Come with us as we conclude our ascent up the ladder of complexity and talk about the remaining property investment strategies that are high risk but high reward. We talk about development approvals and some of the difficulties that come with them, building units and townhouses, we discuss subdivisions, and much much more!

Timestamps:

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Transcript:
Nhan Nguyen:
37:06          It’s attractive to a lot of people because it is a big paper shuffle. And I do love subdivisions in that way because I physically can't do any of the work.

Tyrone Shum:
This is the Think Big Property Podcast where Nhan earns millions from property development and Tyrone (that’s me) has millions of questions.

In this episode we’re going to continue our discussion of the ladder of complexity and find out what other strategies are up the ladder. The ladder is a concept of property investing & developing strategies based on their risk factor, from the lowest to the highest. We delve into building a new house, subdivisions, development approvals and much much more!

The ladder of complexity incorporates the various strategies that are used in property investing and developing. We delve into the 5th strategy, which is building a new house or a project home. 

22:07          So building a new house, firstly like you might be thinking, geez, you're getting someone else to do it. They've got a system. You just paid them the money, you go to work, the house was built when you come home. I'm now building a home that can have many, many complications. I say building a house is like a 10,000 piece puzzle being put together by 20 people with blindfolds on. Right. And I built enough houses to know that because it's a moving part, cosmetic Reno is that the house is already built. You're just adding lipstick or the makeup on top of that. So there's not 20 trades people waiting for each other to be finished. So building your house, there's complications to be able to get it finished. One thing, not to scare you, but you know, builders often go broke and then when I say build is often go broke, it is very, very common for a builder to go broke.

23:05          And they're not managing their finances. They're not paying the trades people, they're not making enough profit. Often, a lot of builders are great at building, but they're not business people. So they're not good at managing cash flows. So while I'm sharing that with you, I'm putting this as a little bit more complex, is with building your house. It's not just building the house is a project of choosing the builder, choosing the right builder, designing the right layout, choosing the right colors, putting them the, the appropriate feedings and fixtures in having the right budget, soil test as well. Are you building a four bedroom house, three bedroom house, single lockup garage? This is my point with building your house is there's a lot of new decisions that previously you wouldn't need to make in a cosmetic renovation. Even with splitters a split up, some of my clients love it because there's so many little decisions to make.

23:57          They go in, knock the house down, put the services, put the land on the market and they don't have to redesign anything. People love building because, and I must say I used to be like this, they love building because as a field or like a manifest or a creative aspect to it where they got to get the energy out of their body. You know how I want to build something. And for me, when I built houses initially, that's what it was, is like, you know what, look at me, I'm so good. I built these five monster homes. It's good for my ego, but I found that it wasn't necessarily good for my back pocket. And then my ego got a bit of a reality check because the profit wasn't as good as it needed to be. Even though I'd built these buildings and there were challenges along the way.

24:41          So my point is building your home low set isn't number five here. When you get a high set, it does take longer. It takes a couple months, longer set of four to five months, it can be six to eight months. And when you're building a house, you are subject to weather as well. I know we're all a let the moment waiting for it to rain in doing a rain dance for it to rain and, and help the farmers, which I completely agree on. But when you're building, you are at the whim of weather at the whim of Christmas as well. When you start building and, and you, you starting in November, that's probably the worst time to start because once December starts, everybody stops work. 

25:24          I just want to say, because I come from the building background and I used to work for one of the largest building manufacturing companies where we supplied millions and millions of bricks on a daily basis. And I actually went into a lot of the studios to be able to help with the design process in terms of actually choosing colors, palettes and all that kind of stuff for a house. And it's no easy process. And I have to admit, you know, after doing it so many times and actually seeing the process, it was quite a lengthy process. And that can take a few months, I actually should say probably from a week to a few months to actually get that all confirmed. Because if you're building a house, unless you're doing it for investment purposes and it's sort of like a turnkey investment where everything's just basically out to rent and so forth, you wouldn't care so much about the qualities of the fixtures and fittings, but when it actually comes to actually building a home for yourself, there's a lot of emotional attachment to it.

26:14          It's very, very easy to get attached to it emotionally because you think, Oh wow, that beautiful stone bench top like a Caesar bench top would actually add extra value to the property. But in actual fact it really doesn't. It just makes it look better. I guess once again, as you said, it's more like an ego boost. So that has to be all taken into consideration because that is a time factor that you've got to put in to actually do this type of project. Not saying it's a good thing or a bad thing. I'm just saying that you need to take that into consideration when actually building a new home. Those are some of the factors that people will be looking at and you need to just be aware that you've got to factor in the time of actually the whole process of building a home because that also comes back down to your back pocket because the cost that you spend in doing all these additional things, man, it can go on forever.

