With this text, I thee wed …

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Picture 3With this simple text message, I purchased a commercial property for $1.5 million (plus taxes and closing costs):

demo $75 and roofing $60 the rest $200 – $250 approx.

Good enough for me to close the deal!

Let me backtrack a little …

Over the past three or four weeks, I’ve been going through my numbers on developing a main road site into a high-rise condominium complex (60+ condo’s over 8 stories plus basement car-parking), but the project didn’t start that way:

It actually started as a buy-with-a-twist project that I favor so much (for good reason, I might add) …

…. the idea was to buy an unloved showroom/warehouse and rehab it into a bright, modern showroom with an excellent main-road frontage, then rent it out as a ‘buy/renovate/hold’ investment. It was only AFTER I made the decision to acquire it that we found out about the potential to rezone as multi-story.

So, let me walk you through the buy/renovate/hold scenario; you’ll be surprised [AJC: unless you’ve read this series of posts ] how LITTLE financial analysis that I do before acquiring 🙂

Step 1

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The first step is to understand what your end product is worth: to that end, I undertook EXACTLY the kind of analysis that I talk about in this post. This tells me that a showroom in this area should rent for approx. $250 per square meter (or, $23.25 per square foot) for office/showrooms in the 800 square meter (8,600 square feet) size range. It also tells me that the ‘capitalization rate’ in this area/market – at the current time – is approx. 5.5% to 6%, which is (a) not much in absolute terms, and (b) not even much when compared to prevailing interest rates.

So, now I know two things:

(i) Buying and holding a ‘ready made’ investment (i.e. something in good condition, already leased to a good tenant) ain’t gonna do much for my future financial well-being, and

(ii) Creating a ‘ready made’ investment for some other sucker … I mean, investor … could be the way to go.

Step 2

I now need to work out how much the project will cost me; which is easy, thanks to that little text:

– Purchase Price: $1,500,000

– Taxes and Closing Costs: $200,000 (approx.)

– Rehab costs; this is where that text – which was from my builder [AJC: whom, I should mention, is a trusted friend … otherwise, I would have looked for written quotes before proceeding] – comes in handy because it lays out the major costs for me:

– Demolition works – at $75,000 actually a large expense because the roof is asbestos and has been fire damaged, so needs to be entirely (and, carefully!) removed and disposed of; also, the building was formerly squash courts, so there are remnants of internal brick walls that need to be removed

– New roof – once the old roof is gone, it appears to be (surprisingly) cheaper to put up the new roof than it was to demolish the old!

– Renovations – now that we have a ‘clean’ four walls and (new) roof, $200k to $250k should be enough to render the horrible old yellow-brick exterior, put in nice large aluminum showroom windows, new plasterboard interior walls, suspend a new ceiling and associated lighting, dab a little paint on the walls, and put in some flooring (and, a little kitchen and bathroom) and we have a ‘new’ building for not much money!

[AJC: commercial renovations are generally cheaper on a per-square-foot basis than residential because the quality of finishes is lesser and there are no – or, small – kitchens and bathrooms to fit out]

Step 3

Now, I get to redo the sums:

a) I have an ‘as new’ showroom in a prime position that cost me $2,085,000 all up,

b) It provides a ‘net lettable area’ of approx. 800 square meters at $250 per square meter … we’ll have some letting, management costs out of this, but the tenants pay ‘all outgoings’, so let’s say that this nets $200 psm x 800 sm = $160,000 per year

c) This provides me with a $160k / $2,085k = 7.7% return

Step 4

Now, a 7.7% return isn’t shabby (in the local market that we are talking about); but, I could now turn around and find one of those lazy investors that we spoke about in the beginning … one of those guys who is after a low-maintenance, fully-let property and who is willing to accept a paltry 5.5% – 6% return.

They should be willing to pay me $160k / 5.5% to 6% = $2.7 mill. to $2.9 mill. or a cool $600k+ profit for not a lot of work/time on my part …

So, if I decide not to build the condo’s, my backup plan is complete 😉

Let me know if this long-winded series on real-estate has been useful to you …

Speak up!

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Picture 1Speak up, everybody … it’s important!

