In this episode of the series, Investor vs. Developer, Flux gives you an in-depth look behind the scenes of effective planning when navigating the property space. He wastes no time in examining scalable development strategies and revealing how you can battle 'bright-shiny-objectitis' on the path to investing success. Along the way, he divulges the secret of '6', and explains how it can help you find the best strategy for your property journey.

Timestamps:
01:15 | Investment and Development Strategies: There and Back Again
02:48 | On the Matter of Scalability
05:37 | Scaling Out v. Scaling Up
08:04 | 'Revenue Forever and a Day'
12:36 | Six — The Magic Number
19:04 | The Battle Against 'Bright-Shiny-Objectitis'
20:02 | One Strategy At A Time
29:27 | Keep Your Head in the Game: Rob's 'Money Rules'
40:33 | Always Start With the End in Mind
49:02 | Your Move: Map Out Your Journey

Resources and Links:

Transcript:
Rob Flux:

[00:10:11] Passive income—that's the goal. We're all trying to get to the point of being financially free. So we need to start collecting properties in order to become financially free. So then, the question there is, 'Well, how or when should I actually then start to keep properties? At what point in the journey?'

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. We examine scalable development strategies and reveal how you can battle the 'bright-shiny-objectitis'. Along the way, he shares the secret of '6', and explains how it can help you find the best strategy for your property journey.

Tyrone Shum:   

Most, if not all, property investors know that there are numerous development strategies out there. But there is almost always just one burning question on top of their minds: 'Which strategy should I implement at this time?' Flux covers passive income and burndown rate, and explains why scalability is crucial in your chosen strategy in the long run.

[00:01:15] I guess [it's] probably worthwhile giving some grounding to everything and say, 'Look, there's a ton of different strategies out there—whether they are investment strategies, whether they're development strategies—every single one of them works'. So this is not a 'This is the one that you must choose; it's the only way'. They all work. But they only work if you get really good at it. So I want to get very clear on that. 

[00:01:40] And so, whatever people are doing, they're going to choose for a whole variety of reasons that we're going to talk to a little bit later on as to how to actually narrow that down for you. But I guess there's a couple of elements to that. 

[00:01:54] So investment strategies tend to be, I guess, a small amount of effort at the start, and then let the market do the heavy lifting. Whereas development strategies are a lot of effort upfront. And we do the heavy lifting through our sweat equity, our knowledge, our skills—that sort of thing. So choosing that strategy for ourselves up front is really then about 'Well, if I've got to learn something and I've got to get very good at it and I have to put a lot of effort in, then I want to get a development strategy that is going to be able to stand the test of time'. 

Tyrone Shum: 

[00:02:42] It's not repeatable—that's the problem. You do it once, and basically, you're chasing your tail every time because you're learning something new, which we don't want.

Rob Flux: 

[00:02:48] Absolutely. So for that reason, scalability of our development strategies is super important. So that we can do a lesson. We can do a project. We're going to learn something. We're gonna go implement that. We're going to get some lessons learnt out of doing that. 

[00:03:06] And then we want to do a slightly bigger version of that the next time around, so we can apply the lessons we've just learned and do the next one a little bit better and a little bit bigger. And if we can do that, then we start to then get a snowball effect on the efficiency of our time, how good we actually are at our trade, and a whole bunch of more that actually goes into that. 

[00:03:29] So when we start to look at our development strategies, it's super important about the scalability. So an example of things that are not scalable—okay, so if you do a renovation, that is not scalable. Because you buy one house and you renovate one house, and then, that project is over. And then, you go do another one house. And so it doesn't scale, right? Similar for a knockdown rebuild, you buy an old daggy house, you knock it down, you put a brand new spec home on it, and they'll both make money. So there's no issue at all about it making money. But the scalability doesn't work. 

[00:04:12] And what you find with those kinds of things is the money that you make tends to come through in lumps, because you have to wait to the end of the project. And whilst you were running the project, you actually had a burndown rate—so you had money that you're spending on sending the kids to school and eating, putting food on the table, that sort of thing. 

[00:04:34] So you're burning down your cash, waiting for cash to come back in. And so most of the cash when it comes in is just replenishing your original funds used just because [of] the burndown rate and a little bit. And so what tends to happen there is you swap your day job for your property development job? And then three [or] four years later, you're wondering why you're still working for a living.

Tyrone Shum: 

[00:05:01] And you're stuck in the same thing—just a different type of job.

[00:05:04] You're the boss instead of somebody else. But if you start to get into scalability and you start to do something that— [like on] the first project, you get to do two of something. The next project, you might do four of something. Then the next project after that, you do six of something. 

As you start to get that scalability, then you're going to get, I guess, the efficiencies of what you're doing. Plus, the size of that lump sum that you get starts to get bigger and bigger. And that way offsets that burn rate. And now it's actually worthwhile. 