27:00          I'm not saying that renovations can be any better. Sometimes people take 6 to 12 months or even 5 years to finish off a renovation, but with the cosmetic reno, you can get in and get out in two to four weeks in terms of add value and then have the property available for rent or available for sale straight away. So that's why we believe that cosmetic renos are a lot less risk and a lot less capital required as well for it with a budget of 10 to $20,000, I want a better sweat equity and as bit of a labor yourself, you can be doing it where building a house unless you're a builder, which I know Tyrone in myself and not, I've seen his hands. They're very much [inaudible] mind though. You're right. I only get blisters when I'm going fishing, but a chin up is yeah, the, the building a house takes more time, more capital. It can be more rewarding. However, I've done enough to know that I prefer to only build to hold and, and that's what I'm doing at the moment with a couple of my bills I'm building to hold, not necessarily building to sell.

28:03          This is the thing, you probably have noticed that throughout the podcast and everything that we've talked about, we want to get in and get out quickly if it's possible because we don't want to be holding on to anything for too long. And because of that, you know, that's where I guess the philosophy of money goes through much faster, which is going to be a particular topic we're going to be talking about in the future. But I think that's the key point about what we're trying to share with everyone is that we want to get into deal, get in, get out quickly. So that way you minimise the amount of risk that's involved as well.

28:34          The philosophy behind all this, I'll let building a single story home versus a two story home. The amount of actual risks for the construction process itself isn't that much different, but it's the timeframe that is increased. And when you increase the timeframe in any construction process where it's not finished, where it's vacant and saleable, we call that dead time. You know, that increases the risk. 

So number six, we're not going to spend too much time on that building a new house, two story larger home, more than 300 square meters. You know that that's just a natural progression from the building and low set 200 Stuart's where I'm in a home.

29:12          We kind of covered already back in that part about building a new house on just a project home. So let's move on to number seven. We're talking about removal of the home and major structural renovations. What would that be related to?

29:26          Now that we're looking at that next level of renovation before, we've been talking a lot about the cosmetic renovation at a bit of lipstick half a dozen trades people. Now we're talking about significant renovation and the difficult thing here, it's actually very similar to a build, very similar to a build. You might be doing a $500,000 extension to your home. You might be lifting it, you might be sliding it, and there's just more moving parts. And the complication here is it's not a clean slate. So with, with building a house, I'd rather do an existing by compile and build a house, then do a removable home or structural Reno simply because you've got a clean slate. So when you're doing a removal home, you're obviously getting an a house from another block, bring it to your block or moving the house on your own block.

30:18          And it's got it's own idiosyncrasies. It's got its own challenges, it's got its own limitations. So we even did a major structural innovation on the house that we're living in now. Existing house could not knock it down, and could not build townhouses behind it. And then we ended up deciding to do a structural RedDough on us, about 200 grand structural Reno at a kitchen, granny flat center, et cetera. This was about 10 years ago. And so the existing dwelling had its limitations. And like I said, it's like building a brand new building but with constraints to start with. So yeah. So,

30:56          I was going to add as well too, with any structural renovations. Say for example, if we're looking at maybe an existing building and they may have, say for example two bedrooms in it, but these bedrooms are the large two bedrooms and you may want to turn into three. That could be considered as a structural renovation where you're knocking down a wall and putting two walls instead to make it into three bedrooms. There are also some issues that you may face structurally. You've got to get an engineer to come in, check it to make sure that you can do that and also, you don't know what's behind all these walls. It could be termite infested or there could be, you know, electrical problems. All those kinds of things are all unknowns and that's why when we say a major structure renovation, these things have a lot of complexities in itself because there's a lot of unknowns as well too.

31:39          You generally need council approval for these kinds of structural renovations that you may want to do. Like we talked about previously, when you're changing the carpet, polishing the floors, you don't need approval for that. But if you're lifting a building or sliding a building or you know, adding five bedrooms at the back of the toilets and bathrooms and extension of roof lines, granny flats, and you need council approval to do that. So that, that's where extended time frames, extended costs and limitations. You just can't do what you want to do. You know, ceiling Heights have to be right. Fire ratings need to be right. Energy ratings need to be right there. There's so many factors.

Coming up after the break we will delve into subdivisions.

32:43          I think going from let's say number four with the splitters to a subdivision at number eight, this is where you start to learn the actual process of creating a new title.

