I’m trying to be smarter in the way I purchase my future properties to maximise profits. I’ve been looking into developing rather than buying each property as it comes to the market as I’d like to pay under ‘retail’ value. The below is my understanding of what I’ve been researching and should not be taken as fact as I’m a layperson sharing my experiences only.
Last week I looked into joining a 'joint venture (JV)' through a company specialising in property development. The gist was that the JV members would employ a development manager to build on land purchased through the JV for a set price, meaning that the member's kept control and gained the profits from the development. Each JV member would end up with a strata titled unit in a complex of 13 2x2’s and 4 1x1's in their own name.
A company specialising in joint ventures would find the land, bring the investors together and guide them through the process. They receive their fee from the development manager, which is billed back through the JV.
My understanding is that the usual way a Developer makes his profits (around 20%) is by purchasing and building themselves and selling a property (either off the plan or as a completed product). By keeping the project in the JV's hands, the profits are gained by them. A deposit is required up front to purchase the land and other costs, in this case it was $80,000.
The rest of the cost is required at the end of the build when the titles are ready to be put in your name, in this case $227,000. The total cost of the strata unit (2x2x1) was $307,000 with a projected market value of around $380,000 (which was quite close to the market value of similar developments in the area).
The end result would be instant equity or possible positive cashflow if kept and rented out. The length of time waiting for the build was around 22 months, which meant I had to factor in an end loan in the future which could cause issues with other new loans moving ahead.
Normal due diligence of the area, growth prospects and transport/public amenities/closeness to the city centre and airports etc were all sound, hence the increase in the number of developments going up in the area.
I spoke to my broker about joining a JV and was advised against it, mainly as I am still wanting to purchase several more properties from now until the new loan would be due while keeping this end loan in mind.
There were other variables to consider such as the deposit could not be placed against the new residence and had to be funded via a line of credit (LOC). Whilst the end loan could be placed against the new unit, the end sale/rent value could not be guaranteed and there was an amount of risk in taking this on. With a total outlay of $307,000 for a new 2x2 within 12km’s of the Perth city and airport for Fly in/Fly out workers.
Mainly due to the considerations of new loans moving forward I decided not to go ahead. There were too many unknowns for my controlling nature and as the marketing firm managing the venture had not yet completed a development to lockup I stepped back.
This does not mean I will not relook at this type of venture in the future and was impressed with the professionalism and information I received, just not at this stage in my strategy. Using the word strategy makes me feel like I know what I’m doing when in reality it’s step by step as I learn new ‘stuff’ and grow in confidence.