Nhan Nguyen, from Advance Property Strategies, has some advice for those wanting to get into small developments. How to find the sites and carry out the feasibility and more importantly, how to minimise your risk.
Kevin: In the latest edition of Profitable Small Development, the newsletter produced by Australian Property Investor magazine, it focuses very much on small development. These are investors moving into small development. Nhan Nguyen from Advance Property Strategies is quoted quite a lot in that particular article, and he joins me as our special guest.
Nhan, thanks for your time.
Nhan: My pleasure, Kevin. Thanks for having me.
Kevin: What would you determine as a small development? What size?
Nhan: Small developments generally start as one into two, and then you can go into threes and fives and eights and tens. I think any more than ten, you start going to the next tier up, which would be small-to-medium. Then when you’re hitting 100, you’re probably big boys then and probably need a fair bit of capital.
Kevin: What’s driving property investors into small development?
Nhan: Look, I think they see that the market is buoyant in certain areas, especially Southeast Queensland. You have Logan; you have Ipswich where markets have the opportunity where you can do granny flats at the back or secondary dwellings. People are jumping on the bandwagon
Banks are happy to fund certain small projects, generally one into two or one into three at the same loan-to-value ratios as a small investment property, so people are finding it easier to get into up to around about the three dwelling mark. When you get bigger than three, generally, the banks change their rules and you go into commercial and it gets a bit more difficult and more capital is required in pre-sales and things like that.
Kevin: I guess we’re talking here about investors who have maybe traditionally gone out and bought a property and either held it as it is or do a small reno on it, maybe flip it over, but they’re building their wealth and their portfolio as they go along.
You and I have talked about splitter blocks in the past. Is this a step for someone who wants to move into development?
Nhan: Yes, I think splitter blocks are a really great entry-level way to get into small developments because it is quite straightforward in many aspects. There can be some complex aspects if the house needs to be removed and you can’t, or the block is what we call a widow block, which is two triangles as opposed to two rectangles.
But generically speaking, 80%, 90% of the time, splitter blocks are very, very easy to do. You don’t need to lift a paintbrush, and most of the things that I like about splitter blocks are I can’t do them myself, so it means I definitely have to leverage my time and get other people who are qualified, like people with demolition tickets, people who are plumbers with those certificates, and engineers.
It’s a highly leveraged form of development, which is very, very quick. You just basically knock down the house, install the services, and you can get in and out in 8 to 12 weeks if you’re organized.
Kevin: Widow blocks: you mentioned those that go triangular, so the lot divisions turns it into two triangles as you described. That requires a re-alignment of the boundary, doesn’t it? Is that a difficult project to undertake?
Nhan: Look. If you’re looking at the standard 20-by-40, where the line of demarcation might be from one corner to the other diagonal corner to create those triangles, the re-configuration of lots is generally a standard procedure and can be done quite quickly in less than two to eight weeks — maybe even 12 weeks depending on other constraints of the site. It can be done quite quickly and quite cheaply. When I say cheaply, I’m talking about $3000 to $5000 if you’re getting surveyors or engineers in to be able to re-configure the lot and draw the new plans.
Kevin: I was going to ask you how investors can get the jump on other developers because of the high competition for these sorts of blocks, but I know that in your company, Advance Property Strategies – and I’ve spoken to a number of people who have been through your course – you advocate doing it on your own, going and doing your homework, and even doing some door-knocking, Nhan.
Nhan: Yes, absolutely. I laugh because I know that a lot of our clients who come through the door are complaining about how we can’t find deals, and that might be right to a certain degree because you’re competing with everybody else when they look on the typical RealEstate.com.au. I think that RealEstate.com.au is a good place to start; however, you need to go direct to owners, whether it’s sending out letters, sending out fliers, door-knocking, and getting a lot more connected with the owners.
I’m not necessarily talking about bypassing agents full stop. I know you’re a real estate agent, and in terms of property, I work with real estate agents, so I might buy it directly and I might sell it to a real estate agent. It’s just that real estate agents only source some of the deals that are out there. There are a lot of sellers out there who don’t want to work with an agent or they’re just not ready to sell right now, and you just have to be the person knocking on their door to have a chat with them.
Kevin: Yeah, it always looks easy from the outside, but I guess many of these people who have become very successful at these small-type developments – splitter blocks and the like – they have really done their homework, they have gotten on the ground, they have walked the area, and they have become a bit of an area expert, Nhan, haven’t they?
Nhan: Yes, that’s right. I think it is very important to become an area expert. Too oftentimes, many people look at different areas where they spread themselves from north side, south side, east side, west side, and they don’t become a laser focus, and when you become laser-focused, just like with anything, opportunities come because you focus your energy.
If you’re too scattered and you’re looking at every bell and whistle and shiny object out there, going from splitter blocks and townhouses and this and that, and you have no skill, then it’s very likely that you won’t succeed.
It does take three, six, 12 months to get your head around it. It took me six months to buy my first property. But after that, everything fell into place and I was buying a lot faster.
Kevin: Just on that point of not losing heart and understanding that you need to become an area expert, is there a rule of thumb? How many properties should you be looking at to actually get one viable gem?
Nhan: The ratio – and I’ve mentioned this many times in my seminars – is that in a normal market… I don’t believe we’re in a normal market right now; we’re in probably more of a buoyant market. But in a normal market, you need to look at roughly 50 to 100 to find three to five. In a more buoyant market, you might have to look at 200, maybe even 300 properties to get that same three to five.
But if you do door-knocking or you do letterbox drops or fliers and connect directly with the owners, those ratios get a lot better and you can look at a lot less than the 300.
Kevin: There’s a good reality snap there for us to make sure you get your homework done. It’s not always as easy as it looks, but do your homework and it could really pay some big dividends. My guest has been Nhan Nguyen from Advance Property Strategies.
Nhan, thank you so much for your time.
Nhan: My pleasure, Kevin. Thanks for having me.