In this episode of the series, Investor vs. Developer, Flux unveils his insights on how to control property rather than owning it. With a selection of approaches anyone can take towards their goal of financial freedom, he doesn't shy away from revealing the primary benefit of property development over property investing. Plus, he opens the box containing the juicy details of the 7 different ways to profit from the development process.

Timestamps:
00:28 | Hefty Assessment
04:24 | Ways to Profit From the Process
07:48 | Cash Flow, Not Cash
10:25 | Soft Equity
13:07 | Low or No
15:10 | So Much Money It’s Not Funny
18:34 | The Gatekeeper
23:28 | Agent #2

Transcript:
Rob Flux:

[00:27:58] So go looking for what you want. And then what you find might not fit your strategy, it might not fit your cash flow. So they're the ones that you flick. But what you want to do is you're going to cherry pick the ones that you find and go, well, that's just for me, because I'm just looking for me.

This is Property Investory where we talk to successful property investors to find out more about their stories, mindset and strategies.

 

I’m Tyrone Shum and in this episode of 'Property Investor vs. Developer', we’re chatting with Rob Flux from Property Developer Network. As always, he has a selection of approaches you can take towards your goal of financial freedom. This time, he shares how to control property rather than owning it, and details 7 different ways to profit from the development process.

Tyrone Shum:   

When you’re not flush with cold hard cash, it may feel like property development is nothing but a pipe dream. Investing requires going to a bank and having them assume you’ll be keeping a property for 20 to 30 years, when this often isn’t the case. This brings Flux to the primary benefit of property development over property investing.

Rob Flux:   

[00:00:28] They want to see some very key requirements, they want a fairly hefty deposit in the deal. And they want to understand that you can service the loan for that period of time. So they're assessing you on some pretty heavy criteria. 

 

[00:00:39] But many of us just don't have that cash going into a deal. And so this allows developers, because of the short term nature of the deal, to say, let's not get assessed for that 20 or 30 year requirement, but rather, what is the profitability of the deal? And given the profitability of the deal, would someone actually come in, in some way, shape or form and actually assist us in the process? 

  

[00:01:06] So it's quite often referred to as low or no money down strategies where I guess the money is actually needed. But it doesn't necessarily have to be yours. And it's about how do we control property rather than owning property. And by controlling property, then we can actually benefit from the sweat equity, or the skills that we have in the process to force value onto the property, and then use that to unlock the potential.

Tyrone Shum:   

[00:01:33] That's what I love about property development, is that when we're talking about creative strategies here, we're looking at strategies that won't require us, as the developer, to be putting our money into the deal. 

  

[00:01:47] Yes, every single deal will still require money, but it doesn't necessarily have to be yours. And that's what we're referring to, is the low and no money down from the developer or development side of things.

Rob Flux:   

[00:01:57] Yes, and it's, I guess, finding creative ways to either defer, avoid or minimise our cash requirements in the deal is really the key to the process. So there's lots of... I mentioned control is the key to actually unlocking that. There are many, many things that you can actually benefit from controlling it. And when we talk about the different ways of doing this, they won't all get the same sorts of benefits, but the benefits that can come along, in some instances, you can avoid costs altogether.

Tyrone Shum:   

[00:02:33] Wouldn't it be great if I could just go into a deal and just say, 'Hey, I don't have to worry about costs until the end of the project, get our profit and then pay our cost then'. That would be fantastic.

Rob Flux:   

[00:02:42] I can give you multiple examples of how that will work. So an example could be what if the current landowner stays in the deal? Now I don't have to actually come up with either the deposit or the serviceability and instead, I only need the liquid cash to run the deal.

  

[00:03:02] That avoids all sorts of things. So firstly, those elements plus no stamp duty to transfer it into your name. Plus the landowner's holding costs are very, very different to your holding costs, because they might have bought it 10 [or] 15 [or] 20 years ago, they've got very, very low interest. Whereas if you put it in today's market, it'd be very, very high interest. So the profitability of the deal actually goes up. So whilst they stay in the deal, you might do a profit split with them as an example. There's actually more profit to split.

Tyrone Shum:   

[00:03:33] And I was gonna say, that's win/win for everyone.

