Property Development Explained To Help You Get The Best Return On Your Investment
Real estate development, or property development, is a multifaceted business process encompassing activities that range from the renovation and re-lease of existing buildings to the purchase of raw land and the sale of developed land. While some educational organisations offer courses in property development, many developers who are active in the market are property entrepreneurs who have learnt the process from mentors like Bob Andersen. Enjoy his latest tips.
Now when it comes to making great amounts of money, there’s no property strategy that comes anywhere near property development. The good news is – when it comes to financing property development projects, the bank puts in most of the money. But you need to put in some money up front and we call that equity. Now typically on a commercial-type transaction or commercial finance, you’ll have to put in about 25% of the costs, up front, and the bank puts in the balance. Now the good news is, even if you don’t have that 25% equity upfront, there are a range of strategies that go towards supplying part of that 25% or even all of it, and I’m going to take you through some of those strategies.
The first one I’m going to talk to you about is what I call a ‘joint venture with a land owner’. Imagine that there is lots of land out there that has development potential. Now the problem is, it’s usually owner by people who aren’t developers. So when they come to want cash, what do they do? They sell it. And who do they sell it to? A property developer! Now from their point of view, they often get a bit cranky because they’re giving away a lot of future profit but they don’t have a choice because they don’t know what to do. And remember the 2 key ingredients of a property developer are: Knowledge and money. And I can tell you that the one that is in short supply is knowledge! It’s not money, not once you get involved in property development. So an opportunity exists for you to do a type of joint venture with land owners who own development land. Now there are a couple of prerequisites to make this work. First of all, there needs to be either little or no debt on the land. This is important because what you’re going to do here is you’re actually going to use the equity that is in the land (if you like the land owners equity in fact) to supply the equity in the development.
So let’s look at it like this. Let’s just say there’s an opportunity there to talk to a land owner. There is little or no debt on the land. Now what the land owner will get out of this is he will get his land value, although they would have to wait for a little while, and he will get a chunk of the profits. How much? Well it depends on how much you negotiate. Typically it might be 50% of the profits. Now this is how it works. The land owner comes into the deal with you. They put up the land as equity, as security if you like, to the bank and that supplies the 25% equity. The bank takes security over that through what we call a “Third Party Mortgage’ . So you can actually put that property up for security even though you don’t own it, but you have to do it with permission from the owner. Now with that security in place, the bank then lends the rest of the money to fully develop the property. Now at the end when it’s finished and you start selling down the property – that could be vacant blocks of land, it could be townhouses or it could be apartments – as the settlements come in, first of all the bank (the financier) will take their money up front. Then the next money to come in from the settlements will go to the land owner and pay for the land… so they’re getting paid for their land at the end. And the next chunk of money that comes out is the profit. And that profit is then distributed between yourself and the land owner. So let’s just say you’re going 50/50 in the profits, so it’s a good deal for the landowner, they get their full land value on valuation, but at the end of the project they get 50% of the profits. That’s a big upside for the land owner and a good incentive for them to want to get involved. For you, the entrepreneurial developer, you get 50% of the profits but you haven’t had to put any money it. It’s fully funded without having to use one cent of your own money. So it’s a good deal for you.
So that’s what I call a little or no money down deal. It could be a NO money down deal if the land is owned without debt. It’s a great strategy and I like it and it’s not even my favourite one. I’m going to cover that with you in my next edition. So get out there, start tracking down land owners and start negotiating.
So we’ve been going through our Profit Development Process – our 6 steps if you like. Remember the key word again? PROFIT. P-R-O-F-I – we’ve done those, now we’re down to T, the last one. This is a good one, I like this one – it’s T – Take your profit. That’s it, beautiful! You know you can actually take some of your profit on the way through; I don’t know if you knew that?
