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What Kind of Property Developer Can You Be?

Feb 27, 2008
Today, I will encourage you to take a good, hard look at yourself to decide which approach to real estate works best for you. I want to make sure your endeavours start out on the right foot, and this crucial step will help you prepare to successfully enter the world of property development and investment.

So read on and dive in!

What kind of property developer can you be?

Let's get things started with three questions:
1. Do your bank statements make you glow with satisfaction, or do they make you toss and turn all night?
2. Do you have the time to take on new projects and challenges, or is your calendar jam-packed with prior obligations?
3. Are you interested in learning new skills, or would you rather hire someone to take care of your property dealings for you?
No matter how you answered, there is a wealth of options for you. Read on to find out what they are.

Are you a developer or an investor? - Three big differences:

Have a look at this comparison and see which category suits you best.

Investor

1. Involvement: More passive than developers
2. Time frame: Long term - usually 5, 7, 10-year time frames; think yields, capital growth, ongoing management
3. Think of it as playing the stock market, but you're trading real-life properties instead of shares

Developer

1. Involvement: Active - you're adding value to your projects (thus creating equity) directly
2. Time frame: Short term - usually 12-18 month cycles from start to finish
3. Think of it as running a business - you are buying, fixing, and selling goods

Here are three basic factors that will determine which way you should go:

Equity. This means all of your wealth that you own. It can be cold hard cash or the available equity in your current house (i.e. what your house is worth, minus what you owe the bank). The calculation is simple: the more equity you have, the easier it is to actually go out and buy a property or develop one you already own. Having some easy-access cash also means that you can hire a professional to handle your development management. This is very common, especially among people with plenty of money but no time.
Time. Any way you slice it, dealing in property takes a lot of time. Whether you're scouting out neighbourhoods, haggling with contractors or making a sale, you (or someone on your team) must put in the hours. If you have a flexible enough schedule, you can do the work yourself and keep all of the profits. Otherwise, you'll need to outsource the work to a development manager.

Proximity. For beginners, it's best to start with properties that are nearby. It will be easier for you to sell, rent and make improvements on your properties if you can keep a constant eye on them. Also, banks are less likely to invest money in out-of-the-way locations. Down the road you can use what you've learned to venture farther afield.

Personally, I only go for properties that are located in capital cities, near the coast, and within thirty minutes of a major Central Business District (CBD).

Which of these three categories do you fall into? Read my recommendations:

1. Plenty of time, short on cash flow/equity. If that describes you, let me suggest that you start by setting up deals that you can sell to developers. As a developer, I'm more than happy to pay someone to set up profitable deals for me since this can be an incredibly time-consuming process. But you'll need more than just time: setting up deals requires a strong network of contacts. If your network is small now, don't worry. It will grow naturally as you hunt for deals. And once you've racked up some equity, you'll have the freedom to put on your developer hat and buy other peoples deals.

2. Lots of cash, no time. You want to enjoy the healthy profit returns that development offers, but you're one of those busy professionals who are income-rich and time-poor. Consider hiring a development manager to handle your projects. My tip for you: offer the development manager a fixed fee plus a percentage of the profits - this gives them an incentive to maximize your profits.

3. Good equity, not so much cash flow. This is very common in real estate. My advice is to hit the books, hit the streets, and become your own development manager. It's equally important to learn how to deal with banks: while business is good, secure lines of credit. That way, when the market goes through a dry spell, you're covered.

Real estate isn't always smooth sailing. Read here about three common problems and how you can prepare for them:

1. Funding projects. A lot of people are afraid of dealing with banks. But it's crucial in order to round up capital. Well, having worked at a bank for eight years, let me put you at ease. Banks only care about one simple thing: minimizing risk. So your bank will be watching you very closely to ensure that all your bases are covered - that you'll be able to pay back your loan. The more you understand the bank's position, the more you'll succeed in the property business.

2. Cash flow. Staying afloat during periods of negative cash flow is probably the single biggest and most common challenge. Development is high capital business; the rewards are great, but so are the failures caused by mismanagement and overconfidence.

If you don't believe me, consider that Donald Trump came within inches of financial ruin in the mid-nineties. Having overextended himself in more prosperous times, he suddenly became unable to make his loan payments when the recession hit. (He narrowly escaped by restructuring his debt and waiting till the market picked up again.)

Here are some tips to keep your cash flowing: secure lines of credit while business is booming (see Good Equity, not so much cash flow); time your projects wisely and avoid overlap (don't start a new project until you've finished the last); and don't take on more than you can handle. It's really important to stay on top of your finances. Record every bit of income and every expense and analyse them constantly. Efficiency is the key. Get lean and mean.

3. Project management. Keeping it all together and delivering your projects on schedule is crucial. I could go on and on about this one (and I will, in future articles) but it all boils down to three points: Time, Cost, and Quality. These should stay balanced at all times. The more quality you deliver, the more it will cost. The more time it takes, the more it will cost and the less profit it will generate. And vice versa.

Regardless of whether you're leaning toward development or investment, doing it all yourself or working with professionals, I urge you to do your homework! Go to workshops. Read relevant books and journals. Get a coach. Become a student of the property business. Keep on asking questions - of yourself and of others - and you'll be surprised how quickly you can move toward your real estate goals.
About the Author
Daniel Lock is a property coach, consultant and development manager. Offering results-driven coaching and consulting to people wanting to make money through property development. Find out how you can make serious money safely in Property Development at http://www.daniellock.com.au
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