Rob Flux:   

[00:03:34] So that's the idea. Now, that's not the only way. But there are many, many ways like that, where we want to go, 'Well, what can we do that's different in order to understand the work?' 

  

[00:03:49] Firstly, we need to understand what a typical cash flow of a project would be. And then what are the creative ways we can say, 'Well, I just don't have that cash, what can I do differently to kick the can down the road and defer that to a later point in the process, or completely eliminate it where humanly possible?'

Tyrone Shum:   

[00:04:07] I love that. Well, I mean, since we're talking about examples, I love the example that you talked about, the vendor could actually finance the deal. And we kind of call that vendor financing. Let's talk about some other examples about these low and no money down strategies.

Rob Flux:   

[00:04:24] There's actually seven different ways that you can profit from the development process, if you can find these creative ways. Now, not every deal is going to suit every scenario. And so the key is to try and work out how to actually unlock that. So there's seven different ways. 

  

[00:04:44] You could do deal finding, you could do project management, you could do vendor finance, you could do delayed settlement with early access, you can do joint ventures, private loans, and options contracts, which a lot of people have actually heard of as well. 

  

[00:04:55] So [there's] a bucketload of them, but it's really understanding the strengths and weaknesses of each one, the benefits that each one actually provides, and taking a different approach to the process. 

  

[00:05:09] A lot of the times we look at our own personal circumstances and say, 'Well, because I've got no cash, I must have this kind of solution'. And what that tends to do is we ram that down the vendor's throat to go, 'Well, I must do a joint venture with the landowner'. And the vendor probably has no intention for doing a joint venture ever. And you've put them off straight away, and it scares the willies out of them, to be brutally blunt. 

  

[00:05:36] And so it's about how do we actually engage with the vendor in such a way that we encourage them to reveal a little bit more about their circumstances. And by revealing more about their circumstances, we unlock their needs as opposed to their wants. And when we can unlock their needs, then we can rummage around in our toolbox and look at all of those seven different ways [to find] which solution is actually the best solution in this particular instance. 

  

[00:06:06] So it's like having a toolbox. So you get a hammer, and some pliers, and shifter, and all those sorts of things. And it's about picking the right tool for the right job. 

  

[00:06:16] Whereas the former approach is like having only one tool in your toolbox, and it's a hammer, and then everything starts looking like a nail.

Tyrone Shum:   

[00:06:26] That is a very, very good analogy, Rob, I think, and it's just really interesting, because I think the fact is that if we take it from a solutions based approach, rather than trying to fix up a problem with whatever we have, then I think we will be able to come together with the best solution possible for that deal. 

  

[00:06:45] And that ultimately means that you'd have more profit from the deal. And it's actually more win/win situation, not necessary just for [the] vendor, but for you and for whoever else you bring to the deal.

Rob Flux:   

[00:06:55] And we touched on one benefit, but there's a bucket load more benefits to this process. 

  

[00:07:02] So sometimes we can avoid costs altogether. But almost always, we're going to improve the liquid cash flow actually required to run the deal. 

  

[00:07:12] So for example, if we did something that deferred the purchase to a later point in the process, then we may not need to fund the interest rates as we go. We may not need to fund the land tax or the rates, all sorts of things like that. 

  

[00:07:24] So it's about how do we kick the can down the road for when the cash is needed, and then find creative ways to sometimes completely eliminate those altogether.

Tyrone Shum:   

[00:07:35] I love it this time around to say kicking the can down the road. Because a lot of times I don't like doing that, especially in financing. But in this instance, as a developer, you want to delay as much as you can to pay these costs because it ultimately affects your bottom line.

Rob Flux:   

[00:07:48] And more than that— and this is a key tenant that I want everyone to actually understand— it's never about the cash, it's always about the cash flow. So how much liquid cash you actually need to keep the project running at any one point in time. 

  

[00:08:08] If you run out of cash flow, the deal stops. So anything that you can do to improve your cash flow means that the limited amount of cash that you might have will stretch further. And not only will it stretch further, but potentially even allow you to run multiple deals at a time, because you haven't got all of your cash locked up in one particular deal.

Tyrone Shum:   

[00:08:30] Very, very true. Oh, that's fascinating.