[00:05:37] So that's really the gist. So then the question is, 'Well, what are scalable strategies?' So now there are two different kinds of scalable strategies. There are 'scale out', and there's 'scale up'. Now, if we 'scale out', we need more and more land. If we 'scale up', then we're going to go higher and higher into the sky. And as we go higher and higher into the sky, we also start to scale down because we're going to start to build basement car parks and things like that. 

Tyrone Shum: 

[00:06:11] And foundations can be deeper.

[00:06:12] And so, I guess, when we break it down, there's really only two paths to how this works. One is a land subdivision path, where you're carving up pieces of land. You get one piece of land, and you carve it up into many others. Or, alternatively, you're going to do what is called 'multi-res', where you might be building townhouses, or alternatively, you might be building apartments, units, [or] apartments.

[00:06:44] So the multi-res, I kind of combine together, because whether you're building a townhouse, or whether you're building apartments, in the early stages of your development career, the rules are very, very similar. 

[00:07:00] And so you've got the ability to, I guess, fork a little bit further down the road, when you get into the scalability side of things and you can choose 'Do I want apartments or townhouses later?' But the difference is, how much land do I need? And now, if you need a lot of land to do the bigger projects, then you're going to tend to be going out to the outskirts of the city. 

[00:07:24] If you're starting to build up, then you're wanting to be in the heart of the city where all the action’s happening. So our development strategy starts to choose where we start to do our project. 

[00:07:38] So whereas what I find a lot of people do is they do it the wrong way around—they choose where they want to do their deal and then they try to force their strategy into the area. And they wonder why they can't get a deal to work.

Tyrone Shum: 

[00:07:52] And also, it can be quite costly, too, because sometimes people just go to the back of their backyard and think, 'Yep, I'm going to be able to apply the same strategy'. But you may not be able to get that kind of block of land size, because it's not available.

Rob Flux: 

[00:08:04] So the key thing is— decision No. 1 is we want to choose our development strategy. And we want that to be a repeatable, consistent thing that can scale over time. And we want to build ourselves a roadmap of projects, that as we start to build our skills and we start to build our nest egg, we can start to scale up until we can actually get to the point where we, instead of having projects where we cash in and we pay tax in order to live and breathe and that sort of thing, instead—we want to get to the point where we don't cash in. We want to keep the property. 

[00:08:47] So if we can keep the property, then there becomes an accumulative effect. So firstly, we don't cash in. So we don't actually realise the profit. Now the profit is still trapped in the deal. But because we don't realise the profit, then we don't pay tax today. At some point in the future, if we ever sell the property, that's when we realise the profit. At that point, we pay tax. So we defer our tax a long way down the path. 

[00:09:22] Now the beauty of that is 100% of the profit now stays in the property. So if we're keeping the property, then that property is now 100% being growing, and it's going to—like an investment property—double every seven to 10 years. So we start to grow our net wealth—super important. 

[00:09:48] Plus, if we've [been] able to keep the property outright—and that's the ultimate goal—then we also build cash flow. So the cash flow is then going to be giving us revenue forever and a day. Now, if you're getting revenue forever and a day, why would you sell?

Tyrone Shum: 

[00:10:08] Exactly. It's passive income.

Rob Flux:  

[00:10:11] Passive income—that's the goal. We're all trying to get to the point of being financially free. So we need to start collecting properties in order to become financially free. So then, the question there is, 'Well, how or when should I actually then start to keep properties? At what point in the journey?' 

[00:10:30] And I find that a lot of people try to keep properties too early. And when they keep them too early, they have too much inherent debt at the end of the project. And so they've made some profit, for sure, but it's not cash flow-positive enough. And the debt that's remaining, they still have to service and [that] starts to become a little bit of an anchor around their neck.

Tyrone Shum: 

[00:10:55] It'll be more pressure [and] stress, because, especially when you go into the next project, you'll need to realise some cash to be able to inject back into the next project to scale up.

Rob Flux: 

[00:11:03] In the early days, most people are cashing in, paying the tax, rolling the cash over, scaling up, [and] doing that again until they get to a point where the residual debt of what they keep left over is either zero or very close to zero. And so it's a super positively geared property. Now, if you can own a property outright—then I'll touch on in a moment how we can actually own a property outright. But if you can, then you are immune to rent interest rate rises.

[00:11:45] So that's where we want to get to. You are immune to inflation. As a matter of fact, inflation starts to become your friend. Because as inflation goes up, your rents are going to go up. There's this really big rental shortage at the moment, and people queuing up for properties, and the rate of rents is going through the roof, because inflation is going through the roof. 

[00:12:05] So we love interest rate rises when we own our properties outright. Whereas if you actually have debt, interest rate is actually a killer, and it can actually be something that'll actually bring you down.

Tyrone Shum: 

[00:12:16] That's right. Which is why I think the market has changed substantially in the last six to 12 months because of that as well, too. Because a lot of people, a lot of debt. So [the] ultimate goal for us is to ultimately own these properties outright after it's been developed. And it's a really, really good strategy. I'm really curious now, then, how are we going to do this?

Rob Flux:  

[00:12:36] I was waiting for you to ask. 

