Nhan Nguyen is a successful property developer and has been building his extraordinary property portfolio since the age of 21. He has years and years of experience behind him and there is no person better to learn the ins and outs of development, strata title process, improvement in the property industry and how to make money from it than Nhan Nguyen.
Join us as we dive into the topic of the Ladder of Complexity, in this first part we begin our climb up the ladder, we discuss some of the less risky property strategies like buy and hold, stratum title, renovations and many more, we also learn about how you can add value to your property very quickly, and much much more!
– Nhan Nguyen
The Ladder of complexity is a smart way to organise your property investing and developing strategies in terms of their risk factor. We start this episode looking at what this is all about.
When we started out doing our training and mentoring programs about 10 years ago, we found that there were so many different ways that people could make money through property. So we had to figure it out. What’s an organized way to discuss property and train people in the property so that they could understand risk as well as reward and as well as skill sets. So you know, doing a renovation versus doing a block of apartments versus doing a land subdivision. There are some common aspects, but there are also some very, very different aspects because building versus renovation versus civil works, there’s so many different factors and consultants and costs involved. So what we did was we decided to break it up into a dozen or so different ways of making money through property, residential property more specifically, and just try to organise it. And I say to people, this is not the truth.
It’s just an organized way to think about property, to make it easier for people to understand. One where do you start? Where can you start? And if you want to increase in prefs profits increase your skills increase your ability to make more money through property, which ways are more difficult relative to each other because it just gives you a context and a platform to work from a, because oftentimes people will jump into, Oh, I want to do townhouses, or I wanna do a structural renovation, or I want to do apartments. Not knowing naively that the complexities plus risks massively increase when you don’t know what you’re doing. So I think that that’s very important to understand that.
This is why I love talking about this particular topic because it’s actually quite a sequential kind of approach to look at. Starting from the bottom all the way up to a topic like a ladder, you know that’s the reason why it’s called the ladder of complexity. So the lower you are on the ladder, the less risk it is in doing that. And an example is number one, which is bought and hold, all the way to the top of the ladder, which is you know the number 14 which is building units, townhouses and anything like three stories and 10 dwellings above, that gets quite complex. This is where the topic today is we’re going to actually unravel each and every one of these to be able to share with the audience exactly what things they should be looking out for and the complexities behind it and potentially all the risks involved. I think it’s just a conversation that we have with a lot of people too and it’s really, really important to understand this because it helps us determine, which level are we at this point in time? And then what things do we need to understand to move into the next stages? If we want to proceed that way. So let’s start off with maybe the first one then. As I mentioned, number one would be bought and hold. Let’s talk about that in a little bit more detail.
Some people might think that buy and hold is pretty easy, pretty straight forward. However, if you get this wrong right at the start, it can basically constrain you very much long term. You know, I’ve got clients who’ve bought to buy and hold and made a lot of money. Other clients who’ve done it incorrectly have very much gone down the negative viewing path and it constrains them, you know, it strangles them in such that they have to go to work, they have to make those mortgage payments against their property. So Arnhold is very much a cut your teeth type strategy to, to learn how to manage finances, manage multiple bank accounts. If you, when you have multiple properties, manage tendencies, understand the acquisitions process of signing a contract, stamp duty, land tax, rental management. So it’s a really good foundational place to start. And at the beginning, you know, you might combine a buy and hold with a, a minor cosmetic renovation to be able to not outdo yourself too much and not stretch too much to be able to, to learn about finance, to learn about real estate agents, to learn about tendencies as the most fundamental way to make money through property and hold wealth through property.
It’s interesting when you said to buy and hold and we’re talking about those level of things that you just mentioned, that it doesn’t seem that easy at all. It’s quite complex because you’ve got so many different avenues. So even just starting to get into property and how to deal with a solicitor, to deal with real estate and to deal with the bank, to deal with property managers. So much involved in actually managing property just to even start off with buy and hold. And I guess this is the thing is once you get into the property, there’s so much to learn, so many things to do. And I guess as you said, it’s a good way to start off because as you build on top of that, there are more and more complexities that go into it.
Even the foundational stuff of buy and hold. The fundamental question we often get with people is what entity do I buy it in? And we can do a whole podcast just on that of, you know, the topic of what do you buy in and there’s so many variables with that, single name, joint names, company, company in trust, land tax considerations. There’s 10,000 permutations and combinations you can buy the property in. So even with that, it starts triggering off, can I do a bar in my personal name or do I spend a grand or two setting up an entity and lay in tax? And so yes, you are right. It’s only three words, buy and hold. But in the beginning the considerations are endless. And especially if you’re a beginner, it can get a bit overwhelming. And you don’t know who to talk to next.
When do I talk to the real estate agent? When do I talk to the solicitor? When do I talk to the accountant? So it’s a great way to start and it was, it wasn’t only after until I think I bought three buy and hold properties that I understood, you know, the complexity of it. It took me a couple of years for that to kind of settle before I bought a few more and gone, okay well now that we are wanting to transact on them as in buying, sell that then you start getting your head around other interactions and variables.
I like hearing from your story because you know you started off just buy and hold eventually leading up to doing land subdivisions and so forth, which is up a little bit higher at the top of the ladder. So it’s really kind of good to see that progression because everyone has to start somewhere and the buy and hold strategy is a great way just to get started. So let’s talk about the next one, which is number two, which is stratum titling. Tell us a little bit more about that and how that all works.
Coming back to buy and hold a little bit later, I believe in the first five or six levels of ladder of complexity, you can make a lot of money, six figures, just even just on those half a dozen strategies, stratum titling. What is that? It could be as simple as buying a duplex and creating two titles from the individual. One title that started off with and selling off the pieces. So I’d think of it as potentially a pizza. You’re cutting up into two, counting it into five depending on what is already there. I know that a lot of people have done this in the past and the past few decades. I remember in early two thousand I was doing this in MCI at one stage Gladstone had is its run with stratum title as well. They are getting harder and harder to find.
However, they are definitely there in the rural areas where there are blocks of titles that have blocks of 10 blocks of five where you can cut them up. They do need firewalls that go to the roof. You need to check with a certifier as well as potentially a surveyor to check that you can do this. But it’s a really good way of adding value to a property without necessarily doing any work to it. What I mean by that is after Stripe, the title we are talking about a cosmetic renovation, but on stratum title, you don’t even have to paint it. You don’t have to add any other value other than a paper shuffles to be able to sell off the buildings individually.
So just to clarify, it’s basically looking for a property that has maybe a component where it has not been stratum titled. So say, for example, I know someone who I’ve interviewed in the past and my podcast who went and bought a unit block there, had about eight units inside. But interestingly enough, it had not ever been stratum titled. So there was an opportunity for him to be able to stratum title that and yes, he had to go and spend a bit of money to get it fireproofed and fire-safe, all the way through and getting everything stratum titled and getting all of that kind of stuff done. But essentially it’s just getting a block of land or block or something, whether it be units or very rare actually with townhouses that they would be selling as a lot. But if a block of units where it doesn’t have any stratum in it and then just basically getting a stratum title which allows you to sell them individually, that’s where you can actually make the money from.
Whether you’re buying a duplex or a triplex, that’s a really basic one from a [inaudible] point of view. The thing that I do like about it is it does T to multiple titles. Myles will tendencies, multiple sales transactions and cause oftentimes most people or just dealing with one house at a time, that house that they’re living in or one investment property, let alone three.