You can actually pay yourself a project management fee on the way through, so what you’re really doing is taking a bit of profit in advance. But, the big chunk is at the end when you sell. You know there is something really special about having six figure amounts of money go into your bank account. You know might like to see $100 or maybe or $1000 but what about when you’ve got hundreds of thousands going in there? You know you might have a 3 town house project and your profit could be $300,000… I’ll tell you what, it looks pretty good in your account. So this is taking the profit. So what are we going to do there? Well in order to do that, we need to settle our sales, so what we need is separate titles. Now let’s take an example of a 3 townhouse project. We started off with 1 parcel of land; 1 block of land, and we’ve built 3 town houses on it. 3 people, if you like, have decided to buy those. So we’ve signed up contracts on the 3, but they can’t settle, and you can’t get the money, until you have 3 separate titles. And that’s this last part. Now there’s always an expert that can do this for you – like all parts of property development there’s always an expert to do the work for you – but you need to get those separate titles so you can settle.
So getting the titles out first is very important, and then really it’s up to you – what are you going to do? Are you going to sell them or keep them? Well it’s a 3 townhouse project and you might say ‘Well, I want some cash flow and I want to build some long-term wealth… what am I going to do? Well I’m going to keep 1 of these!’. Let’s say the town house is worth $500,000 and it would have cost you around $400,000 as a developer. So you’ve got about $100,000 of built in profit there, or equity and you can use that when you finance at the other end. So you’re going to keep this one for long-term capital growth, and the other 2 you’re going to sell. So, $100,000 each – $200,000 that’s what you get… well you pay tax, sorry about that. You get a big chunk of cash. So this is the great part, the flexibility of property development – holding or selling! And that’s the last part – take your profit, take it however you like, it’s fantastic.
Now, in the next episode, it’s what you’ve been waiting for. I am going to take you through some creative strategies. I am going to show you some ways of doing property deals with little or no money of your own. It’s exciting and I look forward to seeing you then!
Hi, Bob Andersen back again. So we’re going through our property development process, remember the keyword? Profit. We’ve done the P, the R, the O, the F and now we’re up to the I. What I call improvement, what do I mean by improvement? Well it’s a bit like the term valuers use. They talk about the improvement toward land don’t they? An improvement could be a building, a shed, whatever.
As developers, we’re going to improve the land. How are we going to do that? Well in the case of a little subdivision, we’ll improve it by cutting it up into more pieces. In the case of maybe a duplex or some townhouse, we’ll improve the land by building something so that’s what I mean by improvement. That’s how property developers make money. We improve the value of land and then we profit from it. That’s improvement, okay, what do we need?
Well one of the first things we’re going to have to do in the case of say some townhouses or a duplex, we’ve got to get a builder. We have to select a builder. How do you do that? You know there’s such a thing as a building broker? I don’t know if you know that. Building brokers are people who actually have on their books, builders – tried and proven builders. Builders that build different types of buildings, different locations, so Google building brokers and you’ll find one. That’s one way of finding a builder. The other way is simply drive around. Real estate agents know good builders. You’ll see properties getting developed, you’ll see the builder’s sign on the front fence. Lots of ways of finding builders. So you’ve got the builder.
The next part is the construction and that’s the improvement part. The good news is this is the least amount of work you will do during a property development is during the building stage. In fact, when we’re going through the building stage, it’s about an hour’s worth of work a week. We meet with the builder once a week or if there’s nothing much happening, once a fortnight onsite. That’s what we do and we talk to the builder about what’s happening, is he on budget? How things are going? What’s he going to do next week? It’s the builder that needs to know how to build. You think about a building site, there’s lots happening. There’s brick layers there, there’s concreters, plasterers. You don’t have to know about that. You don’t even have to know how they come, how they go, when do you need them – it’s the builder’s job.
This is the beauty of property development. You’re in the big league now. The builder does all the work for you on a building and that’s really cool. Your main job during the construction side is to get the money through every month, to get the money to the builder every month when he’s due to be paid. Not much work in that I can tell you, that’s important.
Now the other part of the improvement and it’s related to the building would be the marketing. If we’re going to keep our project, obviously there’s no marketing, there’s no agents, there’s no commission to pay. We’re going to keep it, that’s good. If we’re going to sell, then we need real estate agent or a project marketer to sell our property. Now with the marketing, you might have to do a little bit of marketing earlier. If you’re on a slightly bigger project, then the banks have all that we need, our pre-sale or two pre-sales. Well you would have to do that early before construction starts and the agents can do that for you. Otherwise if you don’t need any pre-sales, then you need to sell it probably during construction. It’s a good time in the backend of the construction, get the property sold. That’s the job of real estate agents. Of course part of your research when you’re out in the marketplace is to find good real estate agents. Not hard to do, you can see who’s selling. So where the for sale sign is going up, see who’s selling.
