Tag Archives: property development

How To Identify The Ultra-Important Project Approach

Wait! Audacious and Suicidal…Kinda Weird You Forgot or Did You Miss Something?

In today’s blog post, I break down the 10 steps you need to take to get clarity.

Remember, if you want maximum results from any of your property development projects, you’ll need to know the desired end results that’s associated with Project Approach.

If you want to keep risks and complaints down and performance up, it’s always best that you focus on the Project Approach. Why?

Because this allows you to strengthen and test performance of different phases before it becomes part of any process and sequence. After all, what’s the point if it isn’t working?

The big difference is you’re focusing on speed and implementation of end result.

So the following sections describes types of information required in Project Approach.

Project approach involves outsourcers, contractors or vendors
Project approach involves outsourcers, contractors or vendors

Ok, so are you starting to see the power and how it functions as a complete project.

Enough pie-in-the-sky mumbo-jumbo…so let’s talk about how you actually DO IT, keep reading and you’ll be glad you did.

Basically, there are four distinct and logical stages of projects:

Project and Strategic Planning – provides a business with direction on achieving its mission and vision statements within set period of time by setting milestones and specific goals.

Strategic planning differs from a typical plan because planning takes the external environment into consideration.

Depending on the business’s needs…

The strategic planning for a project includes details about necessary organizational design changes for the project.

This includes performance goals, needed resources and required outcomes.

Outcome – Clearly defined project…

Project Feasibility – studies aim to objectively and rationally define the strengths and weaknesses of proposed project, opportunities and threats as presented by environment.

Also resources required to carry through, ultimately the prospects for success.

In its simplest, two criterias are used to judge feasibility, which are costs required and the values and benefits to be attained.

A well-designed feasibility study should provide a historical background of project:

  • Description of project
  • Accounting statements
  • Details of developer’s functional
  • Requirements of project
  • Management and policies
  • Marketing research
  • Financial data
  • Legal requirements…

Outcome – Project substantiation with a clearly developed strategy to deliver client and stakeholder objectives.

Project Procurement – once the project has been progressed beyond the feasibility stage then next important stage of project is procurement stage.

This process involves developing design of project and delivering project to tender stage and award of contract.

Outcome – Project ready for tender to meet client’s requirements and subsequent transaction of contract, which involves delivering project to final handover.

During this phase of the project you want assurance of key risks are being managed and desired benefits are realised.

Project Delivery – once the project has been progressed beyond procurement stage then next important stage is project delivery.

This involves developing design of project and delivering project to tender stage and award of contract.

Outcome – Project ready for tender that meets the client’s requirements and subsequent transaction of contract.

The benefit of Project Approach allows Project Manager, Design Manager and project team to lay out a high-level vision for project execution and use this vision to help create detailed plans.

project management
Project management in various stages for effective development methodology

In the Project Approach section, I’ll tie everything together for your project management benefit:

1. Discuss whether any broader company initiatives or strategies impact the structure of this project.

2. Identify any constraints or time-boxes in terms of budget, effort, time or quality, and the impact to project.

3. Describe other options for overall approach and why you chose options you did over others.

Note why you think this approach has the best chance of success over the others.

4. Talk about how the deliverables will be supported and maintained after the project ends.

Also indicate whether the approach was influenced by support and maintenance implications.

5. Discuss any other related projects that are completed, in progress or pending that influenced the approach for this project and why.

6. Discuss, at a high level, how project progresses from start to end and interdependencies between high-level phases and stages.

7. Discuss any techniques that might be of interest

8. Note whether new technology or new processes are being utilized and why.

9. Identify any unusual staffing requirements, if using consultants or outside specialists and explain why you need them.

10. Describe use of outsourcers, contractors or vendors, especially if they are doing significant work.

Remember, the Project Approach is the linchpin that holds the entire process together.

If you can get this right, you’ll make more money, experience less stress and build tremendous good will amongst stakeholders.

Not only will this process get you specific goals provided by Project Approach, but also gives you the momentum you desperately need to achieve your desired end result.

The big takeaway is by asking these types of questions FIRST hand because this just flat out works…

P.S. There was so much I wanted to cover on this topic that it wouldn’t all fit in one post, so I’m breaking it up into three posts.

Don’t worry… you won’t have to wait a week or more for Part 2 and Part 3.

I’m putting the finishing touches on Part 2 now, and I’ll email you tomorrow and let you know when it’s published.

Project Approach

Safe as Houses?

Safe as houses an expression to satisfy a doubting person…

 

Oh…it’s as safe as houses, i.e., perfectly safe, apparently a  figure of speech used in property as an investment.

Safe as houses phrase originated when the railway bubble began to burst, and people began to turn their attention to more reliable or stable forms of speculation, which was slow and steady…

Safe as houses, let’s firstly establish your investing strategy, criteria and action plan:

  • How much money can you borrow to invest
  • How much time required for research/due diligence
  • How much money can you afford to lose
  • How much debt can you manage
  • What type of property deals
  • How far from CBD
  • What’s the maximum interest rates for borrowing

Residential real estate is almost the sacred cow of Australian investment. What if your sights are set on building a real estate empire, does it mean embracing risk with open arms?

safe as houses

Whatever real estate strategy you decide to do, just bear in mind networking is even more important in real estate than in other industries…so start pounding the pavement as soon as possible selecting the all-important team to manage your projects.

Risk, reward and reality. It’s easiest to think of property investments from least risky to most risky and analyze the pros and cons in each category:

(a) Least risky investing means acquiring and operating existing properties/buildings (buy and hold strategy)

Property investing is all about stability and getting high single-digit returns by operating existing assets (least risk when a building is already operational and generating rental income)

(b) More risky or value-add using opportunistic strategies for improving existing properties.