Tyrone Shum:
The different types of development approvals across Australia

Nhan Nguyen:
01:57          The types of approvals range from like in Queensland or Brisbane, actually, they do what's called a risk smart, in New South Wales, they have a CDC, which is a complying development application. In Melbourne they call it plans and permits. 

Tyrone Shum:
Why building units and townhouses have higher risks and greater profit.

04:12         It might involve the state government as well if it's on a main road or other overlays, cutting down trees and biodiversity. But once you go to the next stage, you've got the approval and you’ve got to build it. 

Tyrone Shum:
So that’s next and you’re listening to The Think Big Property Podcast.

32:26         So the next one is eight which is subdivisions, from a small one into two. We've both done something like that as well, but it'd be interesting to hear from your point of view what that's all about.

32:43          I think going from let's say number four with the splitters to a subdivision at number eight, this is where you start to learn the actual process of creating a new title. I often talk about the five fingers in terms of services. So there's sewer, there's water, there's storm water, electricity and telecommunications, right? So those are generally the five essential services. Gas is another service, but it's not necessarily essential. So sewer, water, storm water, electrical and telecommunications. And when you're creating a new title, a brand new title, you need to provide those services. So if you've got a block of land, a thousand square meters cutting into two, firstly you need council approval. That's not cheap or it's not free. It's about $10,000 for example, for a subdivision draw up plans are via engineer, Tam, planner. It can take two to four weeks depending on how coordinated you are, just to even lodge that to council.

33:37          And that application can take somewhere between, you know, two and 12 months depending on the zoning, depending on the council, depending on other fees and charges and constraints. So, yeah, essentially with subdivisions creating a new title, there are a lot of learning lessons on, okay, how much does, because you've got to install all the services in the split that you generally only stay connect the sewer in the water. You don't have to connect everything else in subdivisions. You have to one connect all the services, but you have to get approval to connect those because there's more services. There's also more costs involved and you may need to upgrade infrastructure. So there's a plan sealing process, which means that you actually have to get the plain sealed of the development approval plan. And yeah, my point is it's a lot more complicated relative to the simple split out, which has already got the titles.

34:30          The five things that you've talked about that would happen all after, say for example, you've got the development approval from council and so forth. So does that mean then those civil works, those people actually come in and laid all those foundations and they're just left open on the land until someone builds on that?

34:48          So with the splitters like you said before, we've already got the titles in the subdivision, you actually need to get the council approval first. Once the approval, it's just a piece of paper saying yes you can sub divided into two and then now then you need to install what are called the civil works or the operational works. So operational works is things like, yeah, the sewer, water, storm water. And then generally what happens is once all the infrastructure is installed, the civil contractor will leave some conduit. It might be a, an orange pipe sticking out of the ground just to show you the location of the service underneath the ground. And then the surveyor needs to come back and engineers need to come back, sign it all off to make sure it's done up to a specification. You can't just put it anywhere you want.

35:34          You need to put it where the plan is drawn. I'm doing one at the moment one to two. And so it's very fresh in my mind. Sometimes you even have to put in a driveway to be able to meet the council's requirements, right? So I'm part of the council subdivisions that each one into two or each subdivision itself is different. You can do one in one street and another in another street, which might look on paper exactly the same, but the council may put you once you put a driveway in one or a footpath and another and this and that. There are so many unknowns about that and it's variable, just whatever council feels like at that point in time. I know it sounds funny, but sometimes on some approval they'll miss a footpath and the other ones, they'll make it 1.5 meters wide. So you just need to allow it. And that's part of the risk as well. It takes a longer time. It might take, you know, 6 to 12 months to complete a subdivision from the start to getting an approval. It's all the surfaces and finish, whereas the split or within 48 hours, the block of land can be ready to go. And on the market subject, you install the services which you can do in a very, very short period of time as well.

36:43          What's interesting with subdivisions, it just seems like it's just a long waiting game because once you've submitted that, then it's just a matter of following up and chasing up. And it's more about shuffling paperwork cause you don't physically have to go out there and actually do anything. You just basically get the consultants and the people that need to set these things up and then you're pretty much just waiting.