And then three tendencies and agreements, three sow’s agents. And the thing I love about strata titling is it can teach you a lot of things all at the one time. But in simple terms, stratum title is buying a property with multiple tenancies in it whereby you can sell them off like pieces of a pizza. So let’s say a duplex is a good one, or a triplex is a good one. When you might have three townhouses together or a block of eight apartments together where you might have eight tendencies that live in separate dwellings and that’d be separated with firewalls, right? So essentially you can strata title them off or separate the titles, create multiple titles starting off with one title. So if it’s a duplex, you go from one title to two and then you sell off the individual buildings or individual segments of that building a to individual owners. Yeah. So yeah. Yeah. So I think strata tiling has a lot of merit in terms of adding value. Simply because you’re not spending much, you don’t have to paint it, you don’t have to change the kitchens, you don’t wanna change the bathrooms. All it is is a paper renovation in terms of getting a surveyor out, getting a certifier out, making sure the firewalls are right. I think around you’ve got an example of a colleague or a friend who had an eight apartment block, is that right?
He basically purchased that I think in Bondi and there’s absolutely no strata titling on that surprisingly, you know, for that period of time. So that opportunity was for him to actually strata title and I think he purchased it for a reasonable amount of money in and out. But after that period of time, once he started renovating inside, keeping a few and then selling off a few, you know, basically paid it off and he’s got positive cash flow from that property.
Stratum titling is a really good entry-level way to buy in bulk and sell retail. It’s no different to buying, you know, 10 computers at a wholesale price and in sell individually for the retail price and having that margin in there, you’re not really adding any much value in terms of you not making it any nicer necessarily. You can paint it and change the floor coverings and paint the roof and put a fence up. You can do that. However, it’s not essential. The principle here is being able to create multiple titles and sell them because let’s say a block of five townhouses that might be worth 500 grand each, you know, five townhouses, 2.5 million. If you can get it for let’s say 2 million or 1.8 million, you might have the resources to buy it at that point in time or, or that price point.
However, moms and dads may not be able to buy it individually and afford that 1.8 million. So, therefore, you’re creating a product that was not essentially salable before and now it is available and someone can buy it and own it and live in it. So it’s really good too because you’re dealing with multiple titles in dealing with multiple tendencies. From an education point of view, you’re learning how to deal with multiple sales, multiple rental managements in, in terms of the tendencies rates, insurance. So it does increase the complexity from the binding hold of what’s just one tendency to multiple tendencies.
What are the typical ways of actually finding properties that are not strata titled? And you know, we don’t have to go into too much detail behind this, but what I’m just curious about is, as you said, it’s becoming harder and harder to find them because I think most people or most developers who are actually building blocks of townhouse usually will strata title so they can sell them off individually. When do we actually find cases where there are blocks that have not been strata titled?
Strata titling is, like I said, hard to find, not necessarily impossible, but the more so in more regional areas these days. One of the tips that you can start off with this when you go into www.realestate.com.au look for, I think there’s a box called blocks of units or blocks of apartments. You can tick that box potentially or even look for dwellings with more than five bedrooms. So you know, if you’ve got a block of five, two bedders that’ll have let’s say 10 bedrooms, so that’ll come up. So that’s one way you can do it. But I think more so regional towns there, there are ways to go out there and find blocks or units that way. But yeah, there are few and far between. It’s more so just being aware of it. And when you do see it, you can see that opportunity straightaway.
I want to probably give an example and share this with the audience. I actually have recently, about a few months ago, purchased a commercial property, which actually has its potential to strata. And I have looked into it, I haven’t actually worked out the cost and so forth, but I basically bought a commercial property with three retail fronts at the bottom. And also there are two units at the top and then I’m going to build on top of that as well at the top. So I could potentially strata title every single one of those and sell them off individually if I did decide to down the track. And that’s a good example just to show you because I purchased the whole block including the actual building on it and there hasn’t been any strata title, but there are multiple tendencies in there. So if you look at it from that point of view, if you find something with multiple tendencies within the building, there’s the opportunity to be able to strata title it.
The beautiful thing with that, like you’re saying there Tyrone, is it’s relevant to whether it’s residential or cause, sorry, commercial as well. So the principles are there, it’s just being open to it.
The next one that we’re looking at is number three, renovations. And that could be potentially cosmetic as well. So let’s talk a little bit about that.
Cosmetic renovations, the word cosmetic means just superficial. It could just be putting on lipstick, so to speak. But from a practical point of view, I’ll give you some examples. Cosmetic is something that you can do quickly and generally not needing council approval. So whether it’s a quick paint job, polishing the timber floors adding a carport changing the fans installing air conditioners. I’m just looking around my house now to see what other things I could do with my house cosmetically.
Replacing the carpet, putting new door handles, fittings, fixtures, those kinds of things.
A new bed, new kitchen, new bathroom. Generally with cosmetic renovations, I will have a budget in mind of 20 grand. Like this will just be my generic budget and it might be five grand. Outside, as in, you know, grass mowed the lawn carport in terms of a lean to just a bit of fencing, clean that up. Some gravel in the garden if need be five grand on the inside. So that’s, like you said, carpets, policy, timber floors, paint on the inside. And then the other part of the 20 grand would be five grand in the kitchen and five grand in the bathroom. So those are just really rough indicative numbers because every house is different. In some places you may just need to spend more and some may already have some workable kitchens or bathrooms that you don’t have to spend it all.
And then sometimes you might need to get second-hand kitchens to be able to meet that budget. But my point is that yeah, cosmetic renovations designed to be quick. Some of it you can do it yourself. And you don’t need a big budget from a capital point of view to be able to do it, you know, 20 grand. If you get it right, can be, just could makeover, get it on the market back in the market in four to six weeks in, sell it again. So yeah, the main thing with cosmetic renovation is a quick add value. It might be a little bit tired, just a little bit of love, a little bit of energy and get it back on the market. And but the key thing is also you make your money when you buy. So this is just an add value to make it saleable, lit, livable so that someone else can buy it and move in straight away.
Just wanted to add as well too. If you’re buying the property and you’ve bought it under market value, but you’re looking to hold it as part of the buy and hold strategy, you can easily renovate it, then put it back onto the market to rent it out as well too. You don’t necessarily have to sell it. So that’s also an option there. So the next one we wanted to chat about is number four which is splitters. I actually know this term, but it’s commonly used more up in the north side of the east coast. So share with us what that’s all about.
I split out in terms of terminology, they’re more so common in places like Queensland and even rural Victoria. I split it into simple terms. Is, is similar to strata toddling but it’s relative to lane. So what you might have is you might have, let’s say I have a hundred square meters and it’s already on two titles and you might have a house that sits on those two titles. So I might be a Queensland or a brick house that’s sitting on those two titles and all you’re doing is producing those titles or releasing those titles more than anything else. So you might have a house that, like I said, that straddles those two lots of may have to knock down that house and then go to the department of natural resources, which is a state government body. And then you pay a fee might be a nominal fee of three to 400 bucks to release that title.
So because it’s already on to existing titles or multiple existing titles, all you’re doing is releasing the title so that they are usable individually. So the thing that you may have to do is knock down the house, release those titles, but to make it even more saleable, I suggest because the existing dwelling may only have one set of sewer, one set of water. You might have to connect that second set of sewer and second set of water supply or as a service to that second block. So in, in essence to kind of round it up and summarize it again. It’s a property that’s already on multiple titles that are usable, that you just released those titles for people to be able to access those lots and build on them individually.
Since we are talking about splitter blocks, I’m just wondering why would someone who owns that block of land already has two titles on it? How did that come about initially?
Sometimes for different reasons. Let’s say in rural Victoria, I’ve known one of my clients to do it in let’s say Ararat, which is a couple of hundred K’s out of Melbourne day. I’m very common in rural areas because they might have acres and acres and acres of land and they won’t have a preexisting lots with that, that may have bought an amalgamated because if you amalgamate those titles and keep them as five lots but not individual, you pay fewer rights. So in the past what would happen is people would buy multiple lots and then they’d combine them and they’d still be on two titles. So one lot on two titles. So they only pay one set of rights. So then they’d build on it cause they want a big backyard, they want to be a bit of dirt. However, here, the only one pays one set of rate. So that would have happened probably 50, 60 years ago, maybe in the 50, something like that. And it’s just a remnant qualification or remnant decision of town planning back in the day.