[00:12:41] I'm gonna ask you a loaded question. Now, I'm 95% sure I know what the answer is going to be. And if I asked the same question to your entire audience, usually, I get unanimously the exact same answer back. What is the typical profit-on-cost percentage that developers aim for? 20%? 

[00:13:04] Okay, so let's use that rule of thumb: 20%. Now based on 20%, we have a magic number of six. So if we can do anything, where we are doing a project where we are creating six things—whatever the thing is—then when you sell five, it pays down the cost, and the sixth one is for free. Okay, so that's the goal. 

[00:13:34] Now, if we have a property that's a 25% profit-on-cost, then our magic number becomes five. If we have something that's 30% profit-on-cost, then our magic number is four. So the higher the profit-on-cost, the smaller the deal needs to be in order to own something outright.

Tyrone Shum: 

[00:13:53] Gotcha, gotcha. Okay. That makes absolute sense. And I hope the audience also understands that as well. You might have to actually pull out a calculator and calculate it. But that makes sense. You know, obviously, the higher the profit, the smaller [the] deal that you can— or [the] smaller the number you can go.

[00:14:08] So our ultimate goal is to get to projects that are six or multiples of six, so we can actually start to collect properties. So then, if we know that's our goal, we should always start with the end in mind. I want to collect, let's just say, three properties. And we should— before talking about that, I might just deviate for a moment. 

[00:14:31] Because firstly, you should actually understand what your current budget is, what it's actually costing you to live—so what's it cost to put food on the table fuel in the car, send the kids to school, all that sort of thing that—those costs, what it's costing you to live today, we want to earn that passively at the end of this process. 

[00:14:50] So if we know what our budget is today, then how many properties do we need to own outright in order to pay those bills? And if we can pay those bills? If we can have enough passive income to pay the bills, then we are financially free.

Tyrone Shum: 

[00:15:04] Absolutely. It's all about working backwards. And so knowing you [have] got to really be accountable and really articulate exactly how much you're spending every year, and then work backwards, essentially.

[00:15:15] So start with the end in mind and go. For most people, the average Australian wage is about $80,000—which means that predominantly, we are living within our means. Predominantly, we are spending less than what we earn—most of us. 

[00:15:36] For most of us, we only need three properties owned outright in order to become financially free. Now, if you are in a couple or a family with some kids, [I] think, clearly we need a little bit more, because we have more people that we're feeding—that sort of thing. But it's still the same one roof, it's still the same one electricity, it's still the same one lot of rates. So we don't need, I guess, that $80,000 for every one person. Actually, the more people involved, it actually starts to become a little bit less. So for most families, it's somewhere between three to five properties owned outright.

Tyrone Shum: 

[00:16:15] So let's just say, conservatively, five properties then. That's a good number to really start off with then.

Rob Flux: 

[00:16:20] [It] depends if you're single or otherwise. 

[00:16:24] I'm gonna say that the approach is: Do your budget, actually understand exactly what your burn rate is, and then that's going to help you to inform you later on in your journey—when do I start to step out of my day job and move into projects full-time—that's going to help you to understand 'how many properties I need to own'. And then you can actually put together a plan. 

[00:16:50] So people that come into my program— we help them to build their five-year property action plan. Now, I don't build it because I'm not legally allowed to do that for them. But I give them the tools and the resources where they can build their own financial plan and go, 'Well, if I can start to do this, then we can get there'. 

[00:17:12] Now if you're doing any project inside a major capital city—so we're talking about Brisbane, Sydney, Melbourne, Perth, that sort of thing—on average, by that... if you own a property outright, on average, you're probably going to net about $25,000 per property, give or take.

Tyrone Shum: 

[00:17:30] When you say $25,000, [do you mean] passive rental income?

[00:17:33] Passive rental income, if you own it outright. Now, there are ways that we can stack other things on top to earn more, but I just want to keep it nice and simple and not overly complicate the process. So that's the goal. We want to collect three to five properties. 

[00:17:52] So then, if we know our magic number is six, then we want to start to work backwards and say, 'Well, I don't know how to do six today. So how do I do a smaller version of that project?' So I might go, 'Well, if I don't know how to do six, perhaps I could do four? Yeah, well, I don't know how to do four yet, so how do I do a smaller version of that? So maybe I could do two, right?' So now if we do that, we're starting to build ourselves a plan. 

[00:18:23] Now, as we start to build ourselves a plan, I know that the first project I want to do: build two of something; the project after that, I want to build four of something; [the] project after that, I want to build six of something. And so all of a sudden, within three projects, because I was consistent with my strategy, I can learn, I can reapply, I can get better at what it is that I do. But within three projects, I'm keeping a property outright. 

[00:18:49] So that's the goal. It's really simple. So one strategy, folks.

Tyrone Shum: 

[00:18:55] Love that. And that's what we want to do: We want to keep it simple, you know. Otherwise, people will not follow. One strategy every time…

[00:19:04] What I tend to see is a lot of people put a lot of effort into learning one strategy. And just before they get success, they see a friend, or a colleague or somebody else, do something else [and] make a whole bunch of money. And all of a sudden, 'bright-shiny-objectitis' gets in the way and they jump to the other strategy. And they go all the way back to ground zero and have to start learning that strategy again.