37:06          It’s attractive to a lot of people because it is a big paper shuffle. And I do love subdivisions in that way because I physically can't do any of the work. You know, with the renovation, I remember painting ceilings and ripping up carpets and throwing out rubbish and you know, helping to install kitchens and bits and pieces back in early in my career. But with subdivisions I cannot do anything other than mow the lawn. Like, what I mean by that is I don't have any approval or tickets to do demolition of the house. You can't just go up and get the sledgehammer to the house cause the excavator is going to come anyway. It's useless. I can't install the driveways. I can't install the pipes cause I just don't have any approval. So that is actually a big advantage of subdivisions from someone like myself who does not like or prefers not to be hands on so that you can leverage it. And the good thing about subdivisions, once you get it right, once you understand the process of the one into two, going to form one into two and two one to five is actually quite easy cause you're scaling it. Yes. There are some other complications that you know, we will address at some stage, but it just, the beautiful thing about subdivisions, it's very scalable. 

00:20          Previously we talked about subdivisions, small subdivisions and now we're looking at probably more complex applications. Because when you're doing applications like applications for townhouses, apartments, demolitions, you really got to understand the rules and the laws like cutting something, one into two, is quite obvious because you've got, you know, maybe a big rectangle cutting into two small rectangles when you're building an apartment. So you're building townhouses and you are just going for the application itself. It involves a bit more time, a bit more money and a bit more expertise. So that can take time. You know, my recent development application on my 30 lot subdivision took a year and a half and it was a fair bit of blood, sweat, and tears. We threw at least probably a hundred grand at least if not more, to be able to get it through because it had a lot of complexities like flooding, like trees, like waterway corridors, slope, sewer, water, storm water, which is a usual, ]with the more factors you have in it, the more complicated it would be. And therefore the development approvals are so wide ranging. Even a demolition application, if a house is character protected and you need certain reports done to identify it and make sure it's not too old and the fact that you can knock it down can take time, effort and money.

01:39          As you mentioned, development approvals come in all shapes and sizes and forms and so forth. So maybe if we want to share with people some examples of, you mentioned just the most recent one that you've been working on, which is a 30 lot subdivision. What are the other types of development approvals that people can go through?

01:57          The types of approvals range from like in Queensland or Brisbane, actually, they do what's called a risk smart, in New South Wales, they have a CDC, which is a complying development application. In Melbourne they call it plans and permits. So my point is that there's so many different types of jargon and terminology. If we're going to talk about Melbourne for example, that the plans and permits, I've actually got one that I'm putting through for a childcare centre and that's been lodged earlier this year and it's taken a while and had some challenges and some ups and some downs. It hasn't quite been approved yet. However, you know, that cost is probably a good part of 30,000 to $40,000. So you can do development approvals for commercial property as well, whether it's petrol stations, child care centres, commercial buildings, industrial buildings, industrial land subdivisions.

02:52          So it's very, very wide ranging. And some costs can start at $3,000 just for the counsel fee. And you know, you've got all the other consultants fees on top as well. So whether it's architect, landscape architect, engineer, town planner, obviously, hydraulic engineer, if there's flooding, childcare consultant, contamination consultant, noise consultants, traffic consultants. There's a wide range of consultants depending on the project and that's why we suggest as a theme of think big and start small so that you know you're learning as you're growing, you've got more capital behind you, you've got more smarts behind you, you've got a better team behind you, but advise you as you go along because it's just a minefield. There's so many different applications as we go along.

03:39          That's the reason why this is number nine for the ladder of complexity and that's obviously after subdivision. So this is a little bit more high up the ladder, which is a little bit harder to get into and also to do as well. We've just talked about development approvals. The next one is number 10 which is building units and townhouses, which is like a multi-unit dwelling. Anything up to four dwellings and this is the next part up that ladder of complexity. Let's talk a little bit more about this. Let's elaborate more about what this is all about and how this works.

04:12          This is where the risk goes to the next level. So if you're talking about development approvals, you might have a block of land with a house on it and you're getting a piece of paper approved with the local council. It might involve the state government as well if it's on a main road or other overlays, cutting down trees and biodiversity. But once you go to the next stage, you've got the approval and you’ve got to build it. Well, it takes it to another level of risk simply because you've got finance to apply for, you've got funding, more financial risk, you're putting down obviously buildings that got concrete timber roofing. And the process of construction itself is a risk in itself. And I know previously in the ladder of complexity, if you've listened to the last recording, talking about building a new house, low set or building a house, high set, building a house or a building itself has an element of risk.

05:05          So here when you're talking about multi unit dwellings up to four dwellings, it's not just one dwelling, it's four dwellings, three dwellings, two dwellings. So any mistakes that you make, for example, in the design, you're multiplying that. So I remember I had a one into four townhouse project and in the middle of two of the rebuildings I tried to squeeze a car park in between the two buildings. I managed to fit the car park. But because the car park was in between the two buildings, each of those buildings lost roughly one and a half metres on each side of the building because they previously potentially were joined. And then we'd put the car park in between such that they lost that car park space in floor space. So my mistake there was because I tried to squeeze more car parking in, I lost living area. 

