An important part of your due diligence is securing funding; that is, making sure you can get the money to proceed with your proposed development.
There are two ways I recommend that people find funding when starting out:
If you use a bank to fund your project, you’ll need to calculate the interest over the duration of the proposed development. Include pre- and post-development time too, otherwise you’ll cut yourself short.
Banks are not emotional; they’re all about numbers. If valuations, serviceability and deposits don’t line up, there’s no way you’ll be able to secure funding for your project.
If the numbers do stack up, banks will typically lend you up to 80% of the total project cost.
Talking to your bank before starting a project will give you an idea of what you’ll be able to borrow, and whether there’ll be a shortfall you’ll need to fund yourself.
Bank loans generally depend on two main criteria:
1. How much you can borrow based on your net financial position
2. How much can you conservatively afford as a repayment
It usually surprises people when their loan application is declined. This can be for a variety of reasons, but is often because, from the bank’s perspective, they’re unable to service the loan. For example, they may have a lot of equity but not enough weekly income.
The finance industry has changed incredibly over the last couple of years, and the squeeze on finance has caught many by surprise. Some people wait until it’s too late to purchase because they assume they’ll get approved. Becoming familiar with your financial position and developing an understanding of the lending process can help you avoid disappointment.
It’s also useful to have a broker you connect with regularly. Staying in touch with your broker will help ensure you’re prepared to fund projects or opportunities as they arise.
Partnering or finding investors is the best way to make money with no money. You need them on your side to open up the opportunity to profit. It’s quite simple: if you have the time to put together deals and ensure feasibility, an investor will show interest.
The aim is to use their money to make them a profit and to give you the opportunity to create wealth to reinvest. The power play is minimum money in for maximum money out. The profit can be divided as a percentage and drawn up by a lawyer. Your role is to present them with a profitable opportunity that motivates them to assist you on your journey.
In the early days of your property development career, you must be willing to sacrifice your time to gain credibility in the industry. For example, you might offer a discounted profit split on your first project with an investor to gain their trust and prove your capability. This will lead to more trust and further investment opportunities.
Don’t forget that an investor will know another investor, who’ll know another investor. Get your foot in the door, prove yourself, offer to do something for nothing and you’ll slingshot past others who are trying to do it alone.
Now let me put this vision in your mind. Imagine you’ve found a profitable development site, have done your due diligence and have worked out a strategy that suits you and the proposed investors. You put pen to paper and present it confidently, which results in the investor falling in love with the concept. The investor is attracted because you take on all the tasks required to acquire and complete the development. He or she has no time but has money. You have no money but have time. You’ve now met the ying to your yang.
The above example is the exact method I teach people who have little or no money already invested in property. We use the power of vision, presentation and figures to spark investor interest. Once an investor is on board, your team can complete the project. All you need is a profitable site and an investor. When you have both and the project has been successfully completed, you can split the profits and move on to the next project. Rinse and repeat.
I’ve educated many people on how to form this system in detail and the results of those who persist are amazing. Small-scale projects such as duplexes and townhouses can easily make a healthy profit of anywhere between $200k to $500k. With no money down, it sounds unbelievable, but this is how a developer makes money. We simply make deals: property deals, partnership deals and business deals.
Some people go wrong in this field, but if you seek the right legal advice, you’ll wonder why you didn’t do it sooner. Sharing profits, money, experience and time is an awesome feeling. The power of vision is amazing, so create an amazing vision.
Everything we’ve gone through in the previous steps is needed to gain the trust of and impress a quality investor. Investors are curious. Investors know their numbers. Investors know how to make decisions. Investors never assume. Investors look at feasibility studies and presentations. Do you get my drift?
You’ll need to sell the investor your vision, which is whatever you truly believe. But your vision means nothing if you don’t back it up with confidence, expertise, numbers and facts. Cut the crap and get real with your numbers. Be realistic with your feasibility studies and be clear on the bottom line. It all comes down to the numbers, and whether you get the result you want all depends on how you present these numbers.
It’s then and only then that an investor will be at ease with you during a development. Remember, you’re taking someone else’s money and are responsible for that money. Make sure you understand the responsibility of on-boarding investors, and make sure it’s a style that suits your development and strategy.