How to create massive wealth through property development

Last month I explained how property development can be an effective strategy to achieve your financial freedom within seven to 10 years – or less. In part two, I want to share the numbers to show how you can do this for yourself and create a $6 million portfolio with $3 million equity. 

The table below sets out the property values, debt and equity position each year if you developed a four-townhouse (T/H) project every second year over a 10-year period (meaning five small projects). I assume that you sell two of your properties and retain two in each of these small projects. I’ve assumed a modest five per cent per annum long-term growth rate on the portfolio as historically most Australian markets have delivered at least this result.

The numbers also reflect the profits on the two townhouses sold each time.  So, in year one we had four townhouses worth $2 million of which we sold two for $1 million leaving us with $1 million-worth of townhouses (the value). The debt is also reduced by four x $100,000 (being the profit on each townhouse). As I think that being able to sell your own stock is a vital skill for developers, I’ve not factored in selling fees – although you can adjust the numbers for agents’ fees if you don’t choose to master this skill. (Agents are in the business of generating commissions, so they’re not necessarily going to get you the best price or terms for your project.)

DIY Small Development – How to create a $6 million portfolio in 10 years

Strategy: You do a 4-townhouse development every two years
You sell 2, and retain 2 in the years you develop.

Assumptions:
Value of each townhouse = $500,000
Profit on each townhouse = $100,000
Assumes you sell your own stock so don’t have to pay agent’s fees
Assumes interest-only financing
Capital growth on porfolio each year = 5%

Numbers on your retained townhouses

margie1
If you assume your portfolio will generate an income of around 4.5 per cent after costs each year, you’re making an annual cash flow (in today’s dollars) of $135,000 on your $3 million equity. And as these are new properties, with your depreciation schedules you may find you’ll pay very little tax on this cash flow.

As an added bonus, the capital growth of your portfolio from the end of year nine onwards, at five per cent growth, will be around $306,778 each year. This means that instead of selling your properties for additional cash flow you can refinance your portfolio and take out some equity growth tax-free over time as needs be (e.g. to finance travel or renovations or other lifestyle expenses).

Ideally, you’ll have a day job while doing this strategy so you can obtain residential financing, as banks love to see evidence you can service your debt – even when you’re only borrowing at a 60 per cent loan-to-value ratio (LVR), as we are in this scenario. If you don’t have a day job, you can resort to low-doc loans but these are harder to get and come on less attractive terms generally. Alternatively you could explore a “done-for-you” strategy, where you put up some risk equity (generally around $150,000) but someone else does the developing. This is commonly referred to as “wholesaling” and is an increasingly popular way for ordinary people to break into developing without having the skills to complete a project.

Wholesale Investment – Turn $150,000 into $1 million+ in 10 years passively
(while an experienced developer does all the work for you)
Strategy:
Put up $150,000 investment to finance a development and share the developer’s profits
Assume:

  • In year one you put up $150,000 and at the end of the year attain a townhouse at 20% below retail cost
  • The original $150,000 is refinanced at the end of the project and recycled every year into a new project
  • You invest in one wholesale deal every year for 7 years (using recycled $150K equity)

Value of each townhouse = $500,000
Profits on each townhouse = $100,000 (developer’s profit)
Assumes you are a passive money partner but share equally in the developer’s profits
Capital growth on your portfollio each year = 5%
Numbers on your retained townhouses


In the table above you can see how by using just one $150,000 capital injection you can be a money partner on small- to medium-sized developments and how that can generate a $4 million portfolio and more than $1 million in equity. All off one initial $150,000 investment that gets recycled each year (or 12 to 15 months on average) at the completion of each project.

The downside of “wholesaling” is that you’re reliant on the skill of the developer to generate your profits. So, the main consideration when considering this option is to do extensive due diligence on the experience and track record of your development partners.

By Margie Baldock

Margie is a property developer, entrepreneur and professional investor, who has undertaken $72 million worth of property projects including renovations, subdivisions, construction, options and project marketing in the past eight years. She is always looking for new projects and joint venture partners. www.prosperdevelop.com and www.PositiveGrowthProperty.com.au

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