Rob Flux:   

[00:08:32] There's a whole bunch of more benefits, mate. So we want to create opportunities for others to contribute funds into the project. In many instances, we've got friends, family, that sort of thing that see that we're doing a great job as property developers, and we get tapped on the shoulder all the time, saying, 'Hey, would love to get involved in this particular project, what it is that you're actually doing?'. 

  

[00:09:00] If you can share the love with many others, that will allow you to actually run more deals at a time. There's some challenges that we have to get around with regards to ASIC, and you can't go out and promote, 'Hey, I need some money' and that sort of thing. There's some big no nos on that sort of stuff as to how you do that. So you've got to be super careful in how you do it. 

  

[00:09:27] But in many instances, we've got people tapping us on the shoulder and it's all, why shouldn't we actually allow them to benefit from the hard work that we're also doing? 

  

[00:09:38] The other things that we can do, we can add soft equity to the project in the early stages. We can defer the settlement, we can add what is called soft equity. So the development approval, when we get that, that means that the property is going to be worth more value. So that's soft equity. Because we've manufactured that. 

 

[00:09:59] And in many instances that soft equity might actually be enough to secure the deposit in order to purchase the property in the first place. So it might even be big enough— subject to the deal— might actually be big enough to secure the construction element of the next phase. So we can find many ways to do things like that.

Tyrone Shum:   

[00:10:25] Soft equity. Can you just elaborate what that means? I'm not quite sure what that means.

Rob Flux:   

[00:10:30] So the term equity, many of us have heard of the term 'deposit'. So a traditional investor is going to have a deposit and debt, or a loan. But when we come into the development world, the word 'deposit' gets superimposed for 'equity'. So it kind of means the same thing. And the loan gets turned into debt. So that terminology changes. 

  

[00:11:00] Now, because of the fact that we tend to use commercial lenders rather than residential lenders, those commercial lenders will want sometimes, I guess, a larger equity component if we want to get to the construction. So rather than an 80% loan to value ratio, it might be a 70% loan to value ratio, in some instances, even a 60%. 

  

[00:11:19] So that equity component, or the deposit component, is the security for the lender to ensure that if the project doesn't go to plan, the lender's money is protected.

Tyrone Shum:   

[00:11:35] Most lenders won't lend anywhere near 100% anyway, because they know if something goes wrong...

Rob Flux:   

[00:11:41] Absolutely not.

Tyrone Shum:   

[00:11:43] Okay, that makes absolute sense, then. So you're talking about the rest of the benefits. What are some of the other benefits you're sharing with us?

Rob Flux:   

[00:11:50] Well, sometimes we might not have enough funds to run the entire project all the way through the end. So for example, we might be able to get ourselves through to the development approval stage. And then we can't finish the construction, because we don't have the funds to get all the way through the end. 

  

[00:12:09] By controlling the property for a period of time, it allows us to get that soft equity uplift, improve the value of the property, and find an ultimate buyer to take that off our hands, I guess. And we've bought ourselves a whole bunch of time to actually do that. 

  

[00:12:25] Now, I guess the final one is if we can defer that far enough down the project, down the timeline, we may even be able to run the entire project having never actually owned it at all.

Coming up after the break, he explains why you should always have your toolbox handy, but not for renovations…

[00:15:23] So when you see a problem in front of you, when you understand the need[s] of the vendor, then you go rummage around in that toolbox…

He reveals the answer to the age-old question…

[00:18:46] And a lot of times— this is probably one of the biggest questions that I get all the time, Tyrone— is, ‘How do I navigate these creative solutions when an agent is involved?’

He explains how real estate agents fit into one of two categories.

[00:19:53] So they create challenges with the agent and so you've got to come up with a solution that helps the agent, first, make sure that they are feeling comfortable.

And that’s next. I’m Tyrone Shum and you’re listening to Property Investory.

Tyrone Shum:   

Flux has been running meetups through Property Developer Network for over 10 years. In that time, he’s seen hundreds of community members sharing the good, the bad, and the ugly of all different kinds of projects. He calls this a ‘real deal’.

Rob Flux:   

[00:13:07] In that 10 and a half years in four states, I would say about 80% of the deals that are presented would have some form of low or no money down in it. Like, the numbers are astounding with regards to how often this is done. The challenge, I think, is that we have been indoctrinated into, I guess, traditional banking, you know, you must have a deposit, you must have serviceability. 

