In this episode of Investor vs. Developer he shares all about finding and funding deals, plus his five sets of rules of three. Whether it’s about funding, total development costs, or how other people see you, it all boils down to three distinct rules that will help you reach your property goals. In amongst spiling the beans on rules, he also busts myths and hands out tools, but don’t worry: Not a single cat was harmed in the making of this podcast.

Timestamps:
00:58 | From Entry Level to Professional
04:17 | Stages and Spaces
07:43 | Start With the End in Mind
13:56 | Deposit, Serviceability, and Cash
17:27 | The Downsides to Residential Lending
20:29 | Total Development Cost
26:14 | Shortfalls, Or No Money at All
33:11 | Get All the Advice
37:28 | Don’t Limit Your Beliefs

Resources and Links:

[00:06:17] So from that perspective, the temptation is to do residential lending, which is one of the three different ways to fund. So you've got residential, commercial and other people's money. They're the three different ways to fund. 

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 special episode we’re speaking with Rob Flux from Property Developer Network. He dissects the pros and cons of commercial and residential lending, joint ventures, and private loans. Plus in sharing his insights, he gives a peek into what went through his mind when he started, and the importance of putting things into perspective.

Tyrone Shum:   

With over 30 stages in a development, they’re not easy for any developer. Some stages are more difficult than others, and Flux has noticed that there are two main criteria that developers often struggle with. They come down to the two Fs: Finding the deal, and funding the deal.

Rob Flux:   

[00:00:58] Today, we're going to talk about all the issues and challenges in that funding space. We're going to talk about what I call my rules of three. And there are many, many rules of three that actually sit in there that are nice and easy and catchy for people to actually remember. 

  

[00:01:15] And how someone's journey is going to change from an entry level developer through to a more professional developer that's going full time and pro, and how the way you fund changes along the way. 

Tyrone Shum:   

[00:01:29] This is what I love about it, because I think this is a key component about any developments. In order to be able to do a development successfully, you've got to be able to get funding for it. And it doesn't necessarily mean that you're going to fund it all. I think that's something we'll talk about a little bit later on, as part of some of the beliefs and so forth. 

  

[00:01:44] But I think one of the key things is: How do you actually go about finding funds to be able to find a deal to be able to develop? Because the thing is, once you've got a great deal, and it stacks up really well, and feasibility is good, you go, okay, it could cost you millions of dollars, but no one has literally millions of dollars to be able to sit there and put into this. If everyone did, then everyone would be doing development.

Rob Flux:   

[00:02:05] Well, some do. But most of us have, I guess, limited resources in actually coming in here. And so I guess a parable of mine, or a catchphrase: Don't let your lack of resources stop you from being resourceful. So it's about understanding the constraints of the deal, understanding your own personal constraints, and then being able to negotiate how to avoid some of those issues along the way. 

  

[00:02:36] So when we start to think about those resources, they change from different stages of the project, which really comes into the first rule of three. Which is there are three stages to do the funding, right? 

  

[00:02:51] Most people don't think about it, they think more about just the point of acquisition. But the point of acquisition gets you [a] certain way through the project that allows you to do all of your development applications, etc, and get your approvals. 

 

[00:03:06] But then you transition into stage two, which is the construction phase. Now, quite often, getting that construction phase, the kinds of finance that you actually need at that point are very different to the kind of finance that you want at the acquisition stage. And we'll dive into those a little bit deeper as we go through this. 

  

[00:03:26] But then the third stage is, well, what if you want to retain some stock at the end? You want to pay back the construction loan, and then refinance that into a long term buy and hold type strategy. 

  

[00:03:38] So as you go through those three different stages, you're going to need different kinds of finance along the way. And so you need to be thinking about the end to end process, not just stage one acquisition where most people get stuck, to be honest. 

Tyrone Shum:   

[00:03:55] That's where people usually start because they don't realise, 'Okay, there's the other parts there'. I mean, it's really good that you've raised about the last one, basically getting a refinance of return stock. I'd be asking the question: Can't you just go out to any bank and say, 'By the way, I got this new property, can't you just give me lending or finance against it?' Is [it] as simple as that, or is it a lot more [complicated]?