There’s that opportunity there to be able to split it up now because I guess coming more into today’s times, people are looking for more blocks to, well actually opportunities to be able to get another block that’s already been done because then you don’t have to go through that whole subdivision process and get it approved through council.
The splitters are quite popular these days simply because the amount of land that’s available for these are a lot smaller. And what I mean by that is each split up individual block or be 400 square metres versus 800 square metres and people want small blocks of land to be able to live on. They just want more house, less lawn to mow and budget-wise, it’s more affordable for people as well.
The fifth one is building a new house, whether it be a project home on say a low set of 200 square metres. What’s that all about?
For those of you who are falling asleep listening to this podcast. I’m joking. Like each of these topics, the eight of these topics, I could spend a day talking about just each of these topics, right? And I know and I’m entering programs and our boot camps, we, we definitely ex expand more on that. But yeah, we’re wanting just to, to give you just enough to, to get your head around it so that you’re not asking too many complicated questions at this stage, but there is each of them, like even this topic. Next one is building a new house. You’re thinking, well, geez, why is building your house number five in terms of complications versus let’s say a cosmetic renovation, which is number three, right?
So building a new house, firstly like you might be thinking, geez, you’re getting someone else to do it. They’ve got a system. You just paid them the money, you go to work, the house was built when you come home. I’m now building a home that can have many, many complications. I say building a house is like a 10,000 piece puzzle being put together by 20 people with blindfolds on. Right. And I built enough houses to know that because it’s a moving part, cosmetic Reno is that the house is already built. You’re just adding lipstick or the makeup on top of that. So there’s not 20 tradespeople waiting for each other to be finished. So building your house, there are complications to be able to get it finished. One thing, not to scare you, but you know, builders often go broke and then when I say build is often go broke, it is very, very common for a builder to go broke.
And they’re not managing their finances. They’re not paying the tradespeople, they’re not making enough profit. Often, a lot of builders are great at building, but they’re not business people. So they’re not good at managing cash flows. So while I’m sharing that with you, I’m putting this as a little bit more complex, is with building your house. It’s not just building the house is a project of choosing the builder, choosing the right builder, designing the right layout, choosing the right colours, putting them the appropriate feedings and fixtures in having the right budget, soil test as well. Are you building a four-bedroom house, three-bedroom house, single lockup garage? This is my point with building your house is there’s a lot of new decisions that previously you wouldn’t need to make in a cosmetic renovation. Even with splitters a split up, some of my clients love it because there are so many little decisions to make.
They go in, knock the house down, put the services, put the land on the market and they don’t have to redesign anything. People love building because, and I must say I used to be like this, they love building because as a field or like a manifest or a creative aspect to it where they got to get the energy out of their body. You know how I want to build something. And for me, when I built houses initially, that’s what it was, is like, you know what, look at me, I’m so good. I built these five monster homes. It’s good for my ego, but I found that it wasn’t necessarily good for my back pocket. And then my ego got a bit of a reality check because the profit wasn’t as good as it needed to be. Even though I’d built these buildings and there were challenges along the way.
So my point is building your home low set isn’t number five here. When you get a high set, it does take longer. It takes a couple of months, longer set of four to five months, it can be six to eight months. And when you’re building a house, you are subject to the weather as well. I know we’re all a let the moment waiting for it to rain in doing a rain dance for it to rain and, and help the farmers, which I completely agree on. But when you’re building, you are at the whim of weather at the whim of Christmas as well. When you start building and, and you, you starting in November, that’s probably the worst time to start because once December starts, everybody stops work.
I just want to say, because I come from the building background and I used to work for one of the largest building manufacturing companies where we supplied millions and millions of bricks on a daily basis. And I actually went into a lot of the studios to be able to help with the design process in terms of actually choosing colours, palettes and all that kind of stuff for a house. And it’s no easy process. And I have to admit, you know, after doing it so many times and actually seeing the process, it was quite a lengthy process. And that can take a few months, I actually should say probably from a week to a few months to actually get that all confirmed. Because if you’re building a house, unless you’re doing it for investment purposes and it’s sort of like a turnkey investment where everything’s just basically out to rent and so forth, you wouldn’t care so much about the qualities of the fixtures and fittings, but when it actually comes to actually building a home for yourself, there’s a lot of emotional attachment to it.
It’s very, very easy to get attached to it emotionally because you think, Oh wow, that beautiful stone benchtop like a Caesar benchtop would actually add extra value to the property. But in actual fact, it really doesn’t. It just makes it look better. I guess once again, as you said, it’s more like an ego boost. So that has to be all taken into consideration because that is a time factor that you’ve got to put in to actually do this type of project. Not saying it’s a good thing or a bad thing. I’m just saying that you need to take that into consideration when actually building a new home. Those are some of the factors that people will be looking at and you need to just be aware that you’ve got to factor in the time of actually the whole process of building a home because that also comes back down to your back pocket because the cost that you spend in doing all these additional things, man, it can go on forever.
I’m not saying that renovations can be any better. Sometimes people take 6 to 12 months or even 5 years to finish off a renovation, but with the cosmetic reno, you can get in and get out in two to four weeks in terms of additional value and then have the property available for rent or available for sale straight away. So that’s why we believe that cosmetic renos are a lot less risk and a lot less capital required as well for it with a budget of 10 to $20,000, I want a better sweat equity and as bit of a labour yourself, you can be doing it were building a house unless you’re a builder, which I know Tyrone in myself and not, I’ve seen his hands. They’re very much [inaudible] mind though. You’re right. I only get blisters when I’m going fishing, but a chin-up is yeah, the the building a house takes more time, more capital. It can be more rewarding. However, I’ve done enough to know that I prefer to only build to hold and, and that’s what I’m doing at the moment with a couple of my bills I’m building to hold, not necessarily building to sell.
This is the thing, you probably have noticed that throughout the podcast and everything that we’ve talked about, we want to get in and get out quickly if it’s possible because we don’t want to be holding on to anything for too long. And because of that, you know, that’s where I guess the philosophy of money goes through much faster, which is going to be a particular topic we’re going to be talking about in the future. But I think that’s the key point about what we’re trying to share with everyone is that we want to get into deal, get in, get out quickly. So that way you minimise the amount of risk that’s involved as well.
The philosophy behind all this, I’ll let building a single story home versus a two-story home. The amount of actual risks for the construction process itself isn’t that much different, but it’s the timeframe that is increased. And when you increase the timeframe in any construction process where it’s not finished, where it’s vacant and saleable, we call that dead time. You know, that increases the risk. So number six, we’re not going to spend too much time on that building a new house, two-story larger home, more than 300 square meters. You know that that’s just a natural progression from the building and low set 200 Stuart’s where I’m in a home.
We kind of covered already back in that part about building a new house on just a project home. So let’s move on to number seven. We’re talking about the removal of the home and major structural renovations. What would that be related to?
Now that we’re looking at that next level of renovation before, we’ve been talking a lot about the cosmetic renovation at a bit of lipstick half a dozen tradespeople. Now we’re talking about the significant renovation and the difficult thing here, it’s actually very similar to a build, very similar to a build. You might be doing a $500,000 extension to your home. You might be lifting it, you might be sliding it, and there’s just more moving parts. And the complication here is it’s not a clean slate. So with, with building a house, I’d rather do an existing by compile and build a house, then do a removable home or structural Reno simply because you’ve got a clean slate. So when you’re doing a removal home, you’re obviously getting a house from another block, bring it to your block or moving the house on your own block.
