Oops! I didn’t answer the question …

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?

Picture 2

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?

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.


I prefer to make money 😉

The BEST way to make money …

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!

How much money can you make developing real-estate?

riskyReal-estate development is a risky BUSINESS, but it can be very lucrative and – provided the market doesn’t turn on you, hence the risk – you can predetermine HOW MUCH money you are likely to make and WHEN you can expect to have it sitting in the bank. All in all, not a bad MM201 activity … one that scales from small projects to large ones.

Speaking of which, my projects happen to be large ones but the methodology to analyze them is pretty much independent of size … only the number of zeros will change 😉

So, whether you are building a single dwelling, a quadraplex, an office, or a 8 to 12 story apartment complex (or two, as I am doing), you will still need to collect a few key numbers – that I ran through with you in last week’s post – from a reputable Realtor and an equally reputable builder:

– The cost to buy the land

– The estimated cost per square foot to build the size /type/quality of building(s) that you are planning to erect

– The expected sale price for finished residential apartments/condos/houses

– The expected rental rates – and current capitalization rates – for any commercial space (e.g. office, retail, warehouse) that you are planning on building

Of course, you need to have a pretty clear idea of what you are building – and, their sizes – before you can really do this properly.

If you have all that, then it’s time to move to the second tab of the spreadsheet [AJC: I recommend that you spend a few minutes double-clicking on each cell to see which ones require you to insert a number, and which ones are formulas that should feel free to use or adapt for your purposes]:

– Your site may be a certain size, but you will need an architect, designer, draftsman, or town-planning consultant to tell you how many buildings / floors you can put on the site … it’s this buildable area that we are most interested in.

– I have allowed $500k for consultants’ costs (e.g. survey, plans, etc, etc.) for my large project, but it’s much better if you can call the various experts that you need and get an idea of their likely charges up front

– At this stage, I’m not building in interest cost … that will come in the next tab

– Most of this tab of the spreadsheet is self-explanatory [AJC: just drop a comment, below, with any questions!] and, completes itself, IF you have researched those numbers that I asked you to get.

Don’t get overly excited about the $7 million ‘paper profit’, as next week we’ll look at how to build in the interest component [AJC: don’t worry, the profits will still remain in ‘nose bleed’ territory IF everything goes according to plan] …

Rent to Buy schemes …

Picture 1These exist all over the world …

… the idea for aspiring home owners is appealing; rent a home for a few years, and a portion of your rent is applied towards your eventual – if you want to – purchase of the house:

– If you decide that you don’t want the house, then simply vacate when your lease runs out, just like any other rental, or

– if you do decide to go ahead and buy, then a portion of the rents paid to date go towards your purchase of the house

… you may even have built up enough in ‘rental credits’ to count as a deposit, then all you need to do is go cap-in-hand to the bank for a mortgage for the balance.

Appealing? Certainly.

But, watch out for the sharks – and, there are plenty, as consumer advocate, Neil Jenman points out:

Here is a simple fact: ‘Rent to Buy’ schemes are dangerous scams. They are designed by predators who prey on the poor. They are a complete rip-off and should be outlawed.

Like all slick scams, ‘Rent to Buy’ schemes are so seductive. The pitch goes like this: We are here to help you. We have a unique system. If the banks reject you, we can help you.

And on and on and on it goes. One twisted truth after another. The straight truth, however, goes as follows. Victims of these scams (many of whom do not even realise they are victims until it’s too late) are ripped off in three ways.

First, they are charged an exorbitant amount of rent. Astonishingly, [one ‘rent to buy’ promoter] openly admitted yesterday that his rents are “double” the market rent.

Second, as well as the exorbitant rent, the “buyers” (victims) pay an exorbitant price for the home. The purchase price being asked for a home [that we recently looked at] was $380,000.   [Yet a] local agent estimated its real value at between $250,000 and $270,000.

So, on top of the double rent, the victims are also paying at least $100,000 too much for the home.

From the moment they sign up … they have instant negative equity (meaning they owe at least $100,000 more than their home is worth).

The third rip-off with the ‘Rent to Buy’ schemes is that the buyers are not the owners of the homes they are buying. No, the homes remain in the name of the rogues running the scams. Quite simply, this means that if the buyers pay the rogues and the rogues go broke or their companies collapse (as many do) then the buyers – who have done nothing wrong – are instantly evicted.

These schemes (sorry, scams) are just a variation of the notorious wrap schemes which were once promoted by get-rich-quick spruikers

So, the message is clear: be very aware of both the market prices for rentals and sales of similar homes before you even think about entering into such an arrangement.