Rob Flux:   

[00:04:17] If we start with that end goal of the refinance of that, you're back to a residential lending type scenario. Whereas in the middle stages, you might be using a more commercial style, and we will talk to that a little bit later. 

  

[00:04:32] So when you're in that residential space, you need to demonstrate your serviceability. So can you afford to fund any shortfall of any rental income or anything like that that might actually happen on the property? 

 

[00:04:46] And that then becomes a potential limiting factor if you then want to go on to do project number two [and] project number three, because now you've got these debts sitting over your head. So there's some big decisions that need to be made as to: Can I keep my stock? Or: Should I keep my stock? Because you might be able to, but that might be a handbrake to stop you doing deal number two. 

  

[00:05:09] Or do you start to think about to collapse that down, roll the cash over, get the cash out, and then go and do the next project, which might be slightly bigger. So if we get our deal big enough, we can keep it owned outright. But if we try to keep it too early, sometimes that's the thing that is the handbrake that stops us.

Tyrone Shum:   

[00:05:31] That's really, really interesting. So I guess we'll say it again, there's three different types of stages, or three stages, of funding. We've got the acquisition phase, the construction phase, and the refinance of retained stock, or residual stock, as they also call it as well. 

  

[00:05:45] So let's break it down a little bit, just to let people understand. What is this first stage of acquisition? What does that relate to in a development?

Rob Flux:   

[00:05:53] You're picking up the raw site at this particular point in time. So it might be an existing house, it might be a large parcel of land that you might want to subdivide. But typically, it's only got one dwelling that's sitting on there. So it has not gotten development approvals in most instances. So it is, for all intents and purposes, looks like a house, smells like house, it's a house. 

  

[00:06:17] So from that perspective, the temptation is to do residential lending, which is one of the three different ways to fund. So you've got residential, commercial and other people's money. They're the three different ways to fund. 

  

[00:06:33] But when you do that, then obviously your own financial circumstances need to be taken in with regards to: Can you afford the loan? Is there any rent generation from the property? Paying interest along the way, those sorts of things. And so there's some handbrakes in that when we dive into the detail of that resi space and some of the limitations, we can flesh out the pros and the cons of residential lending. And we can measure that against commercial a little bit later in the process. 

Tyrone Shum:   

[00:07:04] It's really interesting, because it's something we need to think about. Because, say, for example, you're going to a development site and your intention is to buy this, do a development on it, and then eventually say, 'Let's sell it'. And if you can hold on to it, that'd be great. 

 

[00:07:17] But if you don't think about this, initially, upfront with the financial side of things to actually see how you funded, you could actually get yourself in a bit of a... as you said, a handbrake situation where you go down the residential path to get a loan, and you get that approved, and then you realise, 'Hold on. I can't actually do any more, because I'm stuck because I can't get construction finance down that track'. 

  

[00:07:36] So it's actually quite important. Before you even start getting the site, you've got to actually think about how you're going to fund it.

Rob Flux:   

[00:07:43] Start with the end in mind, mate. So if you know what the outcome is, then that will inform what your first step in the process should be. And how do you actually move towards that? 

  

[00:07:54] In many instances, people just go for, 'Well, this is all I know, all I know is how to do residential', so they then do that, and then all of a sudden, that becomes a bottleneck for future stages, or they struggle with the serviceability to get there. And they wonder how everyone else is doing deals, but they can't. 

  

[00:08:14] So we want to kind of bust apart a number of those myths and give some people the tools to say, 'Look, there's more than one way to skin a cat, so long as the cat's dead'.

Tyrone Shum:   

[00:08:29] Well, we won't go into too much details about that one.

Rob Flux:   

[00:08:33] No cats were harmed in the making of this podcast.

Tyrone Shum:   

[00:08:40] So the next part or the stage is the construction. Let's say we've acquired the property, we've got commercial finance for that. Let's talk a little bit about what construction finance or construction stage looks like. 

Rob Flux:   

[00:08:52] Well, the construction stage starts to be, I guess, the litmus test as to how you need to actually fund the construction element based on how many dwellings are actually in there. 

  

[00:09:09] So if you have only three dwellings that you're actually constructing, three or less, then it's relatively easy to use residential finance to do that subject to you having serviceability. 