And it’s got it’s own idiosyncrasies. It’s got its own challenges, it’s got its own limitations. So we even did a major structural innovation on the house that we’re living in now. Existing house could not knock it down, and could not build townhouses behind it. And then we ended up deciding to do a structural RedDough on us, about 200 grand structural Reno at a kitchen, granny flat centre, et cetera. This was about 10 years ago. And so the existing dwelling had its limitations. And like I said, it’s like building a brand new building but with constraints to start with. So yeah. So,
I was going to add as well too, with any structural renovations. Say for example, if we’re looking at maybe an existing building and they may have, say for example two bedrooms in it, but these bedrooms are the large two bedrooms and you may want to turn into three. That could be considered as a structural renovation where you’re knocking down a wall and putting two walls instead to make it into three bedrooms. There are also some issues that you may face structurally. You’ve got to get an engineer to come in, check it to make sure that you can do that and also, you don’t know what’s behind all these walls. It could be termite infested or there could be, you know, electrical problems. All those kinds of things are all unknowns and that’s why when we say a major structure renovation, these things have a lot of complexities in itself because there’s a lot of unknowns as well too.
You generally need council approval for these kinds of structural renovations that you may want to do. Like we talked about previously when you’re changing the carpet, polishing the floors, you don’t need approval for that. But if you’re lifting a building or sliding a building or you know, adding five bedrooms at the back of the toilets and bathrooms and extension of rooflines, granny flats, and you need council approval to do that. So, that’s where extended time frames, extended costs and limitations. You just can’t do what you want to do. You know, ceiling Heights have to be right. Fire ratings need to be right. Energy ratings need to be right there. There are so many factors, so, yeah. Yup. Totally agree. Yeah. There can be money to be made. It’s just that in the philosophy of getting out, get paid structural renovations. Generally, unless you can do them fast can be quite limiting.
That’s the reason why, I guess that’s at number seven as well too. So the next one is eight which is subdivisions, from a small one into two. We’ve both done something like that as well, but it’d be interesting to hear from your point of view what that’s all about.
I think going from let’s say number four with the splitters to a subdivision at number eight, this is where you start to learn the actual process of creating a new title. I often talk about the five fingers in terms of services. So there’s a sewer, there’s water, there’s stormwater, electricity and telecommunications, right? So those are generally the five essential services. Gas is another service, but it’s not necessarily essential. So sewer, water, stormwater, electrical and telecommunications. And when you’re creating a new title, a brand new title, you need to provide those services. So if you’ve got a block of land, a thousand square meters cutting into two, firstly you need council approval. That’s not cheap or it’s not free. It’s about $10,000 for example, for a subdivision draw up plans are via engineer, Tam, planner. It can take two to four weeks depending on how coordinated you are, just to even lodge that to the council.
And that application can take somewhere between, you know, two and 12 months depending on the zoning, depending on the council, depending on other fees and charges and constraints. So, yeah, essentially with subdivisions creating a new title, there are a lot of learning lessons on, okay, how much does, because you’ve got to install all the services in the split that you generally only stay connect the sewer in the water. You don’t have to connect everything else in subdivisions. You have to connect all the services, but you have to get approval to connect those because there are more services. There’s also more costs involved and you may need to upgrade infrastructure. So there’s a plan sealing process, which means that you actually have to get the plain sealed of the development approval plan. And yeah, my point is it’s a lot more complicated relative to the simple split out, which has already got the titles.
The five things that you’ve talked about that would happen all after, say, for example, you’ve got the development approval from council and so forth. So does that mean than those civil works, those people actually come in and laid all those foundations and they’re just left open on the land until someone builds on that?
So with the splitters like you said before, we’ve already got the titles in the subdivision, you actually need to get the council approval first. Once the approval, it’s just a piece of paper saying yes you can subdivided into two and then now then you need to install what is called the civil works or the operational works. So operational works are things like, yeah, the sewer, water, stormwater. And then generally what happens is once all the infrastructure is installed, the civil contractor will leave some conduit. It might be a, an orange pipe sticking out of the ground just to show you the location of the service underneath the ground. And then the surveyor needs to come back and engineers need to come back, sign it all off to make sure it’s done up to a specification. You can’t just put it anywhere you want.
You need to put it where the plan is drawn. I’m doing one at the moment one to two. And so it’s very fresh in my mind. Sometimes you even have to put in a driveway to be able to meet the council’s requirements, right? So I’m part of the council subdivisions that each one into two or each subdivision itself is different. You can do one in one street and another in another street, which might look on paper exactly the same, but the council may put you once you put a driveway in one or a footpath and another and this and that. There are so many unknowns about that and it’s variable, just whatever council feels like at that point in time. I know it sounds funny, but sometimes on some approval, they’ll miss a footpath and the other ones, they’ll make it 1.5 meters wide. So you just need to allow it. And that’s part of the risk as well. It takes a longer time. It might take, you know, 6 to 12 months to complete a subdivision from the start to get an approval. It’s all the surfaces and finishes, whereas the split or within 48 hours, the block of land can be ready to go. And on the market subject, you install the services which you can do in a very, very short period of time as well.
What’s interesting with subdivisions, it just seems like it’s just a long waiting game because once you’ve submitted that, then it’s just a matter of following up and chasing up. And it’s more about shuffling paperwork cause you don’t physically have to go out there and actually do anything. You just basically get the consultants and the people that need to set these things up and then you’re pretty much just waiting.
It’s attractive to a lot of people because it is a big paper shuffle. And I do love subdivisions in that way because I physically can’t do any of the work. You know, with the renovation, I remember painting ceilings and ripping up carpets and throwing out the rubbish and you know, helping to install kitchens and bits and pieces back in early in my career. But with subdivisions, I cannot do anything other than mow the lawn. Like, what I mean by that is I don’t have any approval or tickets to do demolition of the house. You can’t just go up and get the sledgehammer to the house cause the excavator is going to come anyway. It’s useless. I can’t install the driveways. I can’t install the pipes cause I just don’t have any approval. So that is actually a big advantage of subdivisions from someone like myself who does not like or prefers not to be hands-on so that you can leverage it. And the good thing about subdivisions, once you get it right, once you understand the process of the one into two, going to form one into two and two one to five is actually quite easy cause you’re scaling it. Yes. There are some other complications that you know, we will address at some stage, but it just, the beautiful thing about subdivisions, it’s very scalable.
The Differences Between Development Approvals, Subdivisions, Building Units And Townhouses
The ladder of complexity incorporates the various strategies that are used in property investing and developing. We delve into the second half of these strategies which are high risk and also high reward.
Previously we talked about subdivisions, small subdivisions and now we’re looking at probably more complex applications. Because when you’re doing applications like applications for townhouses, apartments, demolitions, you really got to understand the rules and the laws like cutting something, one into two, is quite obvious because you’ve got, you know, maybe a big rectangle cutting into two small rectangles when you’re building an apartment. So you’re building townhouses and you are just going for the application itself. It involves a bit more time, a bit more money and a bit more expertise. So that can take time. You know, my recent development application on my 30 lot subdivision took a year and a half and it was a fair bit of blood, sweat, and tears. We threw at least probably a hundred grand at least if not more, to be able to get it through because it had a lot of complexities like flooding, like trees, like waterway corridors, slope, sewer, water, stormwater, which is a usual, ]with the more factors you have in it, the more complicated it would be. And therefore the development approvals are so wide-ranging. Even a demolition application, if a house is a character protected and you need certain reports done to identify it and make sure it’s not too old and the fact that you can knock it down can take time, effort and money.
As you mentioned, development approvals come in all shapes and sizes and forms and so forth. So maybe if we want to share with people some examples of, you mentioned just the most recent one that you’ve been working on, which is a 30 lot subdivision. What are the other types of development approvals that people can go through?
The types of approvals range from like in Queensland or Brisbane, actually, they do what’s called a risk smart, in New South Wales, they have a CDC, which is a complying development application. In Melbourne, they call it plans and permits. So my point is that there are so many different types of jargon and terminology. If we’re going to talk about Melbourne for example, that the plans and permits, I’ve actually got one that I’m putting through for a childcare centre and that’s been lodged earlier this year and it’s taken a while and had some challenges and some ups and some downs. It hasn’t quite been approved yet. However, you know, that cost is probably a good part of 30,000 to $40,000. So you can do development approvals for commercial property as well, whether it’s petrol stations, child care centres, commercial buildings, industrial buildings, industrial land subdivisions.
