Monthly Archives: September 2009

Can your real-estate development project make money?

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developmentLast week, I told you that I’ve been out shopping for commercial real-estate and ended up with not one, but two, high rise condo/office development lots …

[AJC: for those of you who have been keeping up with this blog, you will know that I feel that development is really a MM201 activity, whereas I was really out shopping for MM301 buy/hold commercial real-estate ‘with a twist’ – i.e. something I can rehab or otherwise add value to before letting it out – instead, I kind of just ‘backed into’ these deals by accident … and, my entrepreneurial instinct grabbed hold and took over 😉 ]

… and, this week I want to share ‘the numbers’ with you i.e. what do I think of the deal that just one of these properties offers?

It’s best if you start by downloading my ‘project feasibility spreadsheet’ – the actual one that I used to discuss with my project manager (who will be an equity partner) and accountant (who will earn some hefty fees) – from the new Real Estate Group/forum at ShareYourNumber.com by clicking on this link:

http://shareyournumber.ning.com/group/realestateinvestorsgroup/forum/attachment/download?id=2494516%3AUploadedFi38%3A5283

If you are having trouble, then try clinking on this image to go straight to the Real Estate Forum, and click on the actual link (that I’ve highlighted in blue for you in this image):

Picture 2

I’ve tested the link and it works for me … but, if you are STILL having trouble, e-mail me [ajc @ 7million7years.com] 🙂

Got the spreadsheet open, now?

Great, let’s get started with the first tab, labeled “Assumptions”:

– I bought the piece of land for $1.5 million (plus closing costs)

– There will be some ancillary costs (that we will go into later) to get permits to demolish and rebuild etc.

– But, this tab of the spreadsheet is more focused on getting down some of the key estimates that we will need in order to do a ‘back of the envelope’ analysis that should be enough to make the ‘go / no go’ decision on the land purchase, since this is exactly what I did with this exact same spreadsheet:

1. Any good multi-level builder worth his salt will be able to give you a ‘rule of thumb’ that says something like “a basement (for parking etc.) will cost you $1,000,000 for the first level, and $500,000 for each level thereafter” OR they may quote a ‘per square foot’ rate, like $100 psf to build it. If you can’t find a builder who will give you this for your kind of project, you may need to pay a GOOD quantity surveyor to do it for you. This is worth while for any reasonable size development project (e.g. quadraplex and upwards).

[AJC: you will need to know that this is an Australian project so you will need to multiply all the Australian dollar figures by 87 cents (i.e. multiply by 0.87) if you really want to convert this example spreadsheet to USA dollars – but, I don’t think that’s really necessary … what I DO think you should do is convert the ‘psm’ figures i.e. the areas given in ‘per square meter’ to ‘per square foot’ by multiplying or dividing by 10.75, as necessary … don’t worry, I’ll give you an example or two, as we go along]

2. To help me work out how large the basement needs to be, I need to find out from the municipal council how may car parking spaces that I need to allow for e.g. office space might be “one space for every 3 workers” whilst apartments and condos may be “one for every 2 bedroom apartment” or “one for every 20 square meters [215 square feet]”.

3. It’s critical that the builder or quantity surveyor is able to provide building costs, such as “it will cost roughly $1,500 dollars psm [$139.50 psf] to build out your office space and $2,500 psm to build the residential areas, depending on the quality of fittings that you want … this will be down to the last tap and door knob in the apartments/condos and the suspended ceilings and commercial-grade carpet in the office areas”.

3. You also need to know how large you want to make your apartments e.g. “do you want large, luxury 2 bedroom condos of about 70 square meters (including 4 to 8 square meters of balcony space) OR do you want smaller, urban-style condos of 35 square meters plus 4 square meter of balcony for your 1 bedroom apartments and 55 square meter, plus balcony, for your 2 bedroom apartments?”

[Hint: usually smaller apartments sell just as well as larger ones “off the plan”, but larger ones command a better price once completed; and smaller 2 bedroom apartments provide the greatest ‘return per square meter’ because you are still only fitting out one kitchen and bathroom; a 50/50 mix of 1 and 2 bedroom apartments usually works well … but, this can vary by location, so get EXCELLENT advice before you buy your land!]

4. Now, if you can’t be the expert on buying and building, these rules of thumb will be extremely critical – if you can find them and feel confident about them – but, you can and MUST become an expert in selling your condos … i.e research, research, research the areas you are interested in, how the condos are built/fitted out/marketed and how much YOU think they will sell for … get a good Realtor’s advice, too, and double-check it with one or two other Realtors.