  

[00:09:22] If you get to four or more dwellings, then the residential funding model changes significantly. And they make that very difficult to do because of the risk position of the bank. And instead, they want you to go to a more commercial style lending, where they're looking at more short term nature, in that space. And so the rules that you lend under change massively in that process.

Tyrone Shum:   

[00:09:50] What are some examples of that, like, compared to, say, residential, compared to commercial? I mean, you've mentioned the serviceability is key for residential. When you jump to commercial, is that still a factor?

Rob Flux:   

[00:10:03] Let's look at a typical early stage developer [who] might be doing a one into two subdivision or a duplex as their starting entry project. In that instance, they go, 'Have I got the 20% deposit? Have I got the serviceability to firstly acquire the land in the first place? Can I service the peak debt from an interest rate perspective to say what it's going to be fully constructed?' 

  

[00:10:32] And as part of that, the bank would say, 'Well, what is the anticipated rent of that finished product actually going to be?' So they look at all of those factors and they say, 'Well, fair enough, it looks like at the end of this, you're going to have a debt of $3 million. Can you service that based on the rent that those two dwellings are going to create?' 

  

[00:10:54] In many instances, people find they can't. And so that then starts to create a situation where the bank won't lend under that scenario to start with. And so then people start using, 'Well, what if I sell one down and the profit of that I'll roll over to pay down the other one?' And the bank goes, 'Hang on. Profit? You didn't mention anything about profit. You didn't mention that you're being a developer'. 

  

[00:11:26] Because [in] residential lending, the banks are looking for 20 or 30 year loans. They're wanting to drip feed their money for a very long period of time, on a low risk proposition. 

  

[00:11:39] Whereas what you're proposing to them is a high risk proposition where you're trying to speculate on the sale of that finished product at the end. And that product was never designed to do that. 

  

[00:11:49] And so the banks, as soon as they get to that three number, that just triggers alarm bells for them that, hey, the likelihood is that you are a developer. And because of that likelihood, we're going to put a lot more scrutiny into that process. And we're going to assess the deal in a very, very different way. And the commercial side of things is that different way. 

  

[00:12:15] Before going into the full comparison of those, though, there's probably another rule of three that we've missed that if we go back to that, it'll probably fill the gap here for people to actually understand. 

  

[00:12:28] There's three amounts of money that are actually needed to run any deal. There's the deposit to purchase the property, there's any serviceability to fund the debt. And then there's the liquid cash in order to run the deal. 

  

[00:12:43] And so whenever you're going to go into a deal, you need to be looking at all three of those elements at all three of the stages of funding. So for the acquisition, the construction, and the refinance of the finished stock. 

  

[00:12:56] So you need to apply that test across everything. And when you start to do that, you'll see where the residential lending model starts to break. And you'll start to see where the commercial model starts to come into play. And then that then starts to go, 'Well, have I got the answer? Have I got all the solutions to each and every one of them? Or is there still a shortfall?' And then I guess funding model three starts to come in, which is other people's money. 

  

[00:13:26] So the biggest challenge is that most people don't think about that end to end solution, thinking about all three stages, thinking about all those three different modes of money that they need. And because they've not thought about it end to end, they get halfway into the project, and they get stuck. And so planning is really the key to then understanding, 'Well, which funding model is actually going to work?'

Tyrone Shum:   

[00:13:56] The banks, or any commercial lender, will look at your feasibility. That's the key thing. Once you flip over to start getting commercial lending, and commercial financing, then they'll go, 'Okay, show us that your feasibility. How did you calculate these? How did you have to come up with this?' 

  

[00:14:10] And as you mentioned, there's three types of amounts. There's a deposit, there's a serviceability, and obviously cash to be able to run the deal to be able to service. So you can actually keep paying your builders and contractors and whoever else that you need to actually do the project with as well. 

  

[00:14:24] Which is really, really key, I think, in this aspect, because that kind of really ties in really well. Maybe just for the listeners out there, we've talked a lot about facts and theory stuff at the moment, but let's maybe run a scenario for them. If you've got one that you can talk about, I guess applying these three amounts and also, too, how we can actually look at it. Let's start off with, like, a four pack or something like that. A four pack of townhouses. 