  

[00:13:35] And so a lot of people don't believe this is possible. There's a lot of limiting beliefs that we bring into this world when we start to transition over to the property development space. But when you actually see the numbers, and how many people are actually doing this, it's astounding. 

Tyrone Shum:   

[00:14:00] I think it's, being surrounded by those people on a day to day basis, we're really opening eyes. And for you and me, Rob, we're very fortunate because every day we talk to developers, we talk to people in the finance space, because [of] the nature and the work that we do within our businesses. 

  

[00:14:09] And I see day in day out as well, I mean, all the developers I speak to, they don't put any or much of their money into a lot of their development sites. That's the reason why they come to us to get funds and loans from. And that's because they know that for them, their cash flow could be used better to run the project rather than actually get tied up to actually own the asset or manage the asset.

Rob Flux:   

[00:14:31] Well, that is a perfect example of a low or no money down. They've come to you using someone else's cash to run the deal.

Tyrone Shum:   

[00:14:39] And investor's happy, it's win/win, because the investors or the lenders, they get a return on their money rather than let it sit there in equity or [the] bank or whatever it is. They're getting something back for their money that's working hard for them. And it's phenomenal to see all that happen.

  

[00:14:55] Once you see that, [it] opens your eyes [and you] go, actually, people, you don't really need your money in these deals. There's plenty of money out there. The question is where to find it and who you know.

Rob Flux:   

[00:15:10] There is so much money, it's not funny. So it's really about the creative way that you actually do that. 

  

[00:15:17] I like to think of it is your lack of resources should not stop you from being resourceful. So when you see a problem in front of you, when you understand the need[s] of the vendor, then you go rummage around in that toolbox and go, 'Do I need the pliers this time? Do I need the shifter? Like, what is it that I actually need in order to get there?' 

  

[00:15:37] And I think the key is in the negotiation part of that, where a lot of times we are asking a single question, which is: ‘Why are you selling the property?' And the vendor just says something generic and broad, like, 'I'm downsizing'. And we just take it at face value and go 'Well, that's the end of it. That's all I can do'. 

  

[00:16:01] But if you drill in deeper, then that will tend to actually understand well, where are they coming from? What are they doing? What are their next steps? Where are they going? 

  

[00:16:11] And when you can actually unlock their need, quite often their want, which is some ridiculously high price, on instant terms and [at a] ridiculously high price, the want tends to disappear if we can actually unlock that need.

  

[00:16:27] So there's a lot of skills that actually go into that negotiation process. And even more challenging when there's a real estate agent involved, and you're not dealing directly. So it's: How do you navigate that?

Tyrone Shum:   

[00:16:41] It's all part of the fun, and the experience of actually going through that. But we don't all want to start exactly there, you know, stay one, we'll need some practice and work alongside with people to get to that point. 

  

[00:16:55] So I guess those are some of the strong benefits. Did you have any other benefits you wanted to share with the listeners out there?

Rob Flux:   

[00:17:01] I guess that's at a general level. That's, I guess, the high level ones. As I touched on before, when we go through those seven different strategies that you can actually execute, not everyone gets every single benefit. And so it's really trying to understand the strengths and weaknesses of each of those strategies and go, 'Right, this is how it actually solves that problem'. 

  

[00:17:26] Looking at your own personal circumstances, and seeing, well, how much cash have I got, there's really three lots of cash that you need. A deposit, serviceability, and liquid cash. 

  

[00:17:38] So when you look at your own circumstances, sometimes you're missing all three, sometimes you're only missing one of those. So when you understand your circumstances, then you go, 'Okay, not all seven of those are going to fix that particular issue'. So that might whittle it down to only four of those seven strategies that might work for you. 

 

[00:17:57] And then it's having those conversations with the vendor. And of those four, which one of those might suit the vendor. And so when you find that marriage of their needs and your needs, that's when there's the opportunity for the deal to actually occur.

Tyrone Shum:   

[00:18:13] And making sure it's win/win, because ultimately, the only reason why the vendor wants to do something like this, or you might want to do it is it's got to be actually profitable for both sides. And if the vendor has got no interest in it, then you don't want to proceed with that. Because ultimately, if you're kind of forcing it in, and it actually does go through, you may not end up in the best scenario towards the end, because things may change.