That’s it, that’s the marketing. That’s the third part of this section. I’ll look forward to going through the last one next week which is the easy one. Well it’s not the easy one, it’s the great one. It’s the favorable one. It’s taking your profit. Talk about that next episode.
Hi, Bob Andersen again. So we’re going through our property development process. In this episode, what have we done? We’ll we’ve done the ‘P’ earlier, we’ve done the R, we’ve done the O. So we’re up to F! This episode is about the F – what’s F? Well it’s finance – very important. Unless you’ve got a truckload of cash, you’re going to have to get some finance. So let’s talk a little bit about finance. Basically there’s two types of finance. There’s what we call retail finance and commercial finance. I’ll just run through those quick. Retail finance, that’s the normal sort of finance that you would have used maybe when you bought your house or when you bought an investment property. This is one of the, if not one the normal banks, building societies, credit unions, those sorts of people.
When we’re doing a small project, what do I mean by small? Well typically up to maybe three lots in a subdivision, maybe up to three townhouses – something like that. We can use what we call normal retail finance through a normal retail source. Once they get a bit bigger, once you do three or four or more slightly larger project, then we have to go and get what we call commercial finance.
Typically the banks they have a retail division, commercial division and they’re a little bit different. When we’re getting retail finance, let’s say we’re doing a duplex, here’s something simple, a simple joint duplex, now that could fall into the retail finance are because it’s only two. Remember when you got your retail finance, there’s two things the bank wanted, what was that? They wanted some equity and they wanted your serviceability didn’t they? They wanted to know that you could afford to pay off the loan. Same thing here. The banks will need some equity and you’ll have to prove that you can pay the interest every month. That’s on a retail loan. Now that’s important. That’s important for you, it’s even more important for the bank. Now the bank is lending most of the money. They might be lending 80% or something like that, very important.
Now if you’re doing a slightly bigger project, you have to get commercial finance. What’s different about that? Well the interest rates are up a little bit, not much more than retail but up a little bit. Certainly the same thing, you have to have equity in… serviceability – well that’s less of an issue and I’ll tell you why. With commercial finance, this is what I love about it, they do what they call capitalising interest. In fact, unlike retail finance where every month you have to find the interest, you have to put your hand in your pocket and come up with the interest. With commercial finance, the interest is actually built into the loan. So every month when your interest due, they actually just take part of your loan. It’s already paid, it’s in advance – it’s part of the loan. It’s called capitalised interest. That’s a good thing. I like that.
I’ll tell you another part of finance that I love and this is where my passion is. It’s what I call creative finance. This is doing deals with little or no money of your own – creative finance. Now I did say that banks want some equity, they want some money from you. Creative finance is all about where that ‘some’ comes from and I’ve got a whole range of strategies. In fact later on in this series, I’m going to run you through some of those strategies. Things like joint ventures with money partners; things like joint ventures with land owners, maybe syndicates; what I call stock back deals where you pay for land with some product when you’re finished. Really creative stuff, fantastic, everybody loves that. So they’re the types of finance – retail, commercial, and creative.
So, we’re going through our Property Development Process at the moment and we’re up to Part 3. Remember the key word – PROFIT. We’ve done the P, we’ve done the R, so now we’re up to the O. Now the O is ‘obtaining the approvals.’
What do we mean by approvals? Well, there’s basically 2 approvals that you’ll need to do, to do a property development. The first one to do or to gain is what we call a ‘development approval or a ‘development permit.’ Now, it might be something simple – it might be a little subdivision, it might be a splitter, it might be cutting a block of land in half, or it might for some town houses – it could be a 3 pack. Whatever it is, we have to get a development permit. Or a planning permit – it’s called all different things in different parts of the country. How do we do that? Well, once again, we rely on the experts. In the case of a subdivision, it normally could just be a consulting surveyor who could help you get that permit. In the cases of town houses, there’s probably 2 key experts there. That’s your architect, and your town planner. So the architect is responsible for the drawings, and the town planner will make sure that those drawings comply with the council’s planning scheme. So we have to get those 2 approvals before we can build anything. Before we can sub-divide the land, or before we start to build our townhouses. And that’s very important to get those.
