwellings. Ask them for a list.
MARKET SPREAD It is highly desirable that your mentor has rounded development experience by having developed a range of products. For example, residential (land subdivisions, townhouses, units), commercial, specialised residential (student, retirement, resort).
INDUSTRY PROFILE Your mentor should be well respected and an acknowledged leader within the property development arena. He / she should ideally have published books, reports and articles in the public arena and be well connected in construction, finance, marketing and professional consulting circles.
STRUCTURED EDUCATION AND MENTORING PROGRAM Your mentor should have a defined education program and strategy to take you from a raw beginner to the successful completion of your first project – and beyond. He / she should offer advanced training in niche areas and defined levels of membership.
IMPLEMENTATION Your mentor should have a specific strategy and level of mentoring for the implementation of the education program into a live property development project.
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PRIVATE MENTORING A number of mentors act as a ‘front person’ role in the marketing and promotion of their programs, then hand over the ongoing contact to underlings (or even spouses) they call ‘team members’ who have very limited experience.
Put any contender to the test below. Bob Andersen Contender Longevity 29 years of development Real Developer Bob’s development company is Positive
Property Strategies
Past Projects Over $1,000,000,000 Present Projects Over $100,000,000 from 3 townhouse
projects to retirement villages
Market spread Commercial, retail, residential (land, units, townhouses) specialised (student, retirement, resort)
Industry Profile Highly respected developer, book author, lecturer to industry bodies, primary contributor and resident development expert for Australian Property Investor magazine
Structured Program
4 levels of education / mentoring: -‐ Property Development Course -‐ Gold Membership -‐ Platinum Program -‐ Private Client
Implementation Advanced mentoring / advice during development
Mentoring Direct with Bob and his two senior development managers
Your next move should be the research and consultation phase, selecting a mentor to help you take your next step to building a profitable property portfolio.
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You Too Can Be A Property Mastermind
In 2007, I travelled the capital cities of Australia conducting workshops about property development. Following the success of these ventures I received considerable pressure from a number of investors for further education and ongoing personal mentoring, so I formed a private ‘closed door’ club. Here investors were educated and personally mentored by me in the art of safe and successful property development as a vehicle to build and accumulate wealth. Then in 2009, I launched for the first time my Property Mastermind Developer Course – a comprehensive guide to becoming a successful property developer by following my step-‐by-‐step system.
Property Mastermind Developer Course
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Response to the Property Mastermind Developer Course exceeded my expectations, completely selling out within days of release and garnering great feedback and reviews from customers. Since then I’ve been concentrating on delivering great value to my clients (while continuing my core business of property development), but I’m happy to say I have just put the finishing touches on the enhanced and upgraded Property Mastermind Developer Course 2.0.
Coming Soon: Property Mastermind Developer Course 2.0
As before, I will only be making Property Mastermind Developer Course 2.0 available for a limited launch period. There are a couple of reasons for this: One: I’m only getting a limited number of sets produced in one ‘production run’, and Two: I want to ensure I have sufficient time and energy to focus on helping purchasers get the most out of the course. I can only help a finite number of people at one time. The launch is scheduled for early to mid September. Before the doors open, I’ll have plenty more case studies, examples and strategies to share with you. If you have any interest in property, you’ll enjoy my new stuff. I look forward to assisting you increase your property development success. Best wishes,
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Copyright: Copyright Bob Andersen 2010. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, communicated or transmitted in any form by any means without the prior written permission of the copyright owners. Disclaimer: The information contained in this report is provided on the understanding it neither represents nor is intended to be advice and is provided as general information only which will require further consultation by the reader to identify the applicability of the information to the reader’s specific requirements, and is referred to by way of example only. The author does not warrant the accuracy of the information or its appropriateness for the reader’s specific requirements. The reader should obtain independent financial and legal advice in respect of their specific requirements. The author expressly disclaims all and any contractual negligence and any other form of liability to any person in respect of the information contained in this book and any consequences arising from its use by any person in reliance upon the information contained in this report.