Rob Flux:   

[00:14:49] [I'm] happy to go through this scenario. There's a couple of pros and cons that might help paint that scenario better. Then when we go through the scenario, I can go see where it triggered that particular problem. And then everyone will go, 'Okay, I got that a little bit better'. 

  

[00:15:04] So, the pros and cons of residential. So if we just look at residential lending, everyone's used to it. We've been indoctrinated into this over many, many years. So everybody's familiar with how the model works. The perception is it's a very low interest rate. And because it's a very low interest rate, it's super cheap. And so is the likely most profitable way out of the deal. So that's the pro. 

  

[00:15:30] The con is that the banks aren't intending it to be used for what we want to. And when we start to do things like knock the house down, take away their security, remove the rental income that starts to come through, the bank starts to get alarm bells that go, 'Hey, that wasn't our deal. You never told us that was actually going to happen'. 

  

[00:15:52] And so the banks are very aware of the fact that people are telling half truths when they're applying for residential lending for development purposes. And so they look for little idiosyncrasies in the contracts. 

  

[00:16:08] So it might be a due diligence clause. A due diligence clause instantly triggers the bank to go, 'Hang on'. Little hairs on the back of their neck start to trigger and go, 'Why would you need due diligence? Unless you're intending to do something with that?' 

  

[00:16:22] They look for the name of the entity under which you purchased it. If it's Rob Developments, Proprietary Limited, then the word developments is probably the key.

Tyrone Shum:   

[00:16:33] It's pretty obvious.

Rob Flux:   

[00:16:34] Don't do that! So they're looking for those little subtle clues that say what is it that is actually there. They will send valuers in to assess the property, and they'll see whether or not there has been a development application already lodged against the property and go, 'Hang on, this has development potential, what are the purposes they're actually going to do it under?' So there's a whole bunch of scrutiny that happens that most people just don't have visibility on.

Tyrone Shum:   

[00:17:04] Especially if you buy, say, for example, two blocks side by side, that's an obvious giveaway. Or if you're buying a big block of land, and you've got plenty of land at the back that is potentially subdividable. That's also another giveaway. So they're not that dumb, to be honest. I think the bank will figure it out.

Rob Flux:   

[00:17:20] I'd say they are actually quite clever, and they're onto us, folks. So don't be trying to do that. 

Coming up after the break, we delve into the big questions that can cause you to hit a glass ceiling…

[00:18:10] And they apply a weighting and a factor against that to say, 'Well, what happens if the interest rate goes up? What happens if the property is vacant? What happens if?' 

How to utilise other people’s money in a way that benefits both parties…

[00:26:54] But at a very high level, the other people's money is going to come into a couple of very basic genres. 

He explains why interest rates aren’t the be-all and end-all.

[00:31:17] And I think a lot of people see the interest rate at 20% and go, 'Oh, my goodness, what am I going to do? That's ridiculous.' 

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

In his years of scrutinising all the aspects to lending, Flux has observed some of the downsides. When it comes to residential lending, one of those is a specific mindset that some people adopt.

Rob Flux:   

[00:17:27] The other negative to the residential lending is is the mindset that we have coming in that we always want to do it with our own cash. So I want all the profit for me. And because of that, that tends to breed a well, have I got the serviceability? Am I in a job that actually has enough to do that? Do I have a large enough deposit to actually fund the deal? 

  

[00:17:49] So when you're going in for residential, we look at those three things. So the deposit to purchase, typically, that's 20% of the purchase price. The serviceability, they look at your assets and liabilities, they look at your income streams, they look at any revenue you've got from shares and rents for other things. They look at the rent that's going to happen for the property. 

  

[00:18:10] And they apply a weighting and a factor against that to say, 'Well, what happens if the interest rate goes up? What happens if the property is vacant? What happens if?' So they probably apply all these weightings. So the actual cash that you've got ends up being a subset of the amount of money that they actually lend you. So you hit this glass ceiling on deal size. 

  

[00:18:32] So that's the biggest problem with residential, that glass ceiling. You are capped out. You are capped out at how much you can borrow based on what you are earning. And you're capped out on the size of the deal, because they limit it to that three lots. 

