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Hitting Brick Walls: the lessons that could save your next development

Hitting Brick Walls: the lessons that could save your next development

By Geoff Doidge of the Reno Kings

Have you ever had one of those sites where the seemingly simplest of things can cause you grief? I have a number of times, from cranky neighbours to misplaced fences and more recently and more importantly $600,000 trees and impossible Council car parking requests in a recent D.A. (Development Application)!

Let me tell you a little about the development first.

The property had 5 twists!

I had proposed a development on this fantastic site that I had bought. It was a great buy and had multiple options:

  1. It was a development site for units
  2. It was two lots and no Demolition Control, so I could demolish the house and split the block
  3. It was sold as a 2 bedder... and I found/created 4. What a winner!
  4. It was a renovator
  5. It was in a growing ‘niche’ market.

In 3 weeks, using the Reno Kings strategies, we renovated and increased the number of bedrooms, which brought me in much more rent while I held and decided on my next option to add value.

As any recent Reno Kings' Workshop attendee knows, I have a strategy of creating as many rental incomes on a site as possible and then holding the site, and that is exactly what I proposed here.

At Developing for Profit © we will be discussing development strategies, setting up these strategies and what to look for in a development site.
 

The 5 key questions

Before I purchased the property I went to my town planner with 5 key questions. These are 5 questions that I ask whenever I buy any property I think could be suitable for development. In fact, these days I even ask when it isn’t a development site. The number one thing to note here is not the questions that I ask, but who I go to: my town planner.

I do not ask the real estate agent – they aren’t qualified to tell me and they are working for the vendor!

I do not ask council – they will tell me what the rules say on development, not what rules can be negotiated!

And I don’t ask my builder – he can tell what the cost to develop is, but not what I can develop!

Everyone should have their ‘army’, a team that they can call upon to ask questions when buying a property or proposing a development. Learn more about your army, their role and when to use them at Developing for Profit.
 

The $600,000 Madagascan Tree

Everything came out rosy and I moved ahead with the purchase and ahead with my plans. The application was submitted and I hit my first brick wall. It was in the shape of a big tree! Apparently it had to stay, and by it staying I had to keep clear of its canopy and root system, which meant my development area just got smaller. Here’s the catch though, it wasn’t on my property! It wasn’t even on council’s land... it was on my neighbour’s block! Wow! You learn something every day. Who would have thought someone else’s tree could cause so many problems.

The consequence of the tree was that by not being able to build near its canopy I would immediately lose two units. At $300k each, my development had just lost $600k! That is one expensive tree!

Anyway, long story short, my neighbour ended up removing the tree due to damage it was doing to his own property, but I learnt a valuable lesson. Here was a tree, not on my property, not on any registers for protection and not even native to Australia and it was going to cost me two units. Do you have a development site that may be affected like this? Forewarned is forearmed.

Experienced Town Planner Shane Smith will be running through a list of development ‘slowers’ and development ‘stoppers’ at Developing for Profit.
 

Two car parks instead of one unit

Then I hit that brick wall for a second time. I had been told by my Architect that I required 1 car park per unit, which was great news. It meant I could fit 10 units on the site, one unit being on ground level with a private courtyard. I based my design around this and submitted my plans. In the same correspondence from council about the tree I get feedback that I actually require 12 car parks.

Who was I to question this? I rang my ‘very busy’ town planner, he said yes, that is right, nothing I can do! This is going to cost me a fortune! So I spoke to my architect, which did not go down too well. ‘Ah Geoff’, came the response, ‘we have no room on site for two more cars, the only way around it is to remove the ground floor unit’.

First a tree that wanted two of my units and now 2 car parks that wants one of them!

This is when I rang Justin Eslick in despair. ‘Help!’ I say, ‘what can I do? My planner has given up. My architect has given up. The whole project’s viability is at risk!’

After taking a look on my behalf he asked me one simple question... 'how far are you from the main road?'

Turned out the busy town planner hadn’t quite got it right... the first time around.  I was within a certain distance of the main road and could therefore have fewer car parks per unit. The project was back on track, thanks to Justin.

But what went wrong? After discussing once again with my town planner I found out he was thinking my property was up the other end of the street, near another road that didn’t allow me to get the discount.

This planner was very well priced, and is very prominent, but that is the problem. He is too prominent. He is so busy that he relented to council’s request (which as you can gather was wrong) to keep things moving, no matter what the cost and didn’t double check what they were asking. I could have gone ahead and it would have meant I would get my approval through quicker, but I would have also lost a unit and that would have been disastrous for the numbers.

The moral here is to ensure you employ someone who understands the numbers and the effect changes like this can have on the investment. Also ensure the person is not too busy! Lastly, have an understanding of the process yourself, or have someone you can ask, because at the end of the day it is you that suffers, not the planner or your other consultants.

Justin Eslick is a qualified town planner working exclusively as a buyer’s agent for people interested in investment property in Brisbane. He found my last two properties. Find out more about Investigate Property by clicking here.


The numbers

So here are the numbers. I purchased the property in 2003 for $295k and I spent $3.5k to turn it from a 2 bedroom place to a 4 bedroom place. I could have done more to increase the rent, but I was after as much rent increase as possible for minimal cost, after all, why would I put a lot of money into a house that I may knock down within 5 or 6 years?
 

Rental increase of 41%... while I wait to develop!

The rent before purchase was $180pw and after renovations it was $255pw, an increase of 41%! Although the rental return wasn’t great, it was about the median for the suburb. The big difference was I had twice as much land as the average property! Not to mention also that I had increased the value of the property to $345k by doing the renovations... and I still haven’t developed!
 

The development numbers

I have received an estimated construction cost from my builder broker of $1.43mill including GST. Approximate costs for consultants, council and holding are about $150k. The holding costs aren’t that large as I have steadily put the rent up over time and I get good depreciation benefits. The beautiful thing is that during this time the property has increased in value by nearly 100%, so I am not all that worried about the holding costs! Upon completion I plan on renting the units out and not sell. Let’s take a closer look.

Purchase price, costs, renovations $312.5k
Consultants, council fees, holding costs $150k
Construction $1.43mill
TOTAL $1.893mill
End Value (10 x 1 bed @ $330k each) $3.3mill
End Rent (10 x 1 bed @ $330pw each x 52 weeks) $171.6k
RENTAL RETURN ($171.6k/$1.8925mill) 9.07%
and there is depreciation yet to claim!


From hitting brick walls to building them!

I am currently constructing 10 units for rent on another site, but I am planning on rolling the builder from that project to this one. But none of this could have been possible if I didn’t have a reliable ‘army’ to call upon, had given up or given in when I hit brick walls, or if I didn’t do my research right back in the beginning.

I did my research in the beginning and still I came up against brick walls. There are a few lessons to learn here: you can always learn more, buy sites with multiple options, buy sites that show a good return, giving you a contingency factor just in case you do hit a brick wall, and lastly, don’t be afraid to seek second opinions.


Developing for Profit©

I have made some mistakes over the years, but I have learnt with each one and despite these mistakes, I have managed to create a $20million+ property portfolio (and as you can see about to get larger!). This is because I do not take unnecessary risk and I continue to educate myself.

We have put together a workshop called Developing for Profit, which will educate experienced developers and ‘new’ developers on how to make profit and avoid the pitfalls when developing.

This workshop is being held very soon on Saturday and Sunday 22nd- 23rd November 2008, in Brisbane, so anyone serious about development should hurry and book their seat.

As well as hearing our stories, learning from experienced people in the industry and networking with fellow investors, you will also receive a 200 page workbook each day to take home and use as a reference.

Click here to be directed to the Developing for Profit website.

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