So in order to get those, we need to appoint our consultants. So remember, we are leveraging these experts’ time and their expertise. I’ll tell you something about consultants – say an architect or a town planner – you don’t need to know how to be an architect or a town planner – those guys are brilliant. They went to University, a town planner probably for 4 years, an architect probably for 5 or 6. You know, I’ve done over $1billion worth of developments and I never went to Uni. In fact, I tried but I failed in year 1. The beautiful thing about property development is that these experts that have gone into their fields, they’ve gone out there, they’ve gone to Uni, they’ve studied, they’ve gone into private enterprise, they’ve gained lots of experience and they’ll work for you. I think that’s brilliant!
And that’s what you’re doing, you’re leveraging their time and their expertise. So during this process of obtaining approvals, this is where the key consultants really come into their own. All you have to do is coordinate. It’s brilliant! See you next time!
Hi, Bob Andersen here. So we’re going through our property development process so what do I call my profitable property process? In the last episode we did ‘P’ – P for position. This week it’s ‘R’. P, R, R for research – very important. In this we’re going to decide, we’re going to find a deal and we’re going to say is it the right deal? Should we do this deal? So it’s R for research. So that’s what we’re going to do, we’re going to find our deal.
First thing, we’re going to locate our deal. Now, we’ve already narrowed down our patch. We did that, that was the last thing in the piece. How are we going to find our deal? How are we going to find something out there? Use other people obviously – real estate agents. You might even consider using a buyer’s agent. There’s people that you can pay to go and find you a deal. So when you’ve got the deal, when it looks right, is it right? Is it the right deal? Well that’s the next bit. That’s when we’ve got to do our what we call our due diligence and our feasibility. So the due diligence, is it the right zoning? Is it the right size? Can we actually do what we want to do? Now there’s always an expert to consult. How would we know? Well, town planner would be able to help us there as well. We’ve got the deal, we’ve found the deal and it looks good. We do our due diligence, our feasibility, now that’s the numbers.
Numbers, look I can tell you, you know the level of mathematics in being a property developer? You need three, because all we’re doing is adding up, multiplying and dividing – very simple stuff but you have to know the numbers.
I spent quite a bit of time teaching people what are the right numbers – that’s the feasibility. The good thing about property development it’s unemotional. Nothing matters but the numbers. If the numbers work, it’s a deal. If the numbers don’t work, it’s not a deal, we bin it and we move on to the next one. That’s very important. The third part of it is actually the acquisition – acquiring the property. If it looks good, location is good, the due diligence comes up, the numbers come up, that’s when we acquire it. That’s normally a matter of going to contract but sometimes we may use options and so we’ve locked the deal up. We found the deal, it’s the right deal and now we’ve locked it up. That’s very important and that’s the second step in our process.
Hi, Bob Anderson again. In our last video, I talked to you about the two key skills to be a property developer. Do you remember what they were? Coordinate people and coordinate the process. The process is very simple. In fact, today and in the coming videos, I’m going to run you through the exact process that you need to go through to do a successful development. I actually have a name for my process. It’s called a Profitable Property Process (PPS) – same name as my development company in fact.
So let’s look at those letters. The key word here is ‘profit’. That’s what we want to make. Let’s go through those keywords. P for position; R for research; O obtaining approvals; F is about finance; I is about the improvements we make to the site; T the final one is the most important one – taking your profit.
Today I want to run through the first one, the P – the position. When I talk about position, I’m not talking about location, I’m talking about positioning your property development right, upfront, before you get going. Now there’s three parts to doing that: Structure, very important; next one, get your core team together and that’s very important as well and; the third one is to choose your patch. Let’s go through those.