  

[00:18:51] And so at that point, residential starts to kind of break. And a lot of people struggle to get in because they can't come up with the deposit or the serviceability in that process. So that's when the commercial model starts to come into play. 

  

[00:19:09] So the commercial model then starts to say, 'Well, we don't care so much about your serviceability. So when we look at those three things, the serviceability part just disappears'. And instead, they say, 'What we want to do is make sure that the deal is actually a good deal. Now, if the deal is actually a good deal, we are with full knowledge and consent. We're not coming in on this 30 year loan arrangement where you're telling porky pies to us. But we're coming on on a 12 month loan or a two year loan, where we are understanding that there is a risk to this, a commercial risk. [We're] factoring that into our interest rates that we're charging, because we're only getting a large amount of money but in a very small period of time'. 

  

[00:19:09] And the other thing is they say, 'Well, given the risk, we want that deposit that you needed, we need that to be larger, because we will only lend you money when the bank is not actually exposed to risk'. 

  

[00:20:10] So what they're trying to do is put a buffer between the profit being lost in the deal. So then the developer starts to lose some of their security money or their deposit money, before the bank actually loses its money. Because the bank will only ever lend us money when they prove that we don't need it.

Tyrone Shum:   

[00:20:29] And that's the reason why you look at the banks, when they do commercial, you will typically see their commercial LVRs— or loan to value ratios— is lower. We typically know and this can change the market is that residential is about 80% LVR. Whereas [if] we go with commercial, start from anywhere between 50%, anywhere up to, say, 65% [or] 70% at most, depending on the commercial deal. So now we understand why.

Rob Flux:   

[00:20:56] That's off what they call total development cost. So they're lending that, and they change the terminology. So that what we call[ed] deposit before, the terminology changes when it goes into commercial and they call it equity. So they're wanting typically about 30% equity of the total development cost actually covered by your cash in some way, shape, or form. 

  

[00:21:23] Now, if you can do that, then at that point, they will say, 'Well, if the deal is a deal, we'll lend you the money'. Now, the bonus from a commercial perspective over residential is [with] residential, you need to pay the interest every single month. Whereas commercial says, 'Look, we understand that this is a high cash flow type deal, we're not expecting you to pay the interest every month. What we're going to do is we're going to capitalise the interest, meaning we're going to push the interest to the back of the loan, and you're going to pay us all the interest at the end when you sell the finished product over and above'. 

  

[00:21:58] So effectively, you're paying interest for day one adds to the end, then month two, adds to the end. Month three, adds to the end. You end up paying interest on interest because of that, but you didn't have to cash flow any of it. So from a benefits perspective, the cash flow is king. So if you can improve your cash flow situation, then you can potentially run more deals than you would in any other circumstances.

Tyrone Shum:   

[00:22:27] So Rob, just to get my head around some of the numbers around this. So let's say for example, total development cost. For listeners out there who might not know what that means, what does that represent?

Rob Flux:   

[00:22:38] It's the accumulation of everything that they call a hard cost. So there are hard costs and soft costs in a project. So a hard cost is cash that is payable today. So purchasing the property, payable today. Stamp duty and purchasing, payable today. Consultants along the way, payable today. 

 

[00:22:58] There are soft costs that are payable in the future. So for example, when you sell the property, there is going to be an agent's commission, but that is offset by the revenue coming in. That's a soft cost. So it's a cost of the project. But you don't have to cash flow it upfront, because it's funded by the revenue coming in. So the total development cost is the accumulation of all those hard costs to say, 'What do I actually have to cash flow to get this deal done?'

Tyrone Shum:   

[00:23:27] So which that also includes, say, for example, construction costs, what you've got to pay the builder and do all that. And you get to the end, you've got this figure, say for example, you bought the site for $1 million, and it's going to cost $2 million, and your profit might be say, $6 million. I'm just making some random numbers up here.

Rob Flux:   

[00:23:44] Very random. It's a killer deal. Why not?