So it’s very, very wide-ranging. And some costs can start at $3,000 just for the counsel fee. And you know, you’ve got all the other consultants fees on top as well. So whether it’s architect, landscape architect, engineer, town planner, obviously, hydraulic engineer, if there’s flooding, childcare consultant, contamination consultant, noise consultants, traffic consultants. There’s a wide range of consultants depending on the project and that’s why we suggest as a theme of think big and start small so that you know you’re learning as you’re growing, you’ve got more capital behind you, you’ve got more smarts behind you, you’ve got a better team behind you, but advise you as you go along because it’s just a minefield. There are so many different applications as we go along.
That’s the reason why this is number nine for the ladder of complexity and that’s obviously after subdivision. So this is a little bit more high up the ladder, which is a little bit harder to get into and also to do as well. We’ve just talked about development approvals. The next one is number 10 which is building units and townhouses, which is like a multi-unit dwelling. Anything up to four dwellings and this is the next part up that ladder of complexity. Let’s talk a little bit more about this. Let’s elaborate more about what this is all about and how this works.
This is where the risk goes to the next level. So if you’re talking about development approvals, you might have a block of land with a house on it and you’re getting a piece of paper approved with the local council. It might involve the state government as well if it’s on a main road or other overlays, cutting down trees and biodiversity. But once you go to the next stage, you’ve got the approval and you’ve got to build it. Well, it takes it to another level of risk simply because you’ve got finance to apply for, you’ve got funding, more financial risk, you’re putting down obviously buildings that got concrete timber roofing. And the process of construction itself is a risk in itself. And I know previously in the ladder of complexity, if you’ve listened to the last recording, talking about building a new house, low set or building a house, high set, building a house or a building itself has an element of risk.
So here when you’re talking about multi unit dwellings up to four dwellings, it’s not just one dwelling, it’s four dwellings, three dwellings, two dwellings. So any mistakes that you make, for example, in the design, you’re multiplying that. So I remember I had a one into four townhouse project and in the middle of two of the rebuildings I tried to squeeze a car park in between the two buildings. I managed to fit the car park. But because the car park was in between the two buildings, each of those buildings lost roughly one and a half metres on each side of the building because they previously potentially were joined. And then we’d put the car park in between such that they lost that car park space in floor space. So my mistake there was because I tried to squeeze more car parking in, I lost living area.
The mistake I made was multiplied by two and we had a lot of difficulty selling those. So my point is that it’s one thing to get an approval on paper, but once you build it, if you don’t know what you’re doing, if your build costs are over the top by 10-15%, you’re multiplying that mistake. And that’s why with the ladder of complexity, the more you do, the more dwellings you build, more blocks of land you subdivide the level of margin of error has to be less. The more mistakes you make it will be multiplied and it’s more risk of you losing money in this process.
You’re not just building one sort of dwelling, which could potentially be the house or a townhouse or so forth, you actually building multiple. And so for example, one of the costs that are really, really high a lot of times is the building costs. One building could be like $200,000 so you have to build say a house or so forth. But once you get started say four dwellings, which is like for example four townhouses, yes your cost could probably essentially come down because you’re building more but then it actually multiplies. So say for example you’re doing four, they might charge you say 180,000 to $200,000 just for a good quality townhouse. You’d be spending up to $800,000 and that’s just only the dwellings itself. So there are a lot more risks involved and also ways to see how you can actually leverage off that because a lot of times people don’t just put cash into actually developing these. We usually would go back to finance these things through the banks or through private lending. Would that be the case in a lot of these instances?
That’s the other thing with when you’re going up this ladder of complexity is the financial risk as well. So it’s one thing as a construction risk, which is what I’m talking about before, design risk, which we’ve mentioned as well, but also financial risk and complexity. So what I mean by that is generally anything more than two dwellings go from residential to commercial. And what that means is you’ll have to put up more deposit. Interest rates are usually a little bit higher as well as presale requirements. So generally you actually just build a duplex, you can get the normal 80 to 90% mum and dad residential investment rates, you know, 4-5% at the top end. And then if you’re going to commercial, you’re talking 6, 7, 8% if not more, depending on how badly you want the money. And you may need presales as well in a market like this, you know, presales can be quite difficult.
Sometimes people want to see the buildings finished, the townhouses, the apartments finished before they’ll even put in an offer. Even though they like the area, they like the plans, they like the finish. But because it’s not like super-competitive anymore that I’d have to fight over each other to get properties off the plan. There’s less competition, they’re happy to wait and it’s like the chicken or the egg in. In the past, you’d get pre-sells before you started building and then those presales would aid finance. You get finance, you get things out of the ground and then you’d already know that the project’s already pre-sold and that reduces the risk. On the other hand, the markets change such that you have to get it out of the ground first before people will look at it so that if you can’t get those presales, you’re going to have to find finance. That’s going to give you finance without that pre-sell. So it either means you have to chip in more money, 30, 40, 50% deposit or you’re going to have to go to expensive money as well. And it could be, you know, I’ve looked at a finance package recently were all up it’s like 11% because it’s about a 3% upfront application fee, 8% interest rate, but they’ll basically give you the money to get out of the ground as long as you’ve got enough deposit.
That’s the most important thing I think that we’ve actually mentioned in this is that once you go from residential to commercial, because you’re increasing the amount of dwellings that you’re building, things start to change. Plus you also go out and on GST as well too, which is another topic altogether. So the costs actually start to compound once you stop moving into more of the commercial development. And that’s the same thing I’ve heard. Once you start reaching about that four dwellings plus, that’s when things have to switch over to commercial because the banks won’t lend you. I imagine everyone was able to get residential rates and residential loans for, you know, 10 lot development. How much profit would we ever want to be making? So the banks are not dumb. You know, they’re quite smart on charging commercial rates for that.
You’ve just got to be smart about it and have to be creative around it and find ways to pre-sell stuff or get investors on board down the track. We can talk about getting investors and how to help bridge this commercial play. But it’s just one of those things that as you get bigger, you get smarter, get yourself educated and look for better ways to get funding that works for you without putting your house on the line, so to speak.
The next one we want to take a look at is development approvals. This time around the non-risk smart or the CDC or the plan and permit. So I guess maybe we should just squish the differences between this part of this ladder of complexity because we just did talk about development approvals, but they were mostly focused on the risk smart in Brisbane and CDC in Sydney, and the plan and permit in Melbourne. So what’s this one here in terms of development approvals and why is this one up high here?
Let’s distinguish these two. So the other ones I’d say are just stock standard approvals where you’re not really pushing the boundaries. Every council, every city, every state has different rules. And like we said before the one we’re talking about before, probably the generic ones where it’s stock standard, where you’re ticking all the boxes. Sometimes it’s two dwellings or less. Sometimes it’s four dwellings or less. Sometimes it’s 10 dwellings or less which are stock standard, tick the box. This level of development application we can call it impact assessable versus code, which means that it doesn’t tick all the boxes but there is a desire or need for it. So it might be, you know, if you’re looking at a block of land that normally you’d be able to put 10 townhouses on but you’re pushing for 15 because you might be going three-storey or instead of 10 apartments you be going for 20 apartments because you’re going five-storey.
So this is the more complex type of approval and you can call it impact assessable or out of the box or just depends on the council and the appetite for it. Because sometimes councils definitely want more density because it alleviates pressure on the infrastructure and things like that. However, you really need to, it’s a case by case scenario. It might even be a residential block of land that you potentially want to put a commercial use on, I’ve seen it recently, you know, where there’s a block of land, 7,000 odd square metres and that normally you can put townhouses or residential blocks on and they’ve got a McDonald’s because it’s on a main road. They’ve got a McDonald’s and a petrol station plus a few other shops on it and it takes a little bit longer. Like I said previously, you know, with some more challenging applications it takes longer, takes more money, but because it is a nonessential use or a change of use, material change of use then there’s potentially a lot more upside and profit for the developer. But there is some risk to it because you’re throwing money on the line and you may have committed to buy the property, spent a million, excuse me, $2 million on it and waiting for the approval to come through. So it’s just a bit more of an assertive and aggressive play in the marketplace. And this is often where, you know, the public companies go because they want a better return on their money.