Tyrone Shum: 

[00:19:28] And that's just when they're about to succeed. And that's the worst part about it— because if they just held on, they would have seen it.

[00:19:35] Absolutely. But the frustration of they haven't received it yet that—I guess the tricks that our mind plays on us that—'Well, we haven't got the success. We put all this effort in. It must be bad. What do I do?' It's really... consistency is the key. So one development strategy is the ultimate goal, and one that is scalable. That is the key.

Coming up after the break, we dive into juicy details of Rob's 'money rules' that can help pave your way in your property journey…

[00:29:32] They're really just a series of questions that you ask yourself. And as you start to ask yourself those money rules, that in itself will start to inform what strategies will and won't work for you. 

We hear about the key questions that will train your investing perspective to start with the end in mind…

[00:42:12] And if I reverse-engineer their deals, were they making money selling it as land? Or were they making money selling that as a finished product? 

Plus, he explains where a buyer's agent's place is in the line between delegation and personal responsibility.

[00:45:09] …we need to understand that their motive is to sell you a property because that's how they get paid. Your motive is to make sure that that property is profitable. 

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

Tyrone Shum:   

Flux wastes no time in emphasising the value of implementing one strategy at a time and in defining the difference between market indicators and market drivers. Plus, he introduces his 'money rules' in the in-depth discussion of how to choose the right strategy—'rules' that can help reframe your perspective.

Rob Flux: 

[00:20:02] So, now, once we've got the one strategy—and we're talking about subdivisions, townhouses or apartments; that's really where it's gonna be one of those that are scalable—so then we start to go, 'Well, where should I do that?’

Tyrone Shum: 

[00:20:21] That's my biggest question for you next. You know, say, I'm in Sydney; where can I go to actually implement this one strategy? And say, I want to just do subdivisions. I'm gonna keep it really simple. I don't want to touch townhouses or units yet, but say I won't do subdivisions. What should I do next?

[00:20:36] Well, let's firstly start to look at the fact that 'Look, I've chosen my one development strategy. But I want to keep my life super simple', right? Every council in the country has a different set of rules to do that exact same strategy. 

[00:20:57] So there are 537 councils in Australia, which means [there are] 537 different ways of doing a subdivision; 537 different ways to do a townhouse. So we want to keep it super simple. And we want to start to choose one council. 

[00:21:16] Now when we start to do this, what we're starting to do—you've heard the expression 'jack of all trades and master of none'. So if we are looking at too many strategies and we're looking in too many areas, then the amount of effort that we have to apply means we only get to know a small amount about each of those strategies and about each of those councils. 

[00:21:36] Instead, what we want to do is we want to flip it on its head. We want to narrow it down and go one strategy and one council. And now we can go super deep in the knowledge of those things. So we want to be 'inch-wide and mile-deep'. 

[00:21:52] Now, when we start to do that, if we are picking one council, then we can start to analyse every single suburb in that council and go, 'Well, some suburbs are going to be winners, and some suburbs are going to be losers. Let's start to assess each of these suburbs and call them out in order to get to the point where, ideally, we've got three suburbs that are a winner'. 

[00:22:18] By having three suburbs that are a winner, we can now start to become an area expert in each of those three suburbs. And we're going to know which street is zoned to do what; we're going to know which end of the street is the expensive end, [and] which end of the street is the cheap end. We're going to know which agent to buy through [and] which agent to sell through. And so, by narrowing down our focus, we can get super deep into the detail. 

[00:22:44] Now, I get a huge number of questions to go. Three suburbs doesn't appear to be a lot, right? What makes you so confident that three suburbs is it? And the answer is really simple. You only need one deal for where you are on this part of the journey. 

[00:23:03] A lot of us are thinking that 'We need millions of deals. We [need to] look everywhere.' We don't. We just need one deal to get past this part of the journey. So we want to find an area with the most probability of success for that one strategy and, more particularly, that one deal size as to where we are on our journey.

Tyrone Shum: 

[00:23:23] And that one council as well, too, just so that way we can actually learn that skill. Because I'm just thinking what would happen if, say, the market changes and then you go... or maybe, you know, say, for example, Sydney— not many people [who] have been in Sydney [are] buying for a long time in terms of investment. They'll be built in traveling through Brisbane and Perth, and I think eventually, [they'll] come back down to Melbourne, Sydney. What happens if you do development in Sydney over that period of time? And the market sort of tapering backwards? Would that strategy still be applicable?

[00:23:54] Well, so— I guess, there's... Let's ignore the Sydney part of the question. Because markets are going to move everywhere no matter what. So I want to just forget Sydney, and just go, we've got to— As developers, we've got to understand not just what the market is doing today but also where is the market going. Because by the time we run these projects, they're typically going to take—if it's a simple, small subdivision nine to 12 months, if it's a duplex or a townhouse type project, it's going to be somewhere between 18 and 24 [months]. So we're buying in one market, and we're selling in another. 