5. As a ‘double-check’, you can try and run a spreadsheet (and/or ask your Realtor/s) how much condos are selling for ‘per square meter’ [or, per square foot], but this is a less critical figure.

6. If you have run the analysis that I showed you in this post, you should already know for yourself how much your office space (if you are building this as well as condos, as we are on the first two levels of this project) is renting for per square meter, and you can again double-check with a good Realtor or two who specializes in office rentals and sales (while you’re at it, ask him for the current capitalization rates for office rentals v sales …. we’ll get back to this in the next post in this series).

[AJC: you should have also already done this really simple analysis for the parcel of undeveloped land before you even think about buying it!]

Once you have these few figures (and, really, it’s not as hard as it might seem to get this stuff), you’ll be ready to move on to the exciting part:

How much money will this project make me?!

… which, I will answer in the next post in this series 😉

How to fund your business expansion …

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Profit-And-LossTake Mike’s point about raising business capital, from this recent post:

Investment money [for your business] should come from cash flow and not bank loans

I happen to agree, mainly because business funding is hard to come by and can be very expensive …

… when, the BEST place to find the capital to run and grow your business is from the gap between:

a. Your Sales, and

b. Your Costs.

This is nominally called PROFIT, but that is dangerous because it implies that you can spend it.

Remember my friend’s friend who had a business making $3 million a year? Well:

1. He gave Uncle Sam one third, and

2. He saved one third, and

3. He spent one third.

Which sounded totally logical until I realized that his ‘cost of living’ was $1 million per year and the Rule of 20 says that he would need at least $20 million in passive investments to justify anywhere near that sort of spending level!

But, a business generating $3 million in earnings a year – as we now know – is usually worth 3 to 5 times it’s annual earnings AFTER TAX, which means his business is ‘only’ worth $6 million to $10 million … a huge amount, but nowhere near enough to justify blowing $1 million a year.

Then there’s still those savings, which (at 10% return) would generate the ‘missing’ $10 million to $14 million (i.e. to reach his $20 mill. Number) in, say, 8 to 10 years (of course, by then he needs $30 million because of inflation, which would delay things by another couple of years or so).

So, what to do with those profits?

1. Pay Uncle Sam one third, and

2. Save one third, and

3. Double the remaining third; multiply it by 3 to 5; then, divide the answer by 20 … and spend that [AJC: enjoy!], and

4. Add the remainder to 2.

Now, what to do with 4. (i.e. the savings generated by 3. plus 2.)?

Well, I would use it to:

a. expand the business, and

b. invest outside of the business

… probably in roughly equal measure – with any excess amounts (i.e. that the business doesn’t need in the foreseeable future) also moved into ‘passive investments’ outside of the business.

If you do this, Mike, you will:

i) Live reasonably safely and well, and

ii) Build your Perpetual Money Machine, and

ii) Probably won’t need the bank to fund your (international?) expansion

… at least, that’s how it all worked out for me 🙂

Not all is as it seems …

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This video has nothing to do with money per se other than (maybe) helping you realize that IF you want to be successful, you have to be able to see things that others can’t and learn to differentiate between the real and the unreal.

If you want to find the ‘secret’ in the above video, then you really need to watch this version, then watch the first one again:

Maybe, it’s all the people giving you common wisdom financial advice who have everything backwards?

What’s behind Door Number 2?

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Picture 1There’s nothing wrong with being debt free …

… which seems like I am flipping, when I should be flopping, about debt. Until you realize that I can just as equally claim that there’s nothing wrong with being in debt, either.

You see, it depends.

In fact, what I contend is that the majority of my readers NEED to be in debt … but, that’s not the same as advocating debt for debt’s sake.

Confused?

Let me explain by introducing you to a new reader, Lee, who asks:

I’ve been reading about this 20% rule and it does make sense, but after what happened with real estate over the past 18 months do you still think this is a good approach? Right now, I have about 55% equity in my home. To get my home to only be 20% of my networth I would need to refinance it to 80% LTV. I have a pretty low rate (4.625%) and only have 9 years 8 months left on my mortgage. Would you still recommend someone in my situation refinancing?

After a lot of confusing to’ing and fro’ing [AJC: you can go pack to that post and read all of the comments … in fact. I would encourage it, because this is one of my Top 3 most widely read posts], I asked Lee what I think are the critical questions:

1. Do you have a Date in mind, when you REALLY want (nay, NEED) to stop working so that you finally have time to live your Life’s Purpose?

2. Do you have a Number in mind, that represents how much you need in your nest egg (be that the bank, ‘passive’ investments, your house – although, you may need to think how you plan to access those funds to live from – etc.)?