I’ve interviewed previously house developers as well who have actually gone through the council and you raise a really interesting point that the council sometimes actually prefer a developer to add more density to the land just depending on where the area is, and this particular developer I interviewed previously, he actually was applying for a development in Melbourne for a 10 townhouse subdivision. And unfortunately, he got disapproved initially when it went through because it wasn’t, he didn’t have enough townhouses. He was saying that they needed to build more and I think the council requested him to do 18 townhouses in this instance. And I thought, wow, how does that happen? So he essentially did go back and had to redesign the whole thing and managed to put in 18 and then finally got it approved. But that was just a very interesting scenario because it kind of triggered me when you said that, you know if the council can actually increase the density, which they would recommend they would.
There is a lot more opportunity because that’s the same lot and the town plan initially said to him, 10 is going to be fine, you know, to get through. But the council after a bit of time, and it did take him a lot longer than expected because initially, he planned for about year to year and a half, it took almost three years for it to be done. But the profit behind it was substantially greater than what he initially did with 10. The outcome was great. But yes, as you said, the risks are quite high and you know, you can be in development for anywhere between three to four years for something like that as well too.
And if you think about, you know, the holding costs on something like that, the land wouldn’t have been cheap, let’s call it $2 million at 5% you know, that’s $100,000 a year. You might go, a hundred grand year is fine, but one year that’s $100,000, 2, 3, 4 years, that’s $400,000 just of holding costs and you might get rent of maybe $15,000 a year if you’re lucky, $300 a week. Then the capital is tied up. Opportunities tied in there and the market changes as well. You know, if he bought that in 2007 and came out in 2010 and the GFC happened in the middle, just those risks because development approvals, sometimes you win, sometimes you lose. It is a skilled game. The other thing is councils change their mind as well over time because of elections, local elections, council elections, state overlays, state sentiment.
So my point is that it’s not the game for the faint-hearted. Oftentimes the people with the deeper pockets who sit and land bank on stuff, they might lobby for three to five years or they might wait for infrastructure to catch up with them so that they don’t have to put in the expensive sewer that’s upstream. That’s going to come up with them. I know guys who sit on $10 million worth of land in huge estates and they’re just waiting for the guide upstream just to connect the services to go past their block and they’ve saved themselves $5 million or $3 million and then they come out of the ground knowing that because I’ve got the deeper pockets and they can lay and bank. It’s just a different ballgame that moms and dads I suggest steering clear of for the time being until you have, you know, 1 or $2 million sitting around doing nothing.
The next one we’d like to probably talk a little bit about is subdivisions. So this is something that’s really, really right up your alley in terms of subdivisions and you just also mentioned an example about it as well. This particular part of it is subdivisions where we’re creating two lots or more. So, as you’ve mentioned, you’ve got a 30 lot subdivision. Let’s talk a little bit more about this one and how this one goes up in a lot of complexity.
It’s very much congruent with what we were talking about before with increasing the number of dwellings that you’re building when you’re building dwellings, it’s not too bad simply because you can see what you’re doing and you know what’s going on. And once you’ve got the design line and you’ve got the finance right, it’s not too bad, I’d say in this context of subdivisions, when you’re doing more and more of them oftentimes with some reasons of challenges, you don’t know what’s under the ground. You don’t know what’s under the ground and whether it’s contamination, the soil’s bad. You’ve got other things like retaining walls, excavation. You’ve got headwalls which are like if you’re putting some stormwater into creeks if you’re into waterway corridors. So at the moment, I’m dealing with the handful of things such as, like I mentioned before, flooding where we have to build retaining walls for roughly, let’s call it a hundred metres of walls that you wouldn’t normally have to spend on a flat block.
And that’s the other thing with subdivisions, island. For example, if you’ve got a thousand square metres, there are only a few ways you can cut it up. Whereas a thousand square metres with apartments, you can pretend to put 10 dwellings on it, 20 dwellings on it, depending on how many levels you go. So with land, when you’re creating multiple lots, you’re dealing and you’re pushing the envelope, you’re dealing with things like slope, retaining walls, wall costs, buyer retention. So civil contractors as well. So it’s just a more complicated form of construction because you’re moving dirt around versus houses often because the blocks can be levelled and the earthworks with the subdivision have already been done, essentially you’re just building the house. So that’s why I think subdivisions can be a bit more complicated than a building.
In terms of say for example maybe timeframes and so forth, subdivisions versus say getting I guess the dwelling put onto them, do you think that there is much difference in timeframes or would it be something that is quite similar?
One into two subdivisions, you can get it done between 6-12 months depending on the approval timeframe. So it could be approved in 6 months and then the actual work is finished in 6 months, which sounds pretty crazy because all it is is just 2 blocks of land. You actually got no building in that same 6 months. In that same 6 months, you can build 1 or 2 or 3 houses. So actually, it might sound funny and it might sound crazy because it takes 6 months in subdivision, but it’s the process that takes a while and the paperwork is a fair bit of paperwork, just waiting around. Sometimes you might wait 2 to 4 weeks just for something to get stamped. And that’s not unusual. Whereas a building, once it’s finished, certified comes through double, triple checks it because it’s been checked all the way through by the certifier and the engineers.
You can pretty much, keys in, turn the key, you move into the house. But because the subdivision is underground, they want to make sure it’s done properly. They do, you know, CCTVs of the pipes. They do vacuum tests, they make sure the pipes don’t leak, they make sure they’re sealed properly. I heard of a situation where a water main was connected and the subcontractor was annoyed at his boss and therefore he didn’t do the job properly. And the water went everywhere because he didn’t weld it properly and it was sabotaged. So they literally had to dig it all backup and fix it up and backfill it. So my point is that with construction it’s all visible. That’s why it’s a lot more easily inspected and approved. Where subdivisions, 99% of it’s underground.
And for example, even bitumen on the road, once you put the bitumen down, you have to test it to make sure it’s at the right compaction because within a month if it’s not right, it’ll all come up. And then potholes and things like that. So it’s a different kettle of fish and not to scare people but at the same time give them a reality check that this can be serious business. Because if you don’t get it right there’s problems, long term problems down the track because you’re building a building and if the buildings are on bad soil and hasn’t been catered for or the pipes haven’t been installed properly, then they say the sewers, you know, not connected. You’ve got a blocked toilet and that’s not fun.
So this is so crucial when we’re talking about this. It’s the foundation really and foundation people can’t see, it’s like a high rise. People don’t see that. They spent maybe 6 to 12 months digging down deep into the ground, laying all these rods and so forth to build the foundation and the concrete and all of that. And then as soon as that is done, the high rise just goes up in like literally like less than 6 months. And it’s just crazy how it’s so visible and fast. But that foundation is so crucial to ensure that it stands up high.
I know the last two things we’ve got there on the ladder of complexity. Just talk about, you know, three-storey construction with apartments and then more than three-storey, you know, Mascot Tower, I know it’s been on the news a fair bit. I’m sure you know, being in Sydney there, you’ve probably heard more of it than I have, but that’s a really good example of risk in a situation where you’ve got multiple dwellings and it’s 10, 20, 30 storeys high and they just haven’t done a proper job of the engineering and the inspection. That’s all dodgy. And now it’s costing people 5-$10 million dollars to fix something. And it’s just a really, really bad situation because, you know, it’s not like one house. Let’s say you’ve got 100 houses and one of them’s been dodgy. Worst case scenario, $300,000 to build, knock it down, insurance claim or you back fill it or you basically pour some concrete into secure the slab. You can fix that. But something that’s so big, it’s just so gargantuan and the infrastructure, if it’s not done right there’s just so many problems and to fix it, fixing these things are very expensive as well.