[00:24:39] So we need to start to have a crystal ball about how to read the market and be able to know how to use that to our advantage. Now, anyone who's been following me for some time would know that on a regular basis, I do half-and-one-day events that actually talk about my view on where the market's going, so that it can actually help people to actually understand those. And, depending on when this podcast goes out, I've got one of those coming up. So hopefully people don't actually get to miss that. 

[00:25:12] But what we look at is—and this is the key that I want everyone to understand—what we look at is the difference between a market indicator and a market driver. Now, a market indicator measures what has happened. So auction clearance rates: it's already happened. Median house price: it's already happened. Days on market: it's already happened. So they're all indicators. 

[00:25:38] Whereas a driver is what's going to create the sale of the future. So population growth is a driver. Interest rates [are] a driver. Government inflation is a driver. Like, government spending is a driver. 

[00:25:57] So when we start to analyse these 16 different drivers, what we're starting to analyse is where the tailwinds—so the thing is, where the wind is at our back and pushing us in the right direction—where is the tailwind pushing us to say, ’The market of the future looks very optimistic’? Now, that's going to change from time to time. And so, that's going to influence which council we might actually go into. It's going to influence a whole bunch of things. So the strategy and the deal size then starts to influence where those things are starting to work for us.

Tyrone Shum: 

[00:26:34] Absolutely. And that's really interesting. Because that means then you really do need to put in a lot of time and effort to become an area expert, if you're going to do well in these areas. Because, obviously, it's very hard to track 537 councils. I don't think anyone could do it in their lifetime. But if you just focus on the one, you can get really good at that. And even if the market goes up and down, you know what to look out for. And obviously, if the market’s going backwards, that's a great opportunity to buy. And potentially if it's going up, [it's a] good opportunity to make some money.

[00:27:02] Well—and as developers, we want to be countercyclical. So when interest rates are going up, when, I guess, everyone is 'doom and gloom', not wanting to sell, no one in the market, no one wanting to buy no one in the market, prices are dropping—that is a fantastic time for us, as a developer, to start to acquire properties, not just at a lower price point, but potentially with much better terms. 

[00:27:30] So, longer delayed settlements and flexible things about how to come in and actually do work early and a whole bunch of things that actually sit in that—which we're going to talk about in one of our upcoming episodes when we start to talk about no- and low-money-down strategies and things like that. We're gonna go, 'How do we actually do that and use that to our advantage?' 

[00:27:51] But, I guess, we're trying to loop back around to where we were going. But we're wanting to use the market conditions today to help us negotiate that kind of deal. So do we want something with short, sharp terms right now? Or do we want something with very big long-delayed settlements and defer our cash flow to a later part of the process? The acquisition model might change as the market dynamics change. Development strategy, though, does not.

Tyrone Shum: 

[00:28:24] [It] always stays the same, which is the whole idea. We don't want to be jumping around, just as you mentioned at the beginning, when you get to the point where your development strategy is just starting to get really good at it, then you see a— shiny object syndrome— and jump over there and go, 'No, I want to do a different strategy'. So that's why it's so important to be focused on that strategy.

[00:28:45] [A] clear, distinct path. Now, by having a clear, distinct path— so just because you used the word focus, okay... so it's an acronym: so 'Follow One Course Until Success'.

[00:29:01] So that's where I think a lot of people don't follow the one course. They give up. That 'bright-shiny-objectitis' kind of kicks in. So then it gets... we've got a little bit of a trajectory now. But I think we go back to 'How do we choose the strategy?

Tyrone Shum: 

[00:29:24] Oh, how do we do it now? Let's talk about that.

[00:29:27] Now, I have a thing that I like to call 'money rules'. They're really just a series of questions that you ask yourself. And as you start to ask yourself those money rules, that in itself will start to inform what strategies will and won't work for you. 

[00:29:44] It's not a binary black and white. Because, as I said before, every strategy actually works, but it might not work for each individual because of their current circumstances. So there are seven or eight of these questions or money rules that you should ask yourself and start to take note of it.

[00:30:06] So firstly, how much money do you have to invest? Now, that might sound like a really crazy number because—a really crazy question, because, ‘I've got no money. That's why I'm here. I want to learn this’. Like, so it doesn't necessarily mean how much money have you personally got, but it might be how much money have I got access to within my network of people—you know, that might be friends, family colleagues, those sorts of things—to say, 'Well, can I put something together that is actually going to inform where I can actually go?'

[00:30:42] Now, if you hang around with a lot of high-net-worth individuals—doctors and lawyers and that sort of thing—then that answer might be right up here. Okay, sky's the limit, right? But if you don't hang around with a lot of people that are in that category, then you might have to be a little bit more realistic. And that might inform, I guess, some of the decisions that you actually go into, say— look at... You know, if I have to construct a whole bunch of townhouses, I'm going to need a lot of money. If I'm going to do a land subdivision and sell it as vacant land, and there is no construction, I'm going to need a lot less. 