If not, I suggest that’s your first task: think about your Number and Date. Already (or just) got them?! Good … now;

3. Will your current financial plans and strategies get you to your Number by your Date?

To which Lee responded:

As far as retiring by no later than 55, yes my current path will easily provide for that. If I choose to the pursue the passion I mentioned earlier, then that would impact the amount of money I would need in the short term, but would not affect my long term retirement goals.

If your current financial strategy is working for you – i.e. in that you are happy with your current work and financial arrangement, and believe that you can achieve your Number by your Date – why would you even think about changing anything, Lee?!

So, let me go back and clear up the confusion about debt for my other readers:

– If you can achieve your Number by your Date WITHOUT the use of debt then PLEASE do so,

– Otherwise, what choice do you have but the wise application of debt?

… I just happen to believe that for the vast majority of my readers, Door # 2 (‘wise application of debt’) is the one that holds their prize 🙂

I’ve been out shopping!

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high riseYes, I have been out shopping …

… last week I bought not one, but two, commercial properties:

– One is a warehouse/showroom that needs extensive renovation, and

– The other is a quadraplex (four apartments on one title/deed).

The first one (the warehouse) is one of those properties that you drive past for years and years and think to yourself: “Wouldn’t it be great to own that property … one day?”

Well, I happened to drive past ‘one day’ and a For Sale sign was out front!

Naturally, I immediately called the real estate agent listed and commenced negotiations … this is one of the advantages of having money 😉

He sent me a brochure showing the property listed at $1.2 million … the negotiations dragged on for a while so I asked a friend of mine who specializes in commercial real estate to step in and he promptly closed the deal for me …

… at $1.287 million!

Great negotiator, huh?

As it happens, I was not too upset about the price, because something strange happened between the time of first looking at the property and the time of signing the contract (which I did last week):

The property is basically an under-loved property on one of the main boulevards leading into the downtown area … not a hip area by a long-shot but a good area nonetheless (close to a railway station, shops, cafes, and with fantastic main street exposure) … all-in-all, exactly what I was looking for.

My plan WAS to simply rehab it: render the horrible yellow/orange bricks (i.e. cover then with concrete mixture to make a smooth ‘concrete look’ that can be painted)  and put in large, modern aluminum windows, a new roof, and fit out a new interior (probably $500k all up) then rent it out, to give myself a nice, steady 7% return with even nicer depreciation benefits (over all of the renovations) for the first 5 years.

But, my architect found something interesting: you see this property sits right next to an office tower with 8 floors, which was built over 20 years ago – this building is the ONLY building higher than 2 or 3 floors for miles in either direction …

… until now. My architect found out that the council is suddenly willing to rezone three or four properties around that tall building to allow building to the same height as that relatively tall building next door … my building included!

So now, I am sitting on one the the very few properties that may allow us to build 50 or so condo’s plus some office space, all in an up and coming neighborhood that will have scarcity of such condo’s because that’s all the council will allow!

Needless to say that I am going to get plans drawn up and council permits, then I will decide whether to:

a. sell the property to a developer with plans and permits, which I am sure will net me $1 million+ profit in a mere year or so, or

b. do the development myself.

Next week, I will run you through the numbers …

Not a fan?

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GREEDY-BANKIt’s fairly safe to say that Mike is NOT a fan:

I happened to stumble on this site doing some research on debt free. No wonder I’ve never heard of this site or even the radio show apparently associated with it. Anyone who thinks that living debt free is the wrong thing to do needs to have their head examined. That’s like saying Ohh we shouldnt live debt free we’re on the planet to make banks rich on our hard earned money. Nice mentality you got there. It just doesn’t hold any water. The question you should be asking yourself is would you rather live be constantly paying out your hard earned cash to banks making money off you not paying for your own assets or should you own your assets outright and control a greater portion of your hard earned cash? The choice IS obvious.

But, what of Mike’s aversion to paying the banks interest?

I look at banks a little differently to those like Mike who are averse to paying their interest, fees and charges …

… sure, I don’t like how they can mount up. And, I don’t like how the banks can make ‘super profits’ in good times and seem to get away with it. And, I don’t like those snooty tellers who look over their glasses at you, when you want to make a withdrawal, like they’re doing you some sort of favor by letting you have your money 😉

But, I can put that aside, when I realize that here is a partner who is willing to put up some – or even most (if it’s a real-estate transaction) of the capital to fund my latest entrepreneurial or investment endeavor, yet they want virtually no say in how I manage that business / investment once they have put their money in … and, I even get virtually 100% control over all of the daily management decisions and even, pretty much make the ‘sell’ decision on my own.

And, all they want is a few % per year return on the money that they put in … no share of the speculative upside!