Okay, structure. It’s very important that you get structured correctly. What do I mean by that? Well it’s the right sort of entity. To get this information, you need to talk to a good property accountant to get the right structure. Structures can vary depending on what you want to do. It could be a company, it could be a trust, it could be a trust with you as a trustee, it could be a trust with corporate trust or it could be a partnership. There’s different structures for different purposes. That’s important, get your structures right.
The next one is choose your core team. Now your core team, who’s that? If it’s something simple like a subdivision, your core team can be one person. It can be say a consulting surveyor. Let’s say you’re going to do some townhouses. Well there’s two key individuals for you, there an architect and a town planner. So you need to get those two people together.
Now the third part is choose your patch. What do I mean by that? Well I’ll tell you what not to do. If you live in a capital city, let’s say you live in Sydney, now Sydney is enormous, Melbourne is very big too. Now there’s markets within markets within markets in a big city like that. You can’t understand the different intricacies of all the different markets. There’s different price points. There’s different types of product. There’s different sizes of townhouses. There’s different sizes of blocks of land. A different sale process. The land is different value. What you need to do, is to narrow your focus down – very important. You need to do what I call is choose your patch. Now it could be where you live, somewhere you’re familiar with. What you need to do, how big is a patch? It could be just one local government area, one council area. It could be two or three suburbs. What you need to do is become a local expert in that area. It’s not hard to do. You need to understand land values in that area. What does land sell for? You need to understand like say what townhouses sell for and what type of townhouses. You need to go into the market and see product that’s for sale in the market. Get to understand, get mixing with real estate agents and you need to select your patch. That way, you’ll know when a deal is a deal. It’s very important.
In the next episode, I’m going to run through the R bit – Research. Very important.
Hello, I’m Bob Anderson. In today’s video, I’m going to take you through the reasons why you will want to get involved in property development. We’ll just be going to run through two basic skills that you’re going to need. That’s right, just two basic skills. If you don’t know them, you can learn them.
So why get involved in property development in the first place? Well obviously, we want to make money. One of the great things is there’s so much flexibility in property development. One of the great things is that we can develop property for cashflow or to build long-term wealth – and we can do both. In fact, we can do both even in the same project. Think about it this way, we need cashflow don’t we? We need cashflow for the basic commodities. You might have a mortgage, you might be paying rent, you might be paying your car off, might have kids, school fees – all that sort of stuff. We need basic commodities. But you know, with property development because of the amount of money that you can make you can go way beyond those basic needs. Cashflow, what is cashflow for? What would you do? Well, maybe a better car, a bigger house, more holidays, more free time, maybe more time to spend with your family. If you’ve got money, you’ve got power; you’ve got control. Cashflow, we need cash.
We also need to build wealth. We need to build wealth for long term. How do you do that? We have to build up assets. What we want, we want to build up a whole portfolio if you like of properties so that we can get to a point where those properties are actually feeding cashflow to us passively. You’ve got great wealth through a property portfolio and we’ve got great cash. How do we do that with property development? Well quite simply this, if we develop property and we sell it at the end; let’s say we have a parcel of land, we might develop a duplex, we might develop three townhouses. Let’s take that as an example – three townhouses. Let’s say we develop three townhouses. At the end when they finish what could we do? Well, we could sell them or we could keep them couldn’t we? In fact we’ve got more flexibility in that. We might keep one and sell two or keep two sell one. There’s quite a few combinations even on three townhouses. When we develop a property and we sell it, we make a cash profit. Sorry about that, we have to pay tax but we make a cash profit. That is cashflow. That puts cash into our pockets. What do we do with the cash? Well, whatever we like. Excess cash gives us lifestyle, it gives us a great lifestyle. Whatever that is for you, you need cash to do it. What about long term growth? We need to own property. We need to have property rented out and we need to hold it for long term capital growth. That’s how we build property. That’s how we build great wealth. Now what we do, how do we do that? We simply keep some of what we develop. This is the beauty of it. This is the flexibility. We can sell some for cash, for cashflow, and we can keep some for long term capital growth. It’s great flexibility.