05:52          The mistake I made was multiplied by two and we had a lot of difficulty selling those. So my point is that it's one thing to get an approval on paper, but once you build it, if you don't know what you're doing, if your build costs are over the top by 10-15%, you're multiplying that mistake. And that's why with the ladder of complexity, the more you do, more dwellings you build, more blocks of land you subdivide the level of margin of error has to be less. The more mistakes you make it will be multiplied and it's more risk of you losing money in this process.

06:26          You're not just building one sort of dwelling, which could potentially be the house or a townhouse or so forth, you actually building multiple. And so for example, one of the costs that's really, really high a lot of times is the building costs. One building could be like $200,000 so you have to build say a house or so forth. But once you get started say four dwellings, which is like for example four townhouses, yes your cost could probably essentially come down because you're building more but then it actually multiplies. So say for example you’re doing four, they might charge you say 180,000 to $200,000 just for a good quality townhouse. You'd be spending up to $800,000 and that's just only the dwellings itself. So there are a lot more risks involved and also ways to see how you can actually leverage off that because a lot of times people don't just put cash into actually developing these. We usually would go back to finance these things through the banks or through private lending. Would that be the case in a lot of these instances?

07:25          That's the other thing with when you're going up this ladder of complexity is the finance risk as well. So it's one thing as a construction risk, which is what I'm talking about before, design risk, which we've mentioned as well, but also finance risk and complexity. So what I mean by that is generally anything more than two dwellings goes from residential to commercial. And what that means is you'll have to put up more deposit. Interest rates are usually a little bit higher as well as presale requirements. So generally you actually just build a duplex, you can get the normal 80 to 90% mum and dad residential investment rates, you know, 4-5% at the top end. And then if you're going to commercial, you're talking 6, 7, 8% if not more, depending on how badly you want the money. And you may need presales as well in a market like this, you know, presales can be quite difficult.

08:16          Sometimes people want to see the buildings finished, the townhouses, the apartments finished before they'll even put in an offer. Even though they like the area, they like the plans, they like the finish. But because it's not like super competitive anymore that I'd have to fight over each other to get properties off the plan. There's less competition, they're happy to wait and it's like the chicken or the egg in. In the past, you'd get pre-sells before you started building and then those presales would aid finance. You get finance, you get things out of the ground and then you'd already know that the project's already pre-sold and that reduces the risk. On the other hand, the markets change such that you have to get it out of the ground first before people will look at it so that if you can't get those presales, you're going to have to find finance. That's going to give you finance without those pre-sell. So it either means you have to chip in more money, 30, 40, 50% deposit or you're going to have to go to expensive money as well. And it could be, you know, I've looked at a finance package recently where all up it's like 11% because it's about a 3% upfront application fee, 8% interest rate, but they'll basically give you the money to get out of the ground as long as you've got enough deposit.

09:24          That's the most important thing I think that we've actually mentioned in this is that once you go from residential to commercial, because you're increasing the amount of dwellings that you're building, things start to change. Plus you also go out and on GST as well too, which is another topic altogether. So the costs actually start to compound once you stop moving into more of the commercial development. And that's the same thing I've heard. Once you start reaching about that four dwellings plus, that's when things have to switch over to commercial because the banks won't lend you. 

10:08          You’ve just got to be smart about it and have to be creative around it and find ways to pre-sell stuff or get investors on board down the track. We can talk about getting investors and how to help bridge this commercial play. But it's just one of those things that as you get bigger, you get smarter, get yourself educated and look for better ways to get funding that works for you without putting your house on the line, so to speak.

Coming up on the next episode of The Think Big Property Podcast we’ll be delving into the final stages of the ladder of complexity...

If he bought that in 2007 and came out in 2010 and the GFC happened in the middle, just those risks because with development approvals, sometimes you win, sometimes you lose. It is a skilled game.

Tyrone Shum:
We discuss how long it can take to finish a land subdivision...

One into two subdivisions, you can get it done between 6-12 months depending on the approval timeframe. 

Tyrone Shum:
We learn about how erratic the property market can be...

So if you started in 2014 and came out in 2019, which is where we are now, the market's dramatically changed and you've got many, many millions of dollars at stake.

Tyrone Shum:
And that’s next time on The Think Big Property Podcast.