Tyrone Shum:   

[00:23:47] I'm thinking about it right now. But yeah, I guess your total development costs would be, say, the $1 million plus the $2 million which is $3 million. And that's your total development costs. Now, when you said about the banks, or the lender would lend against that. Do they lend a certain value of that total development cost? Or do they lend against the actual property value? 

Rob Flux:   

[00:24:15] Each funder will do a slightly different approach, but the answer ends up being very, very similar. So some of them will lend against the total development cost. And some of them will measure against what they call GRV, the gross realised value, which is the value of the finished product at the end.

Tyrone Shum:   

[00:24:34] Which is $6 million.

Rob Flux:   

[00:24:36] And if it's against total development cost, then they might only want a 30% of total development cost as equity. If it's gross realised value, then they might want 40% or 45%, for example, of the GRV. Which I guess by the time you subtract your profit, you subtract your soft costs, then you start eating into things, the actual cash that they lend you ends up being very, very similar. 

  

[00:25:07] So each bank does that assessment slightly differently. But one of the rules of three that I've got is if you've got approximately 1/3 of your total development costs as cash or equity, that would typically service most loans.

Tyrone Shum:   

[00:25:26] That's very, very good. It's very handy tip there. I won't delve into too much more, because it gets very, very, lots of little details, minor details. But I think this is something that you'd have to sit down and review and learn from feasibilities, and all that. But I think we wanted to sort of just touch on high level, and it's important to kind of understand that. 

  

[00:25:46] So we've kind of talked about pretty much the way of what funds need to be, and the types of mounts related. One thing I guess we wanted to sort of also touch on, because we've talked about residential [and] commercial, is the next one is probably other people's money. 

  

[00:26:01] So say, for example, you've gone down those two paths, and you realise, 'Hold on, I can't really quite get commercial lending, because it just doesn't stack up'. Where would you get money for this deal that's really good example? In this example I just shared with you?

Rob Flux:   

[00:26:14] You've got a shortfall. So whichever approach you want to go down, you've got a shortfall. Or in some instances, you've actually got no money at all. And so then you're gonna go, 'Well, how do I do this when I've got no or low money?' And so other people's money starts to come into play. 

 

[00:26:30] And there's lots of different ways that you can actually deal with other people's money. There are a number of ways that you can profit from a project when you've got little to no money in the process, by controlling the property in some way, shape, or form. But that's probably an entire episode in itself.  

  

[00:26:54] But at a very high level, the other people's money is going to come into a couple of very basic genres. 

  

[00:27:01] One is a joint venture, where you don't have the cash, but someone else has the cash. So that might be a money partner, where you go arm in arm, they fund the deal, you run the deal. That's a nice, simple, easy joint venture.  

  

[00:27:18] Another kind of joint venture might be, well, what about the existing landowner? They already own the property. So if you do a joint venture with them, you don't actually have to purchase it, because they already bought it. They bought it a long time ago, on a very different price point. So their holding costs and your holding costs are very, very different. 

 

[00:27:37] So you look for opportunities to say, 'Well, if I can partner with somebody, or find a way to solve...' Remember those three problems that we had? Deposit, serviceability and liquid cash to run the deal. Where are you short? 

  

[00:27:55] Well, if I'm short on deposit, then I guess I could do a joint venture with the landowner and say, 'Well, why don't develop your land?' I don't need to come up with a deposit. In that instance I don't need the serviceability, either, because I don't need to go to the bank to get the loan because he already owns it. So we're looking at how do we plug those three things when we're actually short. 

  

[00:28:20] The other way to do that is through private loans or private money, where friends, family, network, colleagues, etc. might have some surplus funds that they go, 'Hey, Tyrone, you're a nice guy, you look like you'd know what you're doing. Would you like some? Because it's sitting over here in this piggy bank not doing much for me at the moment, and it looks like you can make my money work a little bit harder for me'. 

  

[00:28:46] So partnering with people to say, 'Well, if I'm short on maybe the liquid cash to run the deal, maybe I only need to borrow $100,000'. 'If I'm short on the deposit, I might need to borrow $300,000 or $400,000'. But we're borrowing it for a short period of time. And so when we borrow small amounts of money on a short period of time, the cost to us is proportionate to the profit, we're going to make very, very low. 

