Donald Trump and other developers hate self funding their projects. And they pay big for your money...
Did you know that 26% of the BRW Rich Listers in 2016 made their money in property development?
It’s no secret that property development can be immensely profitable and that most developers share this wealth with their development partners thanks to the power of crowdfunding and the internet.
What’s less well known is ordinary investors like you and me are commanding as much as 20% – 60% cash returns for their money by solving certain needs that most developers like Donald Trump have.
And When you understand how…
… you will be ready to tap into opportunities you never knew existed.
Opportunities that are not obvious to most every day investors simply because they have typically been restricted to the big end of town. Not anymore.
Let me explain….
We’ve all heard the property investors acronym: OPM
It stands for “Other People’s Money”.
Property investment “educators” will have you believe it’s easy to make money developing property.
They might even goes as far to say there are plenty of people willing to part with their hard earned cash so you can develop yourself without using your own money.
They make it sound simple: approach some investors with your vast skills and connections built up over a weekend at some “wealth retreat” and they will throw their money at you – It rarely happens.
You see, people are very savvy nowadays.
The internet has made them so.
They know that highly experienced property developers bring a vast array of skills, experience, contacts and …most importantly… RISK MANAGEMENT to the investing equation.
These are skills and relationships built up over a long time…often with the developer having made and lost a lot of money along the way. Personally I prefer working with developers that have lost money. They’re the sharper ones for it.
Believe me – they learn far more from their failures than their wins. This experience cannot be bought over the internet or at some seminar. It’s earned in the trenches and it’s for sale.
Does this preclude most of us from enjoying the highly lucrative fruits of property development?
Some newbie developers have a go and get lucky. Maybe they bought a site in a rising market which covered up some simple mistakes like paying too much for a site all the experienced investors have already rejected. I’m seeing a lot of this on the ground now as I write.
I’ve also seen experienced developers fail due to some basic mistakes that get overlooked in good times. Yes, overconfidence has been the undoing of many a developer.
Then there are others that have earned their stripes… in all market conditions…and they are the one’s – like Trump – who rarely use their own money. They don’t need to.
They’re very happy to sell you their time, skills and contacts and a significant share of their profits… for your cash.
Why do they trade such large profits?
This begs the question: why are they very keen to trade their time, skills, contacts and developer profits … all this value and some very impressive returns… for your lazy cash?
I’ve seen annualised returns paid to investors ranging from 20% – 60%.
(Yes, I’ve also seen negative returns. Another blog post dedicated to this soon).
Well, it’s no mystery really.
Developer don’t like tying up all their own cash a limited number of projects because it:
- Reduces the number of projects they can undertake. Using other people’s money is a form of leverage to get more projects running in parallel.
- Concentrates their risk into one project….if the project fails, they lose the lot.
- Constrains their wealth building…rather get 30% of 5 projects than 100% of one project.
- They can “run the cycle” meaning they do more on the market upswing and then relax for a couple of years when the market turns… I’ve seen the holidays and toys my developers indulge in when everyone else is scrambling to buy and develop at the peak of the market.
But here’s the rub
Just as the developer is keen to trade skill and profit for your cash, most experienced investors also know how to objectively evaluate these offers. After all, like every investment, they come with risk.
Calculating the risk is vital particularly when you have many options in the marketplace and limited resources.
Note: I will be bringing out a guide to selecting and evaluating property development investment offers. I’ll let you know when this is available.
Knowing what the potential risks are is easy. You just have to look at the product disclosure statement. ASIC ensure every risk imaginable, applicable or not to that particular project, must be listed in the offer documents. It make for sober reading and will frighten off many less experienced investors.
I intend to help my subscribers understand the risks and get some perspective. For now though, I’d suggest you download a sample PDS from an armchair development offer issued recently by one of our developer partners. In subsequent blog posts I’ll unpack these risks and much more.
What’s this got to do with The Donald and Co?
Donald Trump has been quoted:
Do I Want To Sell a Couple of Buildings and Self Fund?