And time-consuming as well, because it’s not like you could just lift it up from the bottom up and then fix it up. It’s something that’s going to take time to engineer.
At this stage, you know, the stuff that I’ve done, a two-storey I’ve done, I built a lot of houses. I’ve got a handful of townhouses. And you don’t need to get sexy. You don’t need to get overly complicated to make a lot of money. And you know, even with the 30 lot subdivision that I talk about, it might sound sexy. It is definitely challenging for me how I’ve broken down the risk of it financially and emotionally as well as broken it down to 2 stages. That’s what other things you can do to reduce risk is break it down. Stage one is about 16 lots and stage two is 14 lots. So the fact that it’s not just all in one go. It means that I can stage it and financially I don’t have to capitalise or come up with all the cash for the whole project at once.
It’s just this one stage at a time. Then what happens is you get the profit from stage one, it helps you bankroll stage two and the banks are really happy then as well because they know that all the evaluations that you’ve talked about stack up. There is a market for what you’re selling. People want to buy it. You’re making money. The bank’s making money, your investors are making money and everybody’s profitable and it’s creating a product that people want. And then stage two, you know, you’ve got profit, you’ve got the marketing channels, you’ve got the exit strategy and then the bank is a lot more happy to fund that as well.
That’s the great thing because once you’ve got a proven track record that the first say 16 lots have sold. The next stage, when people look, Oh hold on, 16 lots have sold there. A lot of investors are happy or moms and dads are happy, then the people would buy the next lots. There’s a boost of confidence that they can buy the next ones quite comfortably because it’s already got a proven track record. And that’s what I love about hearing stories like that. Like the bigger developments, obviously they do them multiple stages. You know like we’ve had, for example in Sydney, The Ponds section, they had stages. I think it was at least 3 or 4 different stages that they had to go through. But that first release called The Ponds was released with a nice big development. And then after that people were really happy. So they released the second ponds, which is called the Second Pond. It’s very similar across the board with a lot of developments I’ve seen as well.
It creates social proof as well that you have the people who are going in, they’re decent people, they’re working-class people, there are families in there, it’s going to be safe. The buildings look good, the landscaping looks good. So I completely get that. It’s just that social proof that people need to be comfortable with that project. And sometimes at the first stages is the hardest, but you’ve put a lot of energy and that builds up momentum and very approachable with the marketing and give them a good deal where you can, you might give them a small discount of a couple of grand, 5 grand, something like that, just to move the stock down the track. We can talk about potential tips and tricks on how I sold land in the GFC cause I think that’s really relevant to the current market.
Because there’s so many different ways and elements to it. It’s one thing to build townhouses. I’ll come back to this, coming back to number 10 where we talked about building townhouses and units. I’d say subdivisions in some ways is a harder game to play from a marketing point of view. And that’s why I’ve actually made it number 12 versus number 10 which is the townhouses. When you build townhouses, the difficulties of finance, like I mentioned, construction risk, design risk. But when you finish the townhouses, the product is relatively easy to sell versus a vacant block of land. If you’ve got 10 vacant blocks of land, it’s very hard, like you said before, for people to see what the finished product is. Like The Ponds there, because people haven’t moved in and they don’t know what the house is going to look like, what the estate is going to look like, their neighbours, et cetera.
Are they going to do removable homes? Single-storey, two-storey versus apartments and townhouses that are up to 4 dwellings. You turn up, it’s finished. You know exactly what the neighbours are going to be living in, what the whole building is going to be like, what the complex is going to be like, what the specification is, the colours. You have no concerns about the image of the property. Versus a subdivision, selling it is a lot harder simply because you’re talking vacant lots and houses that you know, you may be concerned about, you know, who the neighbours are going to be and now they’re going to build two-storey, single-storey, big homes, more homes. So, but you know, the way that we do it, we make sure that there’s a stock standard covenant across the blocks so that people build a good quality product and it’s an art and science on how to sell land as well.
We’ll definitely be talking about that in a future topic because I think that’s really, really interesting to sort of unpack as well just to understand the psychology behind it too. So I’m really excited to hear about that. So let’s wrap up the last two and I think just to sort of summarise on that one, the complexity for 13 and 14. Basically 13 is building units, townhouses, so basically 5 to 10 dwellings and that’s like a maximum of three storeys. And we’ve kind of talked a little bit about that. And then finally the top of the ladder is building units and townhouses, which are multi-dwelling but three storeys high and greater than 10 dwellings. And you know, things start to change as we discussed earlier, saying that once you start heading past say 3 or 4 dwellings, it starts to move on to commercial and then like commercial financing, commercial rates and so forth. And then once you go even higher when the big guys are playing the big game, there’s a completely different way of mindset in the way that they’re developed. Do you want us to just unpack that before we wrap it up?
The higher you go up on the ladder of complexity, obviously we call it that because it does get more complex. There’s more moving parts that can go wrong. Also, there’s more of a need for financing, whether it’s investors, whether it’s presales, whether it’s just general funding. So general funding as you get above the $5 million mark gets very, very difficult. And you know, the banks are not a fan of it and necessarily. If you looked at ACRA in the last five years or so, they’ve definitely cracked down. They pushed the [inaudible] down because they want, you know, people to put up more deposit and why people will put up more deposit because I think it’s more of a risk to them. And so my point is that anything more than three-storeys and more than 10 dwellings, you start to become professionals.
If you look at Meriton, you know, he’s doing buildings of 200 and 400 and he’s definitely the master of the game. When you’ve got buildings that big, you’ve got a lot of cash outlay, you’ve got a lot of finance at stake and your holding costs are phenomenal and astronomical. So my point is that the reason that’s right at the top is all the things we’ve talked about in the past, design risk, building risk, financial risk, a project like that could take 2 to 3 years to get approval and then 1-2 years to finish off. So we’re talking about a 4 to 5-year project and it’s not just 5 blocks of land or 10 blocks of land. We’re talking about 200 apartments. So in the 5-year cycle, if you think about the property market goes through 7 and 10-year cycles.
So Sydney as a good example, 2012 to 2017 was really the run. So if you started in 2014 and came out in 2019, which is where we are now, the market’s dramatically changed and you’ve got many, many millions of dollars at stake. You know, a site like that, he’s gone out and paid 10, $20 million for sites. So you’ve got that money sitting there, being waited on in land tax while you’re getting approval, and then you’re going to spend another 100, $200 million to build buildings. So my point is, it’s not for the faint-hearted. I’ve known several people who’ve been able to make really good money on it, but I’ve heard of a lot of dramatic stories where the market’s changed, dropping by 10 to 20%. And then the construction costs have gone up by 10 to 20%. So essentially you’ve lost 20 to 40% of your margin at the top was 20%.
Your 20% behind. So it’s just one of those things that definitely for people with the big bucks, public companies with all the resources and skills and for the other mum and dad investor like you and me, you don’t make 200 grand, 500 grand. We don’t even need to go close to that. I know some people want to go there and that’s fine. I had some visions of going and doing a block of 50 or 100 apartments at this stage. My creative aim has changed and I’m probably looking more towards commercial property and McDonald’s and 7/11 and things like that. A bit more diverse in rental space as opposed to a development space in buy/develop/sell. But my point is that it’s a different ball game and we can stick to our knitting and do the small stuff and still make good money.
Definitely just curious since we’re sort of on the topic of talking about say like a Metricon or Meriton or any of those large companies, Stockland builders and stuff like that, for them to actually start to go through that process of purchasing a block of land and then building and so forth, do they usually go out to get funding for these through private lendings or the banks or even just through investors? Is that something that they would potentially do or is it usually funded in other means?