  

[00:29:18] Now, whenever we get into the joint venture scenarios, we tend to be talking about doing profit splits. So whatever the profit is, we're going to split that with the person who's doing the joint venture. Whenever we talk private loans, they tend to be more from an interest rate perspective. But the interest rates are up there. 

  

[00:29:39] So if you're used to, 12 months ago, we were at 2% and 3% loans. Now we're at sixes and sevens. But when we're doing private loans, they can be 10% [or] 15% [or] 20%. I have loaned money out at 35% before. So that sounds like a really scary number. But 35% of what? And for how long?

Tyrone Shum:   

[00:30:07] That's right. 35% per annum as well, potentially. And it could only be for three months. I'm the same as you, Rob, I've seen and done this multiple times and people baulk at it. But then you go, 'Okay, it might be only a small portion of the actual larger amount'. You might be needing, say, $2 million, and out of the $2 million you're short $200,000. So you're only lending against for $200,000. So putting in perspective, it's actually a small amount.

Rob Flux:   

[00:30:34] Your hypothetical before was probably a little unrealistic. Let's say $1 million to purchase, $1 million to construct, and we're going to sell it for $3 million. Give or take, there's $1 million profit in there. So nice, simple, easy scenario. 

 

[00:30:52] Where there's $1 million profit in there, and you've got a shortfall of, say, $200,000. If you paid a— let's exaggerate it, let's say a 20% interest rate— you're probably going to pay $40,000 in interest on that money over a 12 month period. But you're making $1 million. 

  

[00:31:17] And I think a lot of people see the interest rate at 20% and go, 'Oh, my goodness, what am I going to do? That's ridiculous.' But they forget about the $1 million. So what we want to do is we want to start to treat these things as line items within a feasibility, as you touched on, and a cost of doing business. 

  

[00:31:39] So you couldn't have made that $1 million unless you paid that money. And so it's only fair and reasonable that that you are rewarding someone who's sharing risk with you in a deal, let's face it, and they could have put that money somewhere much safer. So it's only fair if they're sharing the risk, they should also share the reward. 

Tyrone Shum:   

[00:32:03] It's really good that you pointed that out. To put things in perspective, we will try and compare $1 value versus, say, a percentage. When you take the percentage and convert it to a dollar value., as we said, you're making $1 million and spending only an extra $20,000. It actually makes more sense compare it like that, it's almost apples versus apples rather than apples versus oranges. 

  

[00:32:24] So it's just putting things in perspective. Because ultimately, if you think that the deal is very, very profitable and you've got to get it across the line, no doubt you do whatever you can to make it work. And I've seen it happen multiple times with developers, and it's quite common. So people don't need to be worried about that too much, I guess. 

  

[00:32:44] But also, I guess one thing we want to mention, what we're discussing about, especially with private lending as well, you've just gotta be very, very wary about this. Because there are also some rules and regulations and governing bodies out there. And we're not giving any advice here, all we're just saying is just to be very wary. And just be aware that there are ASIC and APRA regulations around the type of capital raising, and you've got to be very cautious about that. And know that there are certain rules that you've got to follow.

Rob Flux:   

[00:33:11] Always, always, always get accounting advice, and also get legal advice on anything. Especially when you're trying to borrow money, you want to have the right legal structures in place, the right terms and conditions on your loan documents or your joint venture documents. 

  

[00:33:26] And the way you promote to raise the money, you have to be very, very careful that you are not seen to be in the business of raising capital. So if you're in the business of raising capital, that triggers like you said, ASIC rules and APRA regulations about all this compliance that you need to be doing. 

  

[00:33:46] So it's really easy when it's friends and family, they already know you, you're very well introduced. But if you send an email, blast out to 10,000 people and go, 'Hey can have some money?', or in a Facebook community or things like that, that could be seen to be capital raising. So that can trigger all sorts of things. So you got to be super careful in how you raise it. 

  

[00:34:11] But before anyone lends you money, one of the things is that a lot of people, they've heard the expression, 'If you've got the deal, the money will come'. But they don't think about that until they actually have the deal. And at that point, they've got time pressures on the deal. They're trying to convince somebody that it's a good deal to invest in. They're trying to convince people that you're the right person to invest with. A lot of times you don't know them very well. 