[00:31:21] So instantly, just answering that question kind of might rule out one outcome for you.

Tyrone Shum: 

[00:31:29] And this is where the creative money strategies come into play, which we touched on in the last episode in the funding. But in the future episodes, when we do creative acquisition strategies, we'll uncover a little bit more, because there's so many different ways you can approach it as well.

[00:31:42] Correct. So an antidote to that one question is: 'Well, if I don't need to buy the property, then maybe I don't need as much money'. So the answer might be, 'Look, it's not that I want to limit the strategy' —because some people really want to do townhouses. But now they're informed to say, 'Okay, well, if I want to do that, then I have to do a creative acquisition strategy to do that'. So now it's informing you on what I need to learn to make that happen. So what we're now starting to do is we're starting to build our education path.

[00:32:23] [Am I really] hell-bent on townhouses? Then, I guess, I have to be hell-bent on low- or no-money-down strategies. All right. The next question: How long can I wait to get paid? 

[00:32:36] Now, I touched on this before, but a subdivision might be somewhere between nine and 12 months. I guess, a multi-res strategy might be somewhere between 18 and 24 [months]. So if you can't wait two years for a payday, because you've got a heavy cash burn rate, then you probably want to go for something that's much quicker to get in and out of the cycle.

Tyrone Shum: 

[00:33:02] And much simpler, too.

[00:33:05] Absolutely. Next one: What is your risk profile? Now, some people—and I can speak personally to myself on this. I remember, going back in time, my very first project that I ever did, I needed a money partner involved in the project.

Tyrone Shum:  

[00:33:22] And that was your sister, wasn't it?

[00:33:24] [It was] my sister. So we've covered a little bit of this before, but I guess from a different context... Now, I put in 90% of the funds, and she put in 10% of the funds. It was close to a $5 million peak debt. And so I had the bulk of that debt.

[00:33:44] I was able to comfortably sleep at night because I knew that we were about to make a million bucks. Now, my sister could not sleep comfortably at night because, I guess, the weight of that $500,000 debt on her was a little bit too high for her, and she couldn't sleep at night. 

[00:34:05] So the project wasn't any riskier for me or her. But we each interpreted that risk differently. So because of that, some people will just shy away from the bigger projects. They'll just run away from it, from a larger townhouse type project, because.

Tyrone Shum: 

[00:34:25] And that makes sense. So the risk profile is quite important, especially if you're working in joint ventures. That is something we all need to assess before jumping in, because everyone has different appetites for different things.

[00:34:35] So the next question: What skills do you have currently? Now, some of you might be able to bring some skills from, I guess, your previous investments or whatever. You maybe have done a deal or two and you go, 'Well, I've already done two or three of these little things. I'm just going to start to do that, more of that'. So if that's the case, you can get straight in and accelerate.

[00:35:00] If it's not the case, then you have to go, 'Well, if I want to learn a particular thing, then what that something is might have a different amount of education that I need'. So that's going to dictate who is the educator I want to go and actually get trained through. So if I want to learn subdivisions, I want to specialise in someone who specialises in subdivisions. If I want to do townhouses, I'm going to go and choose someone who specialises in townhouses. So it's going to give you that type of approach. 

[00:35:28] Now, when you combine that with 'how long can I wait to get paid?'— well, if I need to learn something that's going to take longer to learn, and then longer to run, all of a sudden, 'how long I wait to get paid' can only get pushed a lot further down the track. And we might be waiting three years for a payday rather than two years, because we [are going] to have to spend the first part of the journey actually learning the trade.

Tyrone Shum: 

[00:35:54] And I guess that's the question: Do you go out and find someone who has those skills that can help you so much faster? Because why reinvent the wheel? You can learn from these people while they've got the experience. They're on the other side as well.

[00:36:08] So when we say, 'Do you have the skills?', it might not be you, the individual. It might be 'Hey, I'm going to joint venture with someone' or 'I'm going to shadow someone' or 'I'm going to...', so you might be able to leverage or piggyback on somebody else [who is] actually doing that, or choose yourself an educator or mentor that's actually going to show you the path and look over your shoulder as you're doing it. 

Tyrone Shum: 

[00:36:30] Sounds good. 

[00:36:32] So the next one: Have you got enough money to take this through to completion? Now that might sound like a silly question. But there are, many times, multiple different ways that you can exit out of a deal. 

[00:36:49] So for example, you might exit the deal at 'I've acquired it, and I've got an ultimate person that will actually take it off my hands; I'm just being a deal finder, and I'm going to introduce it'. So that is an exit strategy very early on the piece, you may never even own it, and you might make some money on it. 

[00:37:07] The next exit strategy might be, 'Well, I might do the same thing; I might acquire it, take it through to development approval, and sell it as DA-approved'. The next thing might be 'Well, I might actually...' —and this is where we start to deviate based on the development strategy. But just, if we play it out— if I go down the subdivision path, as an example, I might be able to construct as land—which, you know, install the sewer, the stormwater electricals, all those sorts of things—and sell it as vacant land. 