On the other hand, let’s say that you do have a property that you want to rent out; offering ‘rent to buy’ for your prospective tenants can be an interesting option to ‘buy and hold for you’ …

… let’s say that you have purchased a new condo ‘off the plan’ and want to take advantage of the depreciation allowances (which are are strongest in the first 5 years), but don’t want the hassles of tenants not looking after the property and having to rent the property every 12 months or so to a new tenant.

In this case, offering rent to buy can be an interesting option; you could:

1. Find a young professional – or, young couple – with good credit and good job prospects,

2. Offer them market rent (towards the top of the range for your property type and area),

3. Give them a 5 year lease, with 12 month options (which means that they are no worse off than if they signed a simple 12 month lease at market rates)

4. After 5 years [AJC: or, at each lease renewal after Year X], credit a % of their rent towards the purchase of the house.

Now, think about this:

If your tenant stays for a number of years, and looks after the condo as though it will be their own, you won’t need a property manager, nor will you spend nearly as much in repairs and maintenance, nor will you suffer the usual 5% to 10% expected vacancy rate – and, you may be able to get away with something approaching ‘top rent’ (but, still within the market) for your area.

Now, isn’t that worth crediting 10% to 20% of the total rent payments towards their purchase if they stay the full 5 years?

Then, you get to sell the condo to them at market rates (as assessed by a licensed appraiser) LESS (say) another 5% to 10% (after all, you don’t need to spend any time and money of Realtor commissions, marketing, advertising, etc. (and, perhaps, have the property vacant while you do so).

The downside?

Well, what if they don’t stay the full 5 years? You still get top market rents … how can THAT be a bad thing?

How about property condition? Well, one of the clauses should stipulate that the tenant shares in the cost of any ‘wear and tear’ to bring the property back to selling condition (this can come out of the ‘deposit fund’ that you have been building up for them), because you still need it to appraise well. And, the tenant remains solely responsible for any UNFAIR wear and tear (e.g. damage that they have caused).

Sweet deal for both you and the renter/purchaser?

You betcha’ … IF you are ethical, and careful in your tenant / potential purchaser selection. Don’t forget, you get to take up all of those juicy depreciation allowances, then sell just in time to do it all over again … just make you cover off all of the bases with a good REAL-ESTATE SPECIALIST attorney and tax advisor 😉

How to get REALLY rich … from a guy who REALLY knows!

I can tell you how to get rich(er) quick(er) because that’s what I did: I went from $30k in debt to over $7 million in the bank in just 7 years …

… but, even that won’t be enough for some of you.

If you want $50 million or more, then you need to learn from a guy who’s made hundreds of millions of dollars – and, this crazy-looking dude is just the guy for you!

He is, in fact, Felix Dennis the global publishing powerhouse behind such titles as Maxim, and he has written a book (actually, a couple of years ago now) that is a real rip-snorter .. especially if you want to get rich in business.

To prove that he’s just a little bit (a lot?) eccentric, in this video he reads a poem that you should take the time to listen to EVERY SINGLE WORD of …very carefully!

There’s gold in them th’ar stanzas 🙂

Is a fan?

Mike  – the one who actually seems to like my blog – makes a good point in response to the other Mike, who doesn’t:

I’ve never taken out a loan from a bank for my personal finances. Bought every car 100% cash, and bought my first home (condo) 100% cash back in 2005…

On the businesses I’ve run there have been bank loans but I like to get things to where cash flow is coming in and no need to take out a loan.

Unless your business is very capital intensive I’d argue that investment money should come from cash flow and not bank loans. Granted, if you want to expand quickly you need access to capital but who faces this in today’s market?

Now, I’ve been recently told that the true meaning of the word ‘ambivalence’ isn’t a lack of care, but that you care equally strongly about two or more choices; therefore, I can claim that I am ambivalent about bank debt … let me explain by sharing my response to Mike:

1. I have a finance company that uses 90% borrowed money (it has to!),

2. I happily borrow 65%+ for my commercial property purchases,

3. I have zero debt on my houses ($6m+ between them).

So, I can make an argument for anywhere between 0% and 100% leverage (e.g. bank funding) :P

… and, I forgot to mention to Mike that my residential properties are funded 75%+.

Why don’t I pay down the properties now that I have the cash?

Well, if I was truly in Making Money 301 (wealth preservation) I probably would or should, but I have thrown myself back in to Making Money 201 (wealth creation) by making the property development site purchases that I mentioned in this post, last week. If I didn’t preserve my cash (i.e. by NOT paying down debt), then there’s little chance that I could complete these developments.