 

[00:34:42] And then you try to put the pressures of those on top, then you go, 'Oh, by the way, you also need to make sure that you've done your tax return so the financier can actually assess your loans well. You also need to review my joint venture document or my loan document. You also need to review that Information Memorandum of the deal'. So you're putting all this pressure on them in this really short compressed timeline, and you're going to scare people away.

Tyrone Shum:   

[00:35:10] It takes time. And remember, building relationships doesn't happen overnight, and no one's gonna lend you money tomorrow. It's probably actually not a bad idea. If you are looking to consider development, and you're looking at finding deals, then maybe just start building relationships now. And by the time you find that deal, by then hopefully you've got that good relationship in place, and you let your people know,

Rob Flux:   

[00:35:31] Another one of my rules of three: Before anybody will lend you any money, they need to know, like, and trust you. So building those relationships, as you touched on before, is super important. A lot of the time people happy to invest voluntarily. You don't have to ask people, but they don't know you're a property developer. 

  

[00:35:52] Start talking about it at work. Over the water cooler or over lunch, when people are starting to say, 'Hey, what do you do on the weekend?' Tell them, 'I went to a networking event', or, 'I was out trawling the streets for deals', or, 'I did my suburb analysis in order to prove that this area is the area I want to farm in'. 

  

[00:36:11] When you start having those conversations, people will invite themselves in. And they will start to say, 'Well, that looks like you're doing a whole bunch of work. And you clearly know what you're doing. How do I get involved?' 

 

[00:36:24] That's the kind of person you want to work with, as opposed to somebody who knows nothing about it, has no level of interest, and you're trying to convince them that, 'Hey, I can give you this really great return. Don't worry about the risk'. Bad, bad, bad, please don't do that.

Tyrone Shum:   

[00:36:42] And that's the thing. I think a lot of us, even me included, when I first started, I was saying to myself, 'Who would actually want to invest with me? Who would want to lend money with me?' Because this is the tall poppy syndrome is that I don't feel like I know enough. I don't have any runs on the board, etc. 

 

[00:36:58] But I think it's changing that mindset. It's a limiting belief, which I also discovered over time. And I think sometimes when we think about it, and maybe it's raised from family, parents, or whoever it is that we've got to do everything ourselves, with our own money. And that's not true. 

  

[00:37:15] I think we've discovered over the time that you're probably hearing from us because we've done it, but I guess it's building that confidence and overcoming those limiting beliefs. Did you have any sort of other ones that you've heard about as well?

Rob Flux:   

[00:37:28] There's a tonne of limiting beliefs out there. So just on that 'Who would invest in me?' scenario, I guess if we play that out in a lot of detail, I've seen this many times, including my own journey. 

  

[00:37:40] Deal number one, for me, I needed a money partner. And my belief was that nobody would invest in me until I'd proven that I could run a deal on my own. And that ended up being the biggest fallacy on Earth. 

  

[00:37:57] The reality is that people would invest in you because they know, like, and trust you. They know how you deal with things under pressure. They know that you're a nice person. They know you've got integrity. They know you're going to do the right thing. 

  

[00:38:08] What they don't know is you're a property developer. They don't know that you've done all the homework, that you've done all the research, that you've done everything humanly possible, because they would much rather invest in someone they know than a complete stranger that they have no idea about their level of integrity and the like. 

  

[00:38:25] And my encouragement to your audience is to say, 'Stop making it about you.' It's not about they won't invest in me. It's about them. It's about: What problem are you solving for that person? 

 

[00:38:40] They haven't got the time to go and research what areas to go to. They haven't got the time to work out is this a developable site, they don't have the knowledge or the skills to actually do that. And they've got a nest egg that sitting there that is doing nothing. [It] might be earning 2% or 3% maximum in the bank. You're doing them a disservice to not allow them to invest in you. 

  

[00:39:05] If you can take that approach and go, 'Well, of course I want my friends and family to succeed as much as I do'. Because now I'm actually doing them a favour as opposed to being greedy and going, 'Hey, what can I have? How do I serve all the people around me?' If I make it about them, then they will want to make it about me.

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