Take a look at the image (or scroll down to the very bottom of this page, to see the ‘live’ version) … it’s our ‘user cloud’ and reflects the quantity of recent comments by various users. It would be great to see your name on this list …

… in fact, while this blog receives its fair share of comments, it doesn’t – IMHO – receive its fair share of NEGATIVE comments.

C’mon guys, I write a controversial blog, one that flies in the face of conventional financial wisdom … don’t I? 😛

If not, I may as well shut shop …

Now, don’t get me wrong, I love positive reinforcement-style comments – the ones that let me know that I’m on the right track, BUT …

… it’s the negative comments that drive change and we should all be challenged from time to time [AJC: now, let’s not go overboard on the negative, shall we? 😉 ]

Later on in the week, I will introduce Dan, who challenges the notion that paying off your mortgage is the dumbest thing that you can do …

The end of capitalism?

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I love Michael Moore, he can make shotguns in the hands of teenagers seem like a bad thing …

… and, now he’s on to big, bad, ol’ Capitalism.

I wonder how much of the proceeds of this film he’s donating to equalize wealth across the American population? And, I wonder what he’s proposing to replace capitalism with?

If you’ve seen the movie, or have any for/against ideas of your own, let us know by dropping a comment …

An ad free blog!

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Adrian J Cartwood Esq. [AJC: Euphamism for ‘Nobody Important’]

I use a tool called ad-blocker to do exactly what the name suggests: block ads from appearing in my browser. There’s no real reason for this, other than I wanted to see how it works …

… but, it’s (hopefully) well known  by now that I don’t accept advertising, promotions, or cross-links for any products or services on this blog.

I do, of course, mention books, products and services from time to time … but, only those that I genuinely use and like, and I NEVER accept payment or join affiliate programs.

The reason is simple and two-fold:

1. A multi-millionaire can hardly be credible if he writes to earn a few extra bucks per week from advertising revenue,

[AJC: Although, this reminds me of a joke that was a huge hit at Blogger Con 2007: A blogger gets on The Apprentice, and says to The Don “You know, Mr Trump, if I were you I would be richer than you”. To which Trump raised an eyebrow and responded “How so?”. The blogger, with a totally deadpan face, said: “Well, Sir … if I were you, I would still do a little blogging on the side!”. Oh, those blogger’s conventions are such a riot! 🙁 ]

2. Even if I donated that extra few bucks to charity (I give plenty, already) YOU wouldn’t know or believe me, even if I said that’s what I was doing.

So, no solid good reasons, just the way I feel … and, others are entitled to feel totally differently … which is why I present the little owl-logo, above, just in this post, and  probably won’t promote their site by placing it in my sidebar 😉

However, what I would like to see is a ‘community service’ advertising program, where a trusted third-party places ads on your site, collects the revenue (or, maybe the spots are free community service announcements), which goes directly to a panel of trusted and worthwhile charities and/or non-profit organizations.

Anybody up to the challenge? Give me an exec. summary of your business plan!

Oops! I didn’t answer the question …

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Last week, I posted the second installment on my series about real-estate development under the ‘teaser’ headline: how much money can you make developing real-estate?

But, of course, I didn’t actually answer the question!

And, that’s simply because I don’t know …

… it depends on the project, and what you are trying to achieve.

But, I DO know two things:

1. Typically, real-estate developers work on:

– a 20% to 25% profit margin on residential real-estate projects,

– a 35% profit margin on commercial real-estate developments,

– upwards of 50% profit margin on land subdivisions.

2. I also know the EXPECTED profit margin on the two projects that I’m working on.

What that expected margin on my projects will translate into is anybody’s guess, because it depends on so many RISK FACTORS – which is why real-estate development is (in my opinion) a Making Money 201 income acceleration activity, not to be taken lightly.

But, I can share Tab 3 of my spreadsheet, which shows:

– That there’s about $2,000,000 (Australia … approx. $1.8 million US dollars) of land related costs: I estimated this as $1.5 mill for the actual purchase price of the property, plus $500k allowance for taxes, closing costs, and the necessary project permits. Obviously, I will put in better estimates for some of these costs, as they come to hand.