Where else can you find a partner like that?

So, Mike, I ask you: what’s your objective?

– To get rich(er) quick(er)?

– Or is it to avoid putting any of your money into somebody else’s pocket?

I don’t mind which path you choose, as long as it gets you to your financial objective i.e. Your Number by Your Date …

… if not, you will do well in life – not just your financial life – to stop obsessing about what the other guy might be getting out of the deal, and start obsessing about what you might be getting out of that same deal 🙂

I wonder what our readers think? Tell us about your good/bad experiences with bank funding …

The Instant IPO

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Money AngelRecently, I pointed all of the difficulties of the Entrepreneur’s Holy Grail – the IPO [cue angels] …

… for all these reasons – and more – I didn’t IPO my businesses … but, I found something almost as good:

7million7years Patented Instant IPO

It works like this:

Step 1

Make sure that your company is profitable and has a reasonable track record of growing profits. This should value your company at 3 to 5 times earnings (i.e. annual net profit after tax)

Step 2

Find a Public Company in a related industry that is trading at least 12+ times its earnings after tax – the more the better, for you!

Step 3

Sell your company to that company and negotiate a mutually agreeable split of the difference between your ‘private value’ and their ‘public value’!

Basically, what you are doing is using the public company’s stock to “IPO” your own company:

You see, when you are on the outside, your company is worth only 3 to 5 times its profit to a buyer, but as soon as the other company buys you and ‘absorbs’ your profit into their profit stream, that profit is suddenly (well, after a relatively short ‘disruption’ period where the market has to get used to the sudden change in profitability of the public company) ‘worth’ 12+ times itself.

[Hint: The smaller you are relative to the size of the acquiring company the smaller the disruption … on the other hand, the smaller you are, the less attractive your cashflow may be to them, so it helps if you also have some ‘secret sauce’ – i.e. Intellectual Property – to make you look that much more attractive to the ‘big end of town’]

The company that has acquired you has just made a huge windfall by using the difference between how private companies are valued and how they – the public company – are valued to their advantage … in fact, there are plenty of public companies that do this as a matter of course. Sometimes, it even need only be only an ideal coincidence that your company actually adds any other business synergy to theirs!

But, when you sell to them, you will find – if you are a smart negotiator – that they have gone to all the expense and trouble of the IPO process for you 🙂

Let’s look at an example: say that your company produces $1,000,000 net profit each year, and you have found a likely candidate public company. You have evaluated the market and believe that your business would sell for $4 million in the private sale market.

But, you realize that your widgets complement those of Acme Widgets Inc. very nicely. Acme’s stock is currently trading at a P/E of 12.

You approach the CEO of Acme Widgets Inc. [AJC: actually, if you’re VERY smart, you’ll engineer it so that he approaches YOU 😉 ], but play reasonably ‘hard to get’.

The CEO realizes that:

a) Your widgets do indeed fill a hole in his product range that will cost his capital (and, short term profits) to fill in house, and

b) Your $1 mill. profit adds $12 Mill. to his company’s value (i.e. his stock price will eventually go up by about $12 mill. when the value of all the stock out there is totaled), and

c) He happens to hold a nice bundle of stock and options set to vest in 18 months or so.

So, what is worth $4 million to you, is worth $12 million to him … how much would you sell for?

The Myth of Multiple Income Streams …

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thread

For a while now the web has been a’twitter with ebooks spouting the idea of Multiple Income Streams …

… literally, here is an example from Twitter:

Multiple Income Streams is the ONLY way to Achieve Extreme Wealth …

I’m not so sure that was true for me – hence it can’t be ONLY 😉

But, is it true even if we substitute ‘usually’ for ‘only’?

Again, I don’t think so … in fact, I feel that most people achieve a very high level of INCOME from just one of their ‘multiple streams of income’ (that is, even if they have more than one) … for me, it was very much an 80/20 thing:

– One of my businesses produced $1 million a year EBITDA (earnings before bullsh*t),

– The other produced $200k a year (still does).

Now, for those who are astute, you will see that I twisted the original statement from ‘wealth’ to ‘income’ … and, as we all know by now:

Income [does not equal] Wealth

So, this is what I think: you don’t necessarily need multiple streams of income, but you DO need a place to store the income earned – and, it’s the wealth that “passively” builds up there that creates the true wealth (at least, it did for me i.e. my businesses fueled my property investments, and THAT’S what took me to my first $7 million) – and that more equates to my Perpetual Money Machine concept than it does to the usually espoused Multiple Income Streams Fallacy … they may seem the same, but they are very different:

Build your Perpetual Money Machine and prosper! 🙂