Generally, they’d go to first and second-tier lenders to do that, and because their cash flows in their balance sheets are quite strong, they’re able to do that. So generally they’d go like a 65% LVR or even lower, like 50% LVR with some of their own equity that they’ve got in their projects or in their bank accounts in the balance sheet. But they definitely go with a stronger and a lower interest rate to our lenders. From my experiences just simply because of a project that big paying 12%, 15% interest is very, very risky. And for them, you know, that they’d rather even just float a project. They might even go to the stock market and go raise 5, $10 million as seed capital to get a project out of the ground. And then, you know, because if they can show, let’s say 18% or 20% return and they’re giving a proportion of that to their investors, it’s a lot less risky than even, barring the 12%, 15% fund as you can see if you’re borrowing 12 to 15%, if the project takes longer, then they’re in trouble.
Whereas if the investors from the stock market are waiting for return and they’re not getting an interest rate, that means that it can take longer. They haven’t got the holding costs as such. So it’s a balance and that’s really what the analysts do in there. To juggle that. It’s quite a complicated question you’ve asked, which is very hard to answer in a minute.
I can now completely see the bigger picture because if they do to go to the stock market and float it, yes, there’ll probably be an upfront cost to create all that as a prospectus and all that kind of stuff to get it floated. But obviously, on a month to month or year to year basis, they wouldn’t have to return anything back to them because they’ve already raised funds there and they just use it as they need until the end of the development and then return it back. So that’s actually a very, very smart model because the risk is you don’t have to continue to outlay monthly cash flow, whereas you know, with the bank you’ve got to pay that monthly 5-6% whatever that rate is to be able to continue going on and millions and millions of dollars. It’s a completely different ball game as well and that affects cash flow.
Definitely another topic for another time where we talk about joint venture models there. There’s so many different models you can run. I’ve summarised it pretty much down to two fundraising models and it’s very much relevant on how you can do it on a bigger scale. The other way that they can do it while we’re talking about it is sometimes our joint venture, sometimes a public company will do a joint venture with other public companies. I’ll give you an example. Let’s say one public company secures the property and puts up the cash for the land and pays cash debt free for the land. Another public company or another entity might come in and will guarantee the debt on the construction. So it might be a joint venture with a builder, but it might be a joint venture with another property developer whose expertise might be in construction as well as apartment sales.
So, therefore, they’ll come in and say, you put up the $10 million on the land, we’ll guarantee the loan for the $100 million dollar facility. And from a cash flow point of view, we’ll guarantee that and we’ll push hard to get this out. So it comes down to confidence, experience. I know in the past, one of my mentors, his project was I think, off the top of my head, over 200 apartments and they went to the Bank of Scotland. This was about 10 years ago. And in the end, they didn’t make a lot of money at all because it just took so long. But because they had the experience, they had the expertise, they had the teams, they were still able to exit on the project. In the end, they handed over the apartments to the Bank of Scotland. The Bank of Scotland had enough to pay off the debt and then use the rest of their sales just to pay off any interest that was owing. So, you know, there are some big banks out there, but that’s why it’s definitely a big boys and girls game and experience is important. And also have a lot of collateral in terms of your balance sheet as well as cash flow. It’s a good thing to aspire to. But it’s one brick at a time. One deal at a time.
I just mentioned one last thing I have heard and seen happen already as you’ve mentioned, some joint ventures like Lendlease and Stockland, pretty common things. They did that for The Ponds. You know, I knew that they did joint ventures all across there. So that very, very fascinating now that you mentioned it, because just that realisation just kicked in and going, they do it all the time, but we just don’t see it until you unravel it.
You’ve triggered a good topic so we can just keep going on from here if you want. So, for example, Springfield was a really good example up in Queensland where, you know, Maha Sinnathamby and Bob Sharpless, for those who don’t know, Maha Sinnathamby’s in the BRW billionaire now. He was a negative millionaire in a lot of debt and a lot of trouble, but he was able to sort that out and move forward. The point is that, as you mentioned there, Lendlease in joint ventures with them where essentially, from my understanding, superficially anyway, that let’s say Springfield land corporation put up the land and just vacant land, they would have gotten their own approvals in conjunction with the council there. And then Lendlease let’s say, would come in and put the civils in, curb and channel, sewer water, infrastructure in, and then Lend-lease would be in charge, for example, of selling the land.
So Lendlease would put up the capital hypothetically to develop the land and then from the sales, the income would pay back Lendlease their contribution. And they, for example, would do either profit share or based on a fixed price that Springfield would sell to on a per-lot basis. So that can be very, very lucrative in the [inaudible] scenario because let’s say you might do 20 lots at a time, 20 lots from a costing point of view, it might cost them, let’s say $2 million for Lendlease to put in the roads, infrastructure, et cetera. And then after 20 lots have sold, the profit comes back to you in the capital, comes back in and they can recycle it and go again and again and again. Lendlease if they are smart, they might have a building team and they might make a profit on the build as well. So they might, you know, jointly make $50,000 on the land and they might make 30,000, 40,000, $50,000 on the build. So every house and land, they might make somewhere between 70 and $80,000, let’s say as an example. And then they can get rolling through that joint venture scenario was Springfield, they’re just putting up the land, they’re not contributing any more funding and then Lendlease just keeps project managing it and rolling it out and rolling their money over and over and over again.
That’s such a cool concept and I guess this is what we’re seeing a lot in Sydney for example, out in Schofields, Stockland has done that, whoever, I don’t know who’s bought the land out there, but they just continued to build it in stages and stages and with those stages continued to roll out, as you said, it keeps rolling the money back into the project and just continues to expand and that’s how they’ve developed communities like Springfield. It was just small developments or stages that they released bit by bit and that whole community was rolled out. I don’t know how long it took them, but I can imagine now that is a huge, huge development and really nice development that’s in there and as it probably attracted a lot of people in the community to be able to form that whole suburb and I guess that’s how new suburbs get formed.
I think they started in 1991, so we’re talking just a little bit under 30 years because my dad bought a block of land back in 1991. He really didn’t know what he was doing in terms of a money-making scheme and he ended up selling the block and didn’t make a lot of money. That same block of land now is worth probably, I think he paid $30,000. It’s probably worth $300,000 now. So on a 9 to 10 times return. But that’s the thing, you know, you just don’t know. And even back then in 1991, I was 11, I was in primary school. I had no idea about making money or development. I had no interest in that. It was just more computer games and I’m going to school and playing sports. So my point is that there are opportunities around if you just observe what other people are doing and try to analyse how they’re doing business and apply it to your own.
Let’s wrap up this session or this episode, I thought it’d be really good for our listeners out there to probably get an action task in this assignment. They can actually go through and maybe just apply the ladder of complexity that we’ve talked about. So what do you think we should provide for them today in terms of the assignment?
I think an opportunity for people, we’ve talked about a lot of open homes and open for inspections and new homes and things like that. My suggestion for this assignment is for you to go and inspect some new dwellings so you can go and have a look at, you know, on the weekend for an open for inspection. Look at those specifically new dwellings. You could even go to a display village. If there’s a display village near you or if there’s a block of apartments that are just finished and that hit the market, I reckon you open the newspaper and go to www.realestate.com.au and look at something, go observe and study the specification on those dwellings. What I mean by that is study, what kind of benchtops are they using? How high are the ceilings? How big are the bedrooms?
Dimensionally collect the information that you have. The pamphlets and things like that. What colour are the buildings? Are they grey? Are they black? Are they white? Start to study and compile a set of information so that you go, okay, down the track, how can I use this information? I know I mentioned things like ceiling heights and even floor coverings. Sometimes you can duplicate that in a renovation. How big is the kitchen? Is it a stone benchtop? Is it a laminated benchtop? How big are the tiles in the bathroom? Those things after a while become important, especially when you’re building your own specifications, a spec home, or you’re building townhouses that you can either out-compete other people by using bigger tiles, tiling up to the ceiling as opposed to just a one around the bathroom, glass splashbacks, there are so many different bits and pieces that you can learn just by starting a project that someone’s just finished.