[00:37:40] Or I might be able to have just enough money to build one house, not all of the houses. And so... or, if I go to the other end of the extreme—if I'm doing townhouses, then I must construct everything. Because I can't build, if I'm doing a six pack, I can't build three townhouses and sell them and then build the other three townhouses...[intelligible] you build all of them, or you build none of them. It's really simple. So if you don't have the cash to get through the end, that's going to inform your exit strategy. And your exit strategy then is really based on how much peak debt you can actually deal with. 

[00:38:25] So if you can't deal with a lot of peak debt, then that might inform your investment strategy or development strategy up front. Because something like land has more exit strategies. So land, you can exit as land. You can exit with the existing house on the smaller lot. You can exit with the existing house on the smaller lot where you've done a reno on the existing house. You can exit as a house and land package. You can exit as, I guess, two brand new builds. Or you can start to mix and match all of those. And there's about, on a 1-into-2 subdivision, I think from memory, there's about 16 different permutations on exit strategies you can actually come up with.

Tyrone Shum: 

[00:39:12] That's phenomenal. And I think that's enough security there to feel 'Okay, there's enough exit needed to do your job’.

[00:39:19] But if you do townhouses, set [them] up DA-approved or build all of them. They're your exit strategies. So if you're looking for multiple exit strategies, then that might inform what particular path you actually go down. So the flexibility of that exit is super important with regards to the peak debt. 

[00:39:41] Now, that can have multiple iterations that actually start to play out. If you're intending to keep the properties as well, you really want to plan that upfront. That might change things, like what entity I actually do it in. That might change things like how I actually put my funding together. It might change, 'Who do I partner with? And how do I partner with people coming into deals?' So whilst it's not necessarily going to help you to choose your strategy, it will actually help you to choose your acquisition model, but also how you actually acquire the property in the first place.

Tyrone Shum: 

[00:40:20] That's important, because people don't usually think [of] the end until they get to the end. And by then it's too late and can be quite costly as well, too. Because if you can't, it says you got to sell this to this entity. Ouch, you get a nice big fat tax bill, which you don't want. 

[00:40:33] Or you should always, always, always start with the end in mind. And you should understand how I want to exit before I even go into the deal. Now, by looking at those money rules and understanding how you need to exit before you even start looking, that actually helps you to determine where the deal will work. 

[00:40:55] Now, as crazy as it sounds, there are—and I'm going to use a land subdivision example because it's a much easier one to illustrate this—but there are suburbs where exiting as land will make you [a] bucket-load of money, because Joe Public who's going to buy it off us wants to build their dream home and they want the flexibility of choosing their design and all that sort of thing. There's other suburbs where selling as vacant land will not make the money.

[00:41:30] Now converse to that, there's suburbs where building their house and selling it as a finished product will make the money because that area—that demographic—is looking for convenience of 'I just want to get in and move in. And I want the job done for me. And I don't want to think about it'. Whereas if you sell as vacant land in that area, those people don't want that, because they don't want the hassle. They don't want the headaches. 

[00:41:59] So when you're starting to assess your suburbs, it's not just understanding how many opportunities actually exist there. But start to look for evidence of how other people [are] exiting out. And if I reverse-engineer their deals, were they making money selling it as land? Or were they making money selling that as a finished product? There's a lot of effort that actually goes into that.

Tyrone Shum: 

[00:42:22] There's a lot of due diligence. That means you need to understand about each council, each suburb, that you're going to be working with—which is why it's so important to become an area expert in the areas that you choose that you want to develop in. Because, ultimately, when you get good at that, then obviously that's where the money is going to be made. But that will take a lot of time.

[00:42:40] Absolutely. But you only want to become an area expert in the area that makes sense for your development strategy, your deal size and your intended exit. So we need to put that into our assessment criteria to say, 'Where does that start to make sense?'

[00:43:01] Now, in my program, we have a thing called the 'sub-assessment or sub-analysis process' that we go and we analyse: What do all the raw sites actually sell for? What does the finished product actually sell for? And that would be: What does vacant land sell for? What does the small house on the existing lot sell for? What does a finished house actually sell for? What does a renovated old house on a small lot sell for? 

[00:43:27] And then we plug that into a thing called our 'rough cut fee zone'. And what it does is it says 'Well, if I can buy on average and sell on average and run an average project would, on average, that area make money?' based on the different exit strategies. 

[00:43:41] And so it's a red-light-green-light type approach, where it's going to light up like a Christmas tree to say you shouldn't be in this area [or] you should not be in that area. That takes a lot of effort. But when you do, you're going to be in an area that's got lots of opportunities for your deal size and your deal strategy. You're going to find that there's lots of people who have been doing exactly what it is that you're doing, in order to demonstrate the price points are actually working for the finished product. 

[00:44:11] And then you're going to become the area expert there and be able to determine 'is there still demand for your particular product?' If I go and do what the other people have done—we're just cookie-cuttering what someone else did—if I do that, is there enough demand there that I can make money, too? 

