Numbers/Application/The Pareto Principal in Business/Property/Trading

I have been asked in the Housing thread to give an example of Number use in property.

There are 3 very important components in ALL business whether that business be Property/Trading or general business. To some this maybe old ground but to many I'm sure will be new and exciting when applied.

Here I will present the basics.

Regardless of what "A Business does" there are only 3 ways to grow it.
(1) Decrease costs of doing business (efficiency,buy better,reduce overhead)
(2) Increase margin (profit).
(3) Do or sell more. (increase turn over).

All of the above produce a set of NUMBERS and its these numbers with which we must work closely with if we are to grow financially. EVEN if you dont have a business YOUR Business is YOU and your finances.

Bad Numbers mean that your business is failing or the Business venture your about to enter into is likely to fail.
Good numbers are the exact opposite. We should all be working on the 3 basics throughout or Business life and even in retirement.

As I have been asked to present a specific example related to Property I will give 2. One for those who dont Develop but are either investing or thinking of investing in Property and one as an example of looking at a small developement. I will only go into BASIC detail.

Purchasing an IP (investment property).
Basic numbers ONLY (you should add in Tax benifit from the interest component AND depreciation,this does have a large impact---bring this up with a good accountant when your serious. Ofcourse there are establishment costs and yearly costs)

Always start from the top and work BACKWARDS.

Cost of Property (Lets say) $400,000
Possible return (lets say) $18,200/year
Cost of "Money" (finance,lets say 8% interest only) $32,000.

In this case you are NEGATIVELY geared seriously so.Any increase in interest would be very stressful to most.
Possible Solution.

(1) Buy better (Lets say you steal it due to whatever) $370,000
(2) Higher Rent (Lack of rentals highest bidder ) $20,000/year.
(3) You supply 35% deposit $ $130,000 cost of $260,000 at 8% = $20,800

These are almost positively geared numbers (include tax benifits and depreciation and they will be positive.)

These figures are indicative of todays possible investments here in Adelaide,6-9 years ago they looked VERY different. The worm will turn on THIS TYPE of investment but not for Many years!

What about NOW?
As a developer and investor (I was in that 6-8 yr bracket),The NUMBERS for the above investment are NOT attractive,so I look for other opportunities.

Here is the latest BASIC numbers,I'm working with a syndicate (3 of us all business owners,2 general and one solicitor (A handy member)).

24 acres industrial land (There is a shortage all SMALL acre blocks sell off subdivisional plan). The NUMBERS

Cost $3,000,000.
Subdivisional developement costs Turns this to 21 acre lots once roads and cualdersac is implemented.$1.8 mill
TOTAL cost $4,800,000 to 5,400,000.

Return on sale 21 X $500,000 (2 sold at this price 2 mths ago).= $10,500,000.

40% to be sold off plan BEFORE developement.

I know to most these are rediculous Numbers but the point is you can do the exact same with much smaller developements---the NUMBERS MUST add up.
If they dont the investment is NOT a good investment.

Trading

No different.
Do you consistently have positive expectancy for your Business---what are your NUMBERS. (I have written much here as have others on Positive expectancy,if interested search it).
How can you GROW your business?

Pareto Principal.

The 80/20 rule.
You'll find in all your endeavours that you'll invest 80% of your time in pursuits which return 20%.
By recognising the 80% of your return which comes from 20% of your effort you can and should isolate your VALUABLE time into these areas and drop those which WASTE the 80% of time.

Most in trading spend 80% of their time ANALYSING and only 20% (if that) on the important NUMBERS which make 80% of the profit!!

No different for any business or any property deal.
dont waste your time trying to make something work that will only generate 20% return.

Why spend 20 yrs being the most articulate Elliott Wave Practitioner (As an example and not pointed at anyone),when this time may well only increase return by 20% in the whole scheme of BUSINESS.

When you live by the above one day the LIGHT gets well and truely turned on --- to most this may well be embroiled in arguement which will take up 80% of their effort---I think you see the point!

Thanks Tech, invaluable practical advice as always, and applicable to everything in life...

tech/a said:

Cost $3,000,000.
Subdivisional developement costs Turns this to 21 acre lots once roads and cualdersac is implemented.$1.8 mill
TOTAL cost $4,800,000 to 5,400,000.

Return on sale 21 X $500,000 (2 sold at this price 2 mths ago).= $10,500,000.

40% to be sold off plan BEFORE developement.

I know to most these are rediculous Numbers but the point is you can do the exact same with much smaller developements---the NUMBERS MUST add up.
If they dont the investment is NOT a good investment.

Click to expand...

Very nice indeed tech, worst case scenario is still almost double the money I can see.

I've just one question. What's the timeframe from plan inception till the time you expect to sell off all 21 acre lots? Am calculating the annualised returns.

Hard to say.
Will take from Council approval to developement around 12 mths without a fight,so far so good.
Developement approx 8 mths.
Would expect most sold 12 mths after approval. have 3 already waiting for subdivision approval and LTO ratification.--- we havent completed purchase---pending sub divisional approval.We currently have an option.

tech/a said:

Hard to say.
Will take from Council approval to developement around 12 mths without a fight,so far so good.
Developement approx 8 mths.
Would expect most sold 12 mths after approval. have 3 already waiting for subdivision approval and LTO ratification.--- we havent completed purchase---pending sub divisional approval.We currently have an option.

