In today’s show Nhan Nguyen, from Advanced Property Strategies, tells us some tips and traps to completing a profitable property development.
Kevin: About four or five weeks ago, we were talking to Nhan Nguyen from Advanced Property Strategies about what you need to know when you get started out as a developer. Many people want to move from just being a property investor with a portfolio to maybe developing your own stock. A great move, but there are some things that you need to be aware of.
Nhan Nguyen joins us again. Nhan, one of the things you said last time we spoke was think big but start small. Assuming we’ve done that and we’re now into it, what are some of the complications that we’re going to come up against and how do we make sure that we actually are on track to do a profitable property development?
Nhan: Thanks, Kevin. Thanks for having me.
Look, the word property development and being a property developer is a very widely used word, and there are so many ways that we could cover, whether we’re talking about a block of five units, three townhouses, or just building five new houses.
I’m going to just use an example of, let’s say, we’re going to build one house and sell it – what we call a spec home or a speculative home. In that instance, some of the examples of complications that you’re going to have to deal with is choosing what kind of design that you’re going to build. Is it going to be three bedrooms, four bedrooms, single story, two story?
Part of that is really going to come down to your market research on the local area, because if the area is a less expensive area, most people may probably only be able to afford a single-story home, which is cheaper, versus a two-story executive home. That’s the first thing.
Part of that is there are some many layers to consider, one of which is what is the layout? Do you do open plan? Do you put an office at the front? Is it single garage, double garage? What kind of tiles do you use? What kind of materials do you use on the roof? Is it corrugated iron or tile. Firstly, you have to consider the end target market and the product that you’re going to supply.
Moving on from that, one of the other things you’re going to deal with is choosing a builder. There are many display homes out there and many display villages, and going and investigating and getting referrals from your colleagues who may have built before is a very important step to find out which builder would be most suitable for you. There are a lot of builders out there, and some of them are shonky and some of them are great. It’s up to your due diligence to choose that.
Then the step after that is getting a build contract, getting finance, and making sure that you have enough funding for the project. Also, things go wrong – because being a developer, I know there’s a lot of upside, but there’s also downside if you get things wrong – so during the construction process, you do need to manage that, even though you may have never been on site before. You need to check out the builder, make sure he’s doing the project and on time.
Kevin: Nhan, a couple of excellent points you’ve made so far, and I think the one I want to pick up on is the selection of the builder. In fact, we’ve had some time put aside in this show to talk about what happens when you get a bad builder. That builder selection is absolutely critical to make sure that the development is going to come in on time and actually make you some money.
Nhan: Yes, it’s so critical. There are many builders every year who go broke, and the reason that they do go broke is that construction is not an easy process. I say it’s a 10,000-piece puzzle put together by 20 different people with blindfolds on, because oftentimes, they don’t talk to each other. They don’t communicate with each other.
They turn up. The tiler might turn up, and then this thing’s not ready. The electrician turns up, and the previous tradespeople didn’t tell him that they’re behind, and then they come back a week later. It’s a puzzle that’s put together, and you really need to look for a builder who’s been around five, 10, 20 years and has those teams and systems in place.
Kevin: And not accept, too, that the builder is going to be able to project manage the whole thing. I’ve seen many, many TV shows where people think, “Oh. I’m just going to project manage this myself. It can’t be all that difficult,” and within a matter of weeks, it comes unstuck because you don’t really understand what’s involved in managing a project of that size.
Nhan: Exactly. Part of it is that with working with a builder, you cannot control what is happening in the background. I’ve worked with a builder before, and he went bankrupt because he was spending the money on other frivolous things. He had money coming in, and in the first year, I think he signed up 20 to 30 build contracts, and he just got greedy and he misspent the money internally. His tradespeople were fine, his plans were fine, and his business ideas were fine. However, he mismanaged his cash flow.
When you’re choosing a builder, you cannot control what happens internally or behind closed doors and with his other projects. He might be a developer, and the bank might foreclose on his other projects.
I’m not saying this to scare people. I’ve just seen the dark side, and I’ve nearly been caught myself being involved with builders. For example, with the extension of our house, I watched the builder for ten years, literally, one suburb over to see how they would go through the GFC. Did they make it? Did they go broke? They’ve done well. Especially, because we’re extending our own place, I wanted to make sure that my wife was happy, and I wouldn’t get any long-term complaints.
Kevin: I guess one of the things is knowing what questions to ask or knowing what to look for. Perhaps that’s a subject for another conversation, I would think. We are out of time now, Nhan.
I guess the bottom line here is I know we’re sounding a note of caution, but it is something that you have to be experienced at, it’s not something you should take for granted, and make sure you do your homework.
Nhan: Yes. It’s very critical that you do your homework. I’ll write down a couple of points that we can go through maybe next week on how to choose a great builder.
Kevin: Okay, Mate. If you do that, we’ll come back next week with Nhan Nguyen from Advanced Property Strategies, and we will give you his tips on how you select a good builder.
Thanks, Nhan. Talk to you next week.
Nhan: Thanks for having me, Kevin. Talk to you next time.