Trump is a controversial character and, personally, I am intrigued to see what he does with his new powers. I work closely with property developers as part of Hotspotcentral’s Armchair Co-Developer Program and I can say, like them, Trump has taught me something which has enabled my clients and I to get far superior returns on our money and time invested.
You see, as the Trump campaign developed, he backflipped and decided it wasn’t prudent to self-fund his campaign. Using his own money was, frankly, not in his DNA. I mean, why would he sell income producing and capital building assets to fund something uncertain like an election?
It’s not in a successful developers psyche. They prefer OPM.
And here’s the big lesson. And the opportunity.
Developer’s rarely self fund their own property developments.
Property Development is Now Widely Available
In the past, sharing in property development profits was limited to experienced and sophisticated investors only. Also, the minimum investment amount to access these opportunities was way out of reach for the majority of investors.
Just another example of “the rich get richer”…
ASIC also sets limitations on who can invest in these offers … and under what circumstances they can participate. In the past, people have lost their shirts investing with some unscrupulous or inexperienced developers.
Despite the increase in regulatory oversight to reduce this, it still happens, but I think the oversight is important as a deterrent to those hoping to get into co-development without the requisite track record.
It can also be very costly to structure these offers in such a way that they can be made to inexperienced investors with all the checks and balances in place. Previously developers had to either increase the minimum investment amount (thereby reducing the overheads associated taking on a large number of unsophisticated investors) or reduce the compliance (ASIC) costs of going direct to the general public.
With the maturing of the internet, the latter option has become known as ‘crowd funding’ i.e. a means of attracting smaller amounts of capital, from more people, for less cost. The days of minimum entry investment amounts of $100,000 or more are ending.
An example is The Lomax Property Development Fund – the minimum investment amount is only $10,000 AND the (costly) level of compliance and regulatory oversight is very high. The Lomax Fund is offered as a retail managed investment scheme which means an independent Custodian controls all the investors funds and the responsible entity (AFSL) provides day-to-day oversight.
I’m approached regularly by property developers who want to use crowdfunding as a source of starter capital for their projects. Few developers and projects get past our initial screening.
Yes, some bring great projects and good experience but then they baulk when we tell them what’s involved with offering these stellar returns in a compliant way.
Despite some very attractive returns on offer, often when you lift the lid, the risks are usually much too high.
But that said…
The returns offered are meaningless.
Investment returns offered are meaningless on their own. Unlike a bank account interest rate, which is virtually risk free, property development returns are tied to a vast number of assumptions and risk factors. When I consider a project to invest in, I’m wondering what the risk adjusted returns are.
I’ve seen a co-development offer with a 40% return that was much less riskier than a similar offer at 18% over the same period. The returns on offer do NOT indicate the level of risk as the old adage: High Risk = High Return will have you believe.
I’ve also seen offers where there is no separation between the developer and the entity raising the capital. Imagine giving a developer you do not know direct access to the money pot? I’ve also seen offers where there is ‘no bank debt’ involved. Frankly, I want there to be bank debt involved.
When the bank is putting in 70% of the cash, you can be certain they’re paying some very clever people to undertake an array of due diligence procedures on their behalf. The kind of due diligence most every day investors could not do on their own..even if they knew how.
A risk–adjusted return factors in a number of variables (which deserves a whole blog post of it’s own) that makes it easier to compare competing offers. My point is, you need to know what the risks are and how to measure the upside in proportion to this risk.
Only then does your exchange of capital for a share in the developer’s profits, become an equitable investment based on an informed decision.
I hope I’ve set the scene for a series of posts about how to choose an investment offer where there is a share of the profits on the table. It is becoming a mainstream source of wealth for those that don’t want to rely solely on owning direct real property but want to invest in property development without the need for more tenants and more debt.
Property development can offer more certain returns over a more certain time-frame. It can be an important part of the overall investment mix.
And remember, research is everything.
In my next post, I’ll unpack the difference between crowdfunding and armchair development. These terms are used interchangeably but do have distinct differences which are important.
Until next time.