– I’ve assumed that the bank will lend me 60% of the total project development cost of $17.9 mill. (which includes, the land component, all the costs of consultants, permits, etc., and the building costs). I’ve since spoken to the bank and they will lend closer to 80% of the total build costs, PROVIDED that I sell enough condo’s ‘off the plan’ to cover their total debt.

– Based upon the 60% that I have used in the spreadsheet, I will either need to come up with $7,160 million of my own money (i.e. the $2 mill. that I will have already spent on the land and permits, etc. PLUS the $5.160 million ‘shortfall’ in bank funding) OR find a mezzanine lender who will lend me some of this (at inflated interest rates, naturally) OR find one or more equity partners, who will put up some of the $7+ mill. shortfall in return for a good chunk of the project profits.

– In this case, I’ve assumed that we sell the condo’s in year 3 (more likely – hopefully – to be a 2 year project) and pay back the bank and this spreadsheet assumes 10% interest rate (although, that can be easily changed), leaving $10.6 million to pay back my and/or the investors’ equity and (hopefully) leave some real profits.

– I’ve assumed that we’ve had to pay some interest at ‘preferred rates’ (read: higher interest rates) on my (and the investors’) equity, which leaves a ‘real profit’ of $892k … but, don’t forget that the preferred interest is also part of our (i.e. the investors’) profits … so, they need to be added together.

– Now, I have a management partner who is a builder (but, won’t be physically building this one), who is providing time and expertise in return for 30% of the profits of the venture. He has a sweet deal: not risk (he provides NO funding and only his payment is ‘at risk’) and 30% of the upside. In my next life, I want to come back as him 😉

– According to this spreadsheet, I make 32% on my money. Not a shabby return, and pretty much in line with the estimates that I provided above.

The good news is that the project has actually become much more profitable than the early version that I am providing here, but since it’s merely an estimate – as all budgets are – I’m not holding my breath 🙂

I should point out that one of my readers has kindly provided a more sophisticated analysis of the returns that you may wish to substitute in your version of the spreadsheet, if you are going to use it; Jonathan says:

On tab “Proforma”, shouldn’t the annual return equation in cell E34 be something like =(1+E31/E5)^(1/3)-1
It looks like you have =(+E31/E5)^1/3
This drops the return from 32% down to 25%, but I do believe 25% on 2mil over three years comes to 3.9mill (2mill + 1.9mill)

Thanks, Jonathan! This tab of the spreadsheet was actually created by a consultant friend of mine who specializes in this type of thing, so I didn’t really look that closely; still, I will be keen to hear what other readers think?

How did you answer?

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Last week, I asked the question: “does more money give you more security or more confidence?”

The results, from a reasonably representative sample of readers, was overwhemingly in favor of the statement: “more money gives me more security”.

Interestingly, this apparently says something about you …

… you see, most entrepreneurs would say that more money gives them more confidence!

But, why?!

I’m not a psychologist, so I can’t tell you, but I do think it helps to explain why entrepreneurs tend to become ‘serial entrepreneurs’ …. one success emboldens them to go for another.

We all know (by now) that once you reach your Number, you should STOP. Yet, we don’t always do that, do we?

[AJC: if you’ve been reading my recent articles on property development, you’ll know exactly what I mean 😉 ]

Work on your business?

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Picture 1Yesterday, I told you (yet again) about this book … the book that others claim to be “the most important business book” that they’ve ever read.

Well, I claim it to be so, too!

Let me revisit one of the key tenets of this book – indeed, a phrase that has been often (mis)used by all and sundry:

Work on your business, not in your business!

Why misused?

Because I think that most people use it, but don’t really understand what it means to really work on your business, rather than in it …

… to understand what this truly means, let me give you a personal example:

When I started my second business (the first having being ‘handed to me’ in a rather crumpled heap … but, that’s another story), I was not at all qualified to do the ‘work’ of the business, which was essentially technical in nature, yet I taught myself to handle the paralegal files that we were handling at that time because my attorney was too slow.

This became a blessing – because, it meant that I could reduce costs by insourcing a lot of the previously outsourced paralegal work which was the essential component of the business model – and a curse, because I was the person handling all files, initially.

Even when I started to hire staff, all ‘complicated’ files – or, all files over a certain $$$ value – would cross my desk, because I wanted to make sure they were “done right” … you see, I had started the business, so I wanted to believe that I was also the best technician.