When it comes to property development, there’s only two core skills. I’ll tell you what they are. We need to be able to coordinate people and coordinate the process. It’s quite simple. Many people in their normal day to day job do exactly that. You may have some people underneath you that you coordinate and you may have processes that you do in your own job, you have certain processes you have to follow to do your job effectively. It’s no different in property development – coordinate people, coordinate process. Who are we coordinating? Who are the people? We’ve got experts haven’t we? Think about it – architect, builder, there’s a couple of people, maybe real estate agent. There’s people there that we coordinate. How do you coordinate them? Well you simply need to know what do they do, how do they fit in? There’s a process, there’s a timing for things. That’s the process part. So we need to be able to coordinate the people and coordinate the process. Now there is a process in property development. The good news is it’s logical, it’s sequential.
In the next video I’m going to start taking you through the process of doing a property development and it’s very simple.
If you like the people that we coordinate, they are the experts. Now you don’t have to feel over awed by let’s say, dealing with an architect. An architect goes to university for five or six years – brilliant. So what? Well, they know what to do. You have to coordinate them. You have to have them in the process and know when to use them, when to use the architect. You have to know how to get an architect. I’ll show you all that.
That’s what you need to do. You’re coordinating people and you’re coordinating the process. It’s very logical – two core skills and we’re going to go through that process very shortly in the next video.
Hello, I’m Bob Andersen – property developer and deal maker. During the last 30 years I’ve developed over a billion dollars worth of property development projects. Thesedays, I have my property development company ‘Positive Property Strategies’, but my real buzz comes from actually educating people, and educating investors on how to create great wealth and great cash flow from property development. But why property development? There are so many strategies out there, and anything to do with property is good. Any strategy that relates to property where you can do – it’s got to be a good strategy. For me – it’s property development.
Why? Well for me, property development is at the pinnacle of all things property. That’s where the big dollars are made and that’s where you need to be if you’re going to get the absolute maximum return. Now property development – it can be a bit spooky perhaps. If you’re on the outside looking in, you might think “That’s millions of dollars, I’ve got to have so much knowledge… how can I do it?”. In this coming series of videos, I’m going to take you inside the exciting and highly lucrative world of property development and property investment. We are going to break some myths and I’m going to show you the strategies that property developers use to create great wealth for themselves. I’m going to show you how to do it. I think before we get too far, I think what I need to do is I need to kill a few myths because you can come in here from the outside with all sorts of misconceptions. You know one of these misconceptions about property development is that you need to be really wealthy to get a start. You know nothing could be further from the truth. In fact, I teach a whole range of strategies, 13 in fact, where you can get involved in property developments with either little or in some cases none of your own money. And a lot of my students are doing extremely well using these strategies – so no, you do not have to be wealthy.
What about experience? People think you need to have 5- 10 years experience and you need to have worked for a building company, you need to work for a property development company – no you don’t need heaps of experience… what you need is some knowledge; knowledge and a system to follow. And that’s what I teach in my course – a system to follow, a system anyone can adopt to be successful in property development.
Now some of you might think, “Oh I’ve got to be builder; I don’t know much about building!” You know to be a property developer; you don’t need to know about building. You know who needs to know about being a builder? The builder! You organise the builder and the builder does all the building. In fact when we’re doing a projects, I’m doing several projects at the moment – 4,5,6 story apartment blocks, and you know who I deal with? 1 person – the builder. I don’t deal with any trades, any suppliers and that’s what I love about it – leveraging those experts.
And then another thing people think about is time. They think, “Oh, I’ve got a day job, I haven’t got the time.” I can tell you that most of my students when they’re starting out have a full time day job while they do their first 1 or 2 projects. In fact I’ve got a student in Sydney, Henry, who is doing 3 projects at the moment while he has a full time job, quite a high level management job in a major Telco company and he’s doing 3 projects. And he lives in Sydney and the projects aren’t even in Sydney.
So look, money isn’t a problem. You need to some creative strategies. And during this series I’m going to go through a number of those strategies with you. Do you have to know a lot about building? No, I’ll show you how to choose builders and get the right people. Time? Leverage the time, I’ll show you how as a property developer you are actually the coordinator. You are like the puppet master coordinating other people. It’s those people who put in the expertise and the time.
I look forward to joining you again in the next video and we’ll run through the steps and the processes of how to get involved in property development.