Click to expand...

Let me see if I understand this correctly:

Do you mean roughly 12 mths for council approval for all 21 acres?

You have 3 out of 21 acres waiting for approval and LTO rat currently.
So how much time has passed and how many more acres to go?
Option's a nice idea to bear in mind though.

I do hear of property people arranging seminars urging attendees to consider property development, and I wonder how good they really are or if they're just in it to make money out of fees and seminars, but it's not for me atm.

Overall, just love to learn about these things.

Mousie said:

Let me see if I understand this correctly:

Click to expand...

Do you mean roughly 12 mths for council approval for all 21 acres?
No the approval process AND the Subdivisional works should take around 12 mths.Council only 8-10 weeks.,Services,Roads,etc the rest of the time.

You have 3 out of 21 acres waiting for approval and LTO rat currently.
So how much time has passed and how many more acres to go?
Option's a nice idea to bear in mind though.

Click to expand...

No we have 3 properties sold pending Council and LTO subdivision.
All 21 are of course being approved at the one time.

I do hear of property people arranging seminars urging attendees to consider property development, and I wonder how good they really are or if they're just in it to make money out of fees and seminars, but it's not for me atm.

Overall, just love to learn about these things.

Click to expand...

Sure they are in it for the $$s.
Just as experienced Traders who have something of benifit to pass on sell their mentoring. So they should.

Hi Tech,

8 - 10 weeks to get council approval for a 21 acres subdivision ?? WOW !!!!!!

That is fantastic, in NSW it would take much longer than that just to get the various studies done, then has to get passed by council.

It took me 13 months to get approval to cut a suburban block in half, with no objections from neighbours

I know another person who took 6 months to get approval from the Main Roads authority to put a gate onto a main road.

Good onya mate, go for it !!

Great thread tech/a.

Property development can prove to be very lucrative when the numbers ARE worked. Here's my example of doing the same on a smaller scale for those interested:


2 years ago my partner and I wished to buy our own house. All we could afford in our chosen area of Sydney was a small 3 bedroom duplex or a unit. Not wanting either I investigated other possibilities.

We ended up building a massive 25 square 4 bedroom house in a new estate for only $30K more than the neighbouring suburb's 3 bed duplex.

1 year development, kept for 1 year to do the landscaping etc. Sold for a nice 20% gain on original development cost. Would have been more, except house prices crawled back about 10% in the area. I know this gain is not much, but we actually borrowed 103% to build this house! Not a cent of our own savings!


Having learnt stacks along the way, we are about to do another. This time, we are looking to build a duplex (2 x 4 bedrooms). In Sydney, with land becoming scarse, over development is looking good for profits. 2 residences on the 1 block. We are going to build in a very established area where the average house price is 1.5 times our development cost (each). Projected profit 42% on original development cost.

Tech/a thanks for the info.

I will be taking my first foray in property development in the next 12 months with the old man. We've got some land in NSW(Port Stevens area) which currently has approval for 4 units/dups(though I do believe there's potential for another 1-2 units depending on design/council approval, etc.). So we're starting small. Should be a pretty interesting experience, got a lot to learn and I am sure we will learn quite a lot from the experience - it's about the numbers.

Have you any experience in commercial property? Or is your domain residential?

Macca

Of course the 8-10 weeks is if all goes well.
There are precidents in the area and I have an experienced Planning Consultant handling Council.
I know what you mean I have only just finished a 2 yr battle with the Council over a new Home I'm building for myself.(We eventaully won!).

Stockman.
Seriously look into COMMUNITY TITLE you may get 3 on the same block.
More on the block more profit.
I look for 3 min and 6 is really nice---mitigating land cost!
Well done though profit AND experience---what more can you ask eh!

Lucky
See above comments to Stockman.
Your "Size" of developement lends itself to the "Right Numbers".
Work back from what you can realistically get for each--to the developement and HOLDING numbers ie the cost of money whilst developing---there are ways to sell off plan the land component and minimise this cost.

No I havent done commercial only Residential and Industrial.
However Commercial would be similar in that return from leased edevlopement will/should have a great deal of impact on final property valuation.

I think commercial property is more of a yield play.
In terms of development, im not sure.... thoughts?

In terms of developement it would normally be about capital gain.
Longer term as an investment it could mean both yeild and capital gain.
Most developers wish to flip as quick as possible even before completion.
However some ---where the opportunity exists,through the type of developement (In lots of different types of developement) once completed chose to sell enough to be comfortably geared with a good return(Yeild) and sit on some from the developement looking for increased capital return.

Ie build 4 sell 3 sit on 1

A great strategy over the last 10 yrs.

tech/a,

Thank you for posting your comments on the numbers.
It's pretty much what I had in mind when I did the calcs (property vs shares). I'd need a lot of equity in order to get a positive return.

Great example on the subdivision though ( and good profits too!)

slooi1