But, of course, that wasn’t my job …. but, at the the time, I was blinded to the fact that every hour that I spent handling technical issues was an hour that I was NOT running my business!

Eventually, as happens in so many businesses (thank goodness!) my operations manager simply stopped his people referring those files – any files – to me; he didn’t ask, he just stopped sending them to me.

Guess what?

Our technical metrics didn’t fall in a heap … the uber-technician [AJC: obviously, only in my mind!] was not as essential as he thought he was …  and, I had more time to concentrate on my real job: CEO i.e. running the business.

The business grew!

Lesson One learned: I wasn’t essential to the technical operation of the business.

But, as CEO – now, totally focused on marketing, finance, and other high-falutin’ business matters – surely, I was key to the successful day-to-day operations of the business?

Seems logical, until I signed the contract for the USA branch of the business …

… since this would be about three times the size of the Australian operation, I decided that I needed to relocate to the USA to personally manage my ‘global operations’ (well, three countries: Australia, New Zealand, and now the USA) from there.

That left me a hole to fill: I needed to appoint a replacement CEO of my Australian operations.

After a long search, I found somebody, who I appointed and trained over a period of months …. and who promptly resigned for a “better opportunity” [read: more money] just 6 weeks before I was now contractually-bound to relocate to the USA to commence operations!

Think about it: I now had only 6 weeks to find and train a CEO who could replace me in a job where I – like every owner/CEO – believed that I was totally indispensable!

How would this be possible [AJC: queue to apocalyptic visions of imminent business failure]?!

Yet, somehow, I found the ‘new guy’ and gave him all of two weeks training before I left, leaving him with:

– some last minute instructions (which he subsequently, all but ignored),

– my direct phone line in the USA (which he NEVER used), and

– my silent prayers that he wouldn’t run my life’s work into the ground too quickly.

Here is where I learned my ‘second lesson of indispensabilty’: not only did he NOT run the business into the ground, he saved a client that I had all but lost, maintained excellent relationships with my largest existing clients, signed a major strategic new contract, etc., etc. …. he proceeded to double the business over the next couple of years.

In fact, to this day, he is still successfully running the Australian operations for the new owners!

Lesson Two learned: a good business runs well under the watchful eye of it’s owner/CEO … a GREAT business runs even better without him.

You see, anybody [AJC: clearly!] with suitable training and experience can do the technical and managerial work of pretty much any business …

[AJC: if not, you don’t have a business …. you have a JOB]

… it just needs good systems to be put in place so that the business can run on ‘auto pilot’ while you – as the entrepreneur behind the business – do the ONLY job that you NEED to do:

Develop and and promote the strategic vision of the business.

Any other work that you do decide to take on is just so that you can feel busy … if that’s what makes you happy, keep doing it.

Me?

I prefer to make money 😉

The BEST way to make money …

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Recently, I’ve been talking about how to make money in property development, but that’s not the only way to make money … it’s not even the BEST way to make money.

So, what IS the best way to make money?

For that, we need to refer back to Michael Masterson’s table from his book, 7 years to 7 figures [AJC: That’s nowhere near $7 million in 7 years, but it’ll have to do 😉 ]:

Required Compound              Investments

Growth Rate                             Required

4%                                                  CD’s

8%                                           Index Funds

15%                                              Stocks

30%                            Real-Estate together with Stocks

45%              Real-Estate together with Stocks and Small Businesses

50%+                           Start Your Own Business

… from this, it’s clear that starting your business is the way to go IF it’s the Big Bucks that you are after.

But, you don’t have to start off big to end up making it big: I had no idea that I was going to end up with $7 million in 7 years when I started my business (in fact, it was only until a few years AFTER I started the business that I found my Life’s Purpose, hence my Number) … just take it from Pierre Omidyar, the billionaire-founder of eBay:

I started eBay as an experiment, as a side hobby basically, while I had my day job

– It’s what my son is doing with his eBay business (and, now with his New Online Venture … which I’ll share, once he gets it off the ground)

– It’s what my Web 2.0 partners did with our first venture (they’ve since left their full-time jobs to start their own software consulting/development company)

And, it’s what YOU should do, if you want to start a business with the least amount of risk!