Tyrone Shum: 

[00:44:28] Let's just say as a full-time worker in a full-time job 9-to-5, you're so busy already with your work, then you've got family commitments—you've got all these other things—, why wouldn't you go out and find somebody like a buyer's agent to do all this research for you and find the site for you, knowing which area you want to go in?

[00:44:47] So now I think there is very definitely a place for buyer's agents. And so I want to be very careful in how I articulate this, because I don't want to be seen to be bagging them. They have a role in actually helping us to do the search. And there are a lot of them who are very, very good at that. And there's some that are less so. But we need to understand that their motive is to sell you a property because that's how they get paid. Your motive is to make sure that that property is profitable. 

Tyrone Shum: 

[00:45:20] Yes.

[00:45:22] And so, you've got a conflict of interests in that particular approach. Now, because there's a conflict of interest, I guess the onus is on you to do the work to prove that the deal they gave you is actually profitable. So they're really good for bringing you opportunity. They're really good for scaring and bringing up the untapped potential of an area potentially. But do not rely on them to say, ‘This is a cracking site with a cracking deal with all the profitability’. That is your job.

[00:46:01] So what we're trying to do is we're trying to delegate some parts of this without abdicating our responsibility. Because if you abdicate, if you give that responsibility over to them and the deal ends up being terrible, then the only person you've got to blame is you, not them.

Tyrone Shum: 

[00:46:19] That's right. I guess the reason why I asked that question is because we are all very time-poor, including myself. And the thing is, there's going to be a huge learning curve. And usually, if we don't see [some] sort of results within about three to, say, 12 months or something like that, in terms of finding a deal and stuff, it's very easy to throw in the towel. 

[00:46:36] And I can tell you, I've been through that myself. I spent 12 months looking for a site and couldn't find it. In the end, I was recommended to speak to some agents. That was much faster. I wish I knew that knowledge earlier, but I still made that decision at the end of the day.

[00:46:49] So I think the key to how to blend that well is you do the effort to educate yourself, in order to learn how to assess the deal well. You start to do some of that research yourself to understand what it takes to do the research, to understand the kinds of information you're actually going to start to come back. 

[00:47:13] So that when you then start to outsource the work to someone else, when they bring you opportunities, it's much easier for you to be able to assess: Are they bringing you good opportunities? [It will be a lot] easier for you to assess, 'Hey, are they actually doing their job right?' So you're now delegating, not abdicating.

Tyrone Shum: 

[00:47:33] Absolutely. 

Rob Flux: 

[00:47:34] But you need to put that in question upfront.

Tyrone Shum: 

[00:47:37] So I guess as part of your program, do you have these tools already available in your program that you can just access and then implement a lot of these that we've just discussed about?

[00:47:48] Without doing a sales pitch? Yes.

Tyrone Shum: 

[00:47:51] So that's great to know that. I'm part of your program, as you know, and I'm always just keen to save myself a lot of time because I don't want to reinvent the wheel. I want to be able to access those tools and then just implement a lot of the things that you're talking about, which is very, very important.

[00:48:05] So there's the sub-assessment process. There's the rough cut fee zone process; there's the actual quick fee zones, when you're actually doing it. There's tools and resources for how to do joint ventures and how to do private loans and all sorts of things like that you're going to need; how to actually put a letter of offer in... Everything that you're going to need is kind of there. 

[00:48:28] But it's only as good as the people who put the effort in. 

Tyrone Shum: 

[00:48:31] That's right. It's always up to you at the end of the day. So it's been fantastic, Robert, you've shared all this. I think we've cracked a lot of things in this or delivered a lot of fantastic content in today's episode. And hopefully, it's given a lot of people insight in how to approach a strategy, especially for development strategies. As we've said, there's over 50-plus different opportunities to be able to... or different types of options to use. It's just a matter of saying which one we believe is going to be the scale. And that's one of the key things. And sticking with that one…

[00:49:02] And when you narrow it down, there's only land subdivisions that scale. There's only townhouses that scale; there's only apartments that scale. And the townhouses and apartments—the rules on those in the early days are very, very similar. So really, there's two paths that you want to start to learn—so land subdivisions or the multi-res type approach. 

[00:49:22] So pick one. Map out a journey that's going to get you to where you want to be financially free. So map out a five-year property action plan to actually go, 'How do I start to scale that?' And then based on that journey, you can then get to say, 'Where does that one deal size that I need for this deal? Where does that start to work?' And you want to get one council where that deal size works. And then, once you've got that one council, you want to narrow down those suburbs to say I only want three suburbs where I can become an area expert at that deal size with that strategy. 

[00:50:04] So that's really the nuts and bolts. And if we can do that, we're going to become 'inch-wide and mile deep'. We're going to get very, very good at our craft, very good at our trade. And then we're going to rinse and repeat that into the next deal and go, 'How do I apply those lessons learnt into the next size deal?'

Tyrone Shum: 

[00:50:19] And our aim is to get at least six. That's our magic number. 

[00:50:23] That's the goal: six. And you can sell five, keep one, and it's cash flow forever and a day after that.

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