Rob Flux:   

[00:18:34] So not just win/win. But if there's an agent involved, it has to be a win/win/win.

  

[00:18:46] And a lot of times— this is probably one of the biggest questions that I get all the time, Tyrone— is, ‘How do I navigate these creative solutions when an agent is involved?’ 

  

[00:18:58] So instead of this becoming a two way negotiation, we're actually now in a three way negotiation. And so the first thing that we need to do is we need to get through the agent, who is the gatekeeper in this particular instance, to allow us to talk to the vendor. We need to get through the gatekeeper and make sure that they are satisfied that they're going to be looked after in the transaction, and that they're going to have their needs met. 

  

[00:19:25] So I guess the most common need that an agent actually wants is to get paid their commission. So simple, easy thing. And when you're coming up with some very, very creative strategy, that might mean that you've got the opportunity potentially to de-risk a project and run away. The agent might not get paid. If you want to delay settlement, the agent might have to wait for a long period of time to get paid. 

  

[00:19:53] So they create challenges with the agent and so you've got to come up with a solution that helps the agent, first, make sure that they are feeling comfortable. And then once they're comfortable, they will then allow you to get to the vendor and actually then have the conversation there.

  

[00:20:13] Fundamentally, there's really two different kinds of agents. An agent that is living paycheque to paycheque, quite often they're new into the industry, they haven't got a lot of commissions under their belt, that sort of thing. These folks need to have that commission cheque paid straight away. 

  

[00:20:36] And then you've got the other agents who have been in the industry for a very long time. They've got a big pipeline of commission checks coming through, they don't necessarily need the paycheck straight away. They might be happy with delayed gratification, but that delayed gratification really needs to be worthwhile. Incentive to actually make that work. 

  

[00:20:57] So for the first agent, where they really have paycheque to paycheque, then the part of the process is to actually have that very clear conversation with them to say, 'Look, I'm going to need a creative solution here to actually get it across the line. But if I can make sure you get your commission cheque early, then would you be happy to represent me in order to present my alternative solution to the vendor?' 

  

[00:21:25] Now, in almost every single instance, you're going to be putting down 5% or 10% deposit into a trust account. And it sits there until settlement. Now, if you're asking as an example, for a 12 month delayed settlement, the cash has come out of your pocket already, and it's sitting in this trust account, you're doing no benefit to absolutely anyone. 

  

[00:21:48] If, however, you said, 'Well, what if I released that to the vendor, right at the start, as soon as my due diligence period is over? And I'm happy to proceed with the deal, I felt I released that straight away, it's already left my pocket, it might as well go to them'. 

  

[00:22:02] Now at this point, the vendor actually has the cash to pay the agent and get the agent happy. Nice, simple, easy solution to actually get that across the line. So we need to make sure that deposit is, A, large enough to pay that commission, and B, still has enough balance left over that the vendor actually gets a little bit of cash right now so they can spruce up the home, go on a holiday, whatever it is that they need to do. So they actually know, 'Hey, this is a reward and incentive for that delayed gratification of everything that's happening later on'. So that's how we help agent number one.

Tyrone Shum:   

[00:22:45] Awesome, I love that example.

Rob Flux:   

[00:22:49] The other thing that helps in that process is to explain to the agent, 'Look, by creating this process where I'm going to delay the settlement, I'm actually able to in many instances pay more for the property. And by paying more for the property, your commission cheque is actually going to be higher'. And so instantly, we've got [a] higher commission cheque and paid early, that agent is happy.

Tyrone Shum:   

[00:23:22] I don't think any agent out there would refuse or resist on that one unless they just don't understand the deal.

Rob Flux:   

[00:23:28] And that's our processes, we need to actually educate them along the way. 

  

[00:23:33] So then the second agent, the one that's been in the business for quite a long period of time, then for them, it's about not just the higher commission for them, but they might actually be interested in the sale of the finished product. So you're buying one thing, and selling many other things.

 

[00:23:55] So they look at that pipeline and go, 'That's really interesting, that might be worthwhile'. Plus, they know that you're a repeat buyer. So it's not just this transaction, but maybe many, many others. And so you want to build a long term working relationship with your agents to say, 'Look, this is not the only deal that we're going to be doing in this area. You seem to be the best agent in the area. I'd love to be working with you where possible'.

