You're about to invest in real estate development. How do you avoid common financing pitfalls?

We run numbers on an all cash basis and underwrite at 10% below the what the market tells us. These two typically work. The use of leverage in real estate is great and can add to the returns, but the project has to generate 30% all cash returns on an IRR to even qualify.

Knowing your numbers is vital in any property investment project. From the lending costs, refurb costs to an accurate GDV (end value). One of the key factors I have found people often miss when assessing investment property deals is the holding cost, i.e. the cost of the period the property is in refurb (utilities, council tax etc).

Here are the key numbers every real estate developer should know: 1. Realistic Gross Profit Amount: Understand the potential earning backed by current comparable sales in the area. Familiar yourself with recent sales data to determine your expected selling price. 2. What's your cost: Calculate your total development cost, including construction expenses, land acquisition costs, permits, fees, and other associated expenses. Add a contingency of at least 10% to account for unforeseen costs or delays. 3. Net Profit: Do you know your net profit ex GST? 4. Internal Rate of Return (IRR): Assess whether the project meets the general bank target IRR, typically aiming for a minimum of 20%. IRR measures the profitability of an investment.

Here are the 3 things Real Estate Developers must do. 1) Always have a Plan B lender: Time is money, so be proactive in exploring multiple options from the outset. Always have a contingency plan in place. Discuss potential alternatives with other lenders early on to avoid restarting the process, which could increase both time and costs associated with the project. 2) Prioritise Existing Relationships: It's typically easier to communicate with your existing bank as you already have established connections. 3) Understand the Application Process: Ensure you gather all necessary documents at least three months in advance to avoid delays. Familiarise yourself with the finance application process and required documents.

Here's what a robust cash flow development looks like: 1. Moderate Leverage: Avoid being excessively leveraged with loans. Striking a balance between debt and equity ensures manageable repayment obligations. 2. Mix and Match Finance: Utilise a mix of bank and non-bank finance to fund each milestone of the project. Diversifying funding sources can provide flexibility in managing cashflow fluctuations. 3. Stash Some Cash: Let your financier fund the project but keep your cash ready for unexpected expenses!! Cash is king! 4. Utilise Additional Collateral: Consider leveraging other properties as collateral with your financier and contributing equity toward the project if necessary. This can provide additional liquidity for your project.

How to deal with risk beyond your control: 1) Council and Government delay can significantly impact your project, increasing interest costs and delay your project completion. 2) Structure the Deal with seller early: Consider establishing a long settlement framework with the seller upfront. This provides cashflow flexibility while working with the necessary council approval. 3) Plan for Multiple Exit: Developing multiple exit strategies is essential. Experienced developers anticipate hurdles and prepare accordingly. For instance, if faced with council delays, consider selling the project to another developer early on. This approach prevents prolonged setbacks and financial losses. Adaptability is key to project success.

Let's explore some strategies to navigate this complex landscape: Understand the Capital Stack: The capital stack represents the layers of financing in a project, including debt and equity. It consists of: - Senior debt: Lowest risk, first claim for repayment. - Mezzanine debt: Intermediate risk. - Preferred equity: Hybrid between debt and equity. - Common equity: Highest risk, lowest priority. - Balance these elements wisely to optimize financing. Thorough Market Research: - Analyze the market thoroughly before embarking on a project. - Understand demand, supply, and potential risks. - Avoid underestimating costs or overestimating returns. Avoid Overleveraging.