I’m going to say something that will go against the grain of what most of the media loves to talk about… then (just so you expect the unexpected) I’m going to contradict myself…
I don’t care about hot spotting.
There! I said it!
I don’t care about finding the next big trend and trying to pick the best street in that area. Why? Because it’s too easy to get sucked into the lure of big capital growth returns. It’s no different to the siren song of gambling and the lottery.
Trying to find the next hot spot is little more than gambling, and that’s not how I like to treat my investing life… Investing and developing is a business and you’ve got to treat it as such.
That means removing all the silly temptations associated with gambling; with risking it big to make big returns.
When it comes to developing and investing you need to do everything to mitigate your exposure and offset the risks.
There are many strategies I teach my students to mitigate risk and to set up deals so that they are not only covered but also have exit strategies throughout the development process.
The least reliable of these, yet, if you can get it, the easiest to understand… Here it comes… I’m about to contradict myself… is capital growth. It comes from having chosen the right area, that is undergoing a growth phase and catching the rising tide of increasing property values.
If you can get that kind of growth then, during the time it takes to go through the approval process and then the build you can add sometimes a quite responsible amount in that space of time.
The thing you need to catch in what I just said is this: This is the least reliable of all the risk mitigation methods, so, much so that I would scarcely call it a “method”. It’s more just an added bonus.
When I do my feasibility study I generally don’t include any capital growth into the calculations…
Actually, I do… but it’s more of a nod or a hat-tip to capital growth rather than a solid calculation because it’s not to be relied upon.
I find it better to work with solid predictable numbers than pin hopes on fickle market movements, interest rate changes, bank regulations and lending preferences and the popular vote from buyers wanting to move into or out of an area.
Setting all that aside I was looking at a property recently that was really interesting. It was a large block in an area where it looks like people just don’t move from. It’s close to big shopping centre, has lots of schools and is well loved by those who live there. As such there are not many comparable sales for townhouses.
The property got two sets of bank valuations within 6 months of each other. The first ranged from 640k to 700… 6 months later two of the same banks went back and revalued at 720k.
For one bank to go from 700k to 720k was not bad. For the other to go from 640k to 720k was much better.
To me this is a good indicator of growth in that area, all things being the same, continuing into the future.
But that’s only an interesting side note. Then it’s time for the fundamentals that you can rely on.
Is there infrastructure, Council plans for growth and government spending, amenities, lifestyle factors like cafes and restaurants etc. Public transport, universities and all the normal things you should be looking at? Is the site in a growth corridor according to government plans and council zoning?
If you get the fundamentals right, and you happen to have developed in an area that has substantial capital growth, then, when it all comes out in the wash, you’ve got yourself a nice little bonus.
If there’s no substantial capital growth, then you are still getting what you planned on with the numbers that really matter.
Profit should be built into your development right from the get-go, that’s part of mitigating risk. The reason you must do that as part of treating your developing as a business is that the fickle markets can also move against you.
I built a block of apartments in Brisbane a few years ago where the market went against me because of the floods. There was actually negative capital growth during the time when I was building.
When it came time to sell off, I made less than I had planned on… I only made $1.3 Million instead of $1.6.
It’s a bummer, but what’s a poor downtrodden developer going to do? I’ll have to get the slightly smaller lear jet.
The fact is that the project still made good money because of the way I planned it, and it meant there was a really good buffer to take care of those sort of unexpected events.
The moral of the story is… capital growth good… proper planning, feasibility and design, better!