Tyrone Shum:   

[00:24:21] And I think that's a very, very powerful incentive. For especially both agents, I mean, depending on what stage they're in. So that is [a] very good example, Rob. I really, really liked that example. 

  

[00:24:36] So let's talk a little bit more then, I'm really keen to sort of dive into these strategies that we've talked about. So there's seven different strategies here. Let's just touch on them from a high level so people can understand. The first one you mentioned was deal finding. Let's talk a little bit about that. How does that work?

Rob Flux:   

[00:24:54] We're going to put a whole bunch of effort into understanding whether firstly, a deal is developable. And then secondly, is it profitable? So those key key metrics are there every single time. We're going to try and engage with the vendor and understand their needs. We're going to assess that against our own personal circumstances, rummage around in that toolbox. And if we can find a perfect match, we're clearly going to take that. 

  

[00:25:20] But if we can't take it, because of the fact that we had that open approach, we understand exactly what that deal comprises of. There's a community— in my instance, we've got nearly 20,000 people in our community— there's a community that's sitting there, looking for deals, that can't find deals, that would happily pay a deal finding fee in order to be given a deal that was developable and profitable, and the terms are already pre negotiated for them. 

  

[00:25:49] So all they have to do is do the sanity checking that what you've done, actually is valid and anoint the deal and lock it in. In many instances, that finder's fee, typically, we find that it's about 2.5% or 2% to 2.2%. But for some deals, there's no upper limit on the size, depending upon how big a deal that actually is.

Tyrone Shum:   

[00:26:16] I think that's a very, very smart strategy as well. Because not that you don't want to do the deals, it's good if you can actually go through and do the deal. But if you can find a profitable deal, and you want to offload it or give it to someone else to do, it's sort of a very quick turnaround to make some cash if you're just starting out development. 

 

[00:26:34] And if you're spending a lot of time, and you don't have as much cash that you can find funding to be able to deal with property development, this might be a quick and easy way, just to be able to generate some income initially to start off in development. And get a lot of practice, too.

Rob Flux:   

[00:26:50] And I like to think of it as earning as you learn. So you're doing the assessment of the deals, you're determining the profitability and the like, as you try to find the ultimate buyer to take that off your hands. You're gonna get feedback from them along the way as to: Did you do the right thing in assessing the deal? Are the profits that you're projecting in the right ballpark? You're gonna learn lots through that process and the feedback that you get from the potential purchasers as you go, and you've lost nothing in this process other than time. So you're gonna get lots of practice in actually doing that. 

  

[00:27:29] Lots of people come to me and say, 'Should I start by being a deal finder?' And there's whole careers in being a deal finder, you know, becoming a buyer's agent. But my candor is, well, if you've got the intention to actually run a project, then you should look for a project that fits your criteria as your primary objective, and then just flick the rest. As opposed to spending your time and energy looking for deals for other people. 

  

[00:27:58] So go looking for what you want. And then what you find might not fit your strategy, it might not fit your cash flow. So they're the ones that you flick. But what you want to do is you're going to cherry pick the ones that you find and go, well, that's just for me, because I'm just looking for me.

Tyrone Shum:   

[00:28:15] I think that's very smart. Especially if there's a good deal on the table, and there's no harm in actually sharing it with someone else, you might as well let someone else profit from it too, as well, too, rather than just let it go. Because you will have done all the DD anyway behind it. 

Rob Flux:   

[00:28:26] So the key thing in some of this is being able to identify or find the ultimate buyer in the first place. And in some jurisdictions, making sure that you're appropriately licensed to do that. So in some instances, you might need a real estate agent's license to do that. 

  

[00:28:44] Or you work with a real estate agent, who will actually get the finder's fee and might pay a referral bonus to you, and then they'll split the profit on that. So one of my businesses, Development Sites Australia, does exactly that. Where we use our buyer's agency licensing to actually represent people that actually have found deals. And we've got a massive arsenal of people that are looking for deals, as I said, nearly 20,000 people, and so we're more than happy to give that referral back to the actual deal finder for that.

Thank you to Rob Flux, our guest on this special episode of Property Investory.