This is where investors aim to make substantial improvements and renovations to existing properties instead of acquiring and operating, (returns from 15–20% range, may go higher depending on how risky the strategy)

(c) Most risky which is real estate development and building completely new properties. Most risk equals highest returns?

You might think real estate development offers the highest returns because it’s also the riskiest, right?

Real estate development involves buy, sell, develop, managing properties, third party joint ventures (stakeholders) and of course all professionals including:

  • Surveyors
  • Town planners
  • Real estate agents
  • Civil engineers
  • Architects
  • Building contractors
  • Construction managers
  • Solicitors
  • Accountants
  • etc…

The real money in real estate development primarily goes to investors, which put their money at risk in the developments. To complete the construction of a new property, developers only put down a very small portion of total equity, perhaps 5% or less.

Many times the developer contributes land as the only form of equity in the project using debt and mezzanine financing to fund the entire construction cost.

You weigh up the risk versus reward before deciding. It is generally accepted the higher the reward the greater the risk. Property development slightly increases risk because of the many variables such as:

(a) Site costs

(b) Development costs

(c) council approvals and contribution costs

(d) Construction costs

(e) Resale values

Safe as houses…a thorough working knowledge of all these areas is required in order to succeed. Most of the returns go to the third party investors which come up with the rest of the funds.

safe as houses
Safe as houses

How does no cash flow from properties sound like because buildings are under development, so there’s no cash flow generated until tenants move in and rental income starts flowing.

The fees property developers charge are not great compared to the amount of overheads, sometimes there isn’t much money left to pay salaries to employees.

That’s the reason why you wouldn’t get into real estate development if money is your main goal, only do it because you’re interested in building and construction side of real estate and you’ve cash resources with small surplus to cover contingencies and enough money to invest in development projects yourself.

What if you just love every aspect of real estate? People which find the greatest success in real estate focus on the end goal of owning income properties. There are actually real estate investors from all walks of life…

Investing in real estate yourself…you don’t need to raise hundreds of millions of dollars just to buy a house. The key is to find your core strengths where you can be initially be successful, so you’re able to generate enough cash flow to own properties yourself.

So let’s take a wild stab at your future goal here…you want to make a lot of money and ideally own three or more properties debt free and outright (perhaps multiple skyscrapers with your name on them one day, might even end up with your own island one day:)

You’d also like to avoid working in a job if at all possible, and perhaps you want to make the transition from investor to developer?

As an added bonus, you don’t want to earn badges from a top notch school of hard knocks to get started, right? You’re thinking its all worth learning how to crunch the numbers, and sounds like real estate investing is a good fit for you…

How to analyze real estate deals, making sure the numbers work?

Each property is unique and brings a different value to potential investors, so it’s trickier than it sounds to find the right property.

Investors generally look at three factors when analyzing a property:

(1) Investors look at what the property/building is currently doing, how much income it has been generating and what the property-level expenses are, which gives you the net operating income (NOI).

(2) Investors look at the property to make sure it can maintain its current income.

It’s one thing to have generated strong income in the past, sometimes factors like:

(a) Mismanagement

(b) Demographic shifts

(c) Changes to the local area can drive a property right into the ground…

(3) Investors project what the building could do in the future to increase income and/or cut expenses.

Depending on what kind of deal it is, investors will focus on either the current income or the projected income.

For example, a stabilized deal which isn’t expected to see much upside or current rents which is the key valuation driver.

There are four main real estate deal types:

(1) Stabilized deals (buy and hold) are “blue-chip stocks” of real estate investing. These properties are generally recently built and currently have a stabilized high yield, e.g. 7% or 8% per year.

When investors look at these properties/buildings, they’re generally maintaining income which is currently produced. There isn’t a lot of risk with a buy and hold (stabilized deal) and also not much reward.

(2) Renovation is the next type. A property which is a good candidate for a renovation would fit the description of an older building in a stable growth sub-market (one which can support higher rent prices) could get significantly higher income or value from renovating houses, units or entire building.

There is more risk involved with renovation type deals than a buy and hold stabilized deal, because property investors are banking on future upside of renovating the property (perhaps reselling to homeowner or another investor).

Value-add deals do limit risks? Typically the property/building is in decent condition and is a tangible asset ( i.e, asset = liability + stockholders equity) which is easier to show, discuss and understand.

An asset is a resource which is expected to provide future economic benefits (i.e. generate future cash inflows or reduce future cash outflows)…an asset is recognized when:

(a) Asset is acquired in a past transaction or exchange

(b) Value of asset’s future benefits can be measured with a reasonable degree of precision

In markets where there is increasing momentum and upside, value-add deals are easier to do because it requires vision and creativity, which is fun. Downside of increased momentum is competition from other bidders dramatically increases pricing for certain assets.

However, added value is created by gaps in information and understanding. This is where real deals can be made by being innovative,
creative and diligent with the details.

Success comes from properties which others may have overlooked or passed due to their lack of motivation and understanding.

Nothing in real estate is easy, yet if you have the desire to roll up your sleeves and get a little dirty, there are diamonds in the dirt.

Real estate is challenging and rewarding and you just got to know how to dig for the value-added, diamond in the rough deals.

(3) Real estate distressed properties, these usually need a lot of work (units or building itself is in bad shape) or under performing.

Often, these building have huge vacancy rates, so the projected income is a big factor in valuation. Real estate distressed properties carry even more risk than a renovation deal because the building needs work and it is already under performing.

4) New development deals. These are just what they sound like. Development happens when an investor wants to take raw land, then evaluates what can be built on it and what kind of future returns can be generated.

Development deals have the highest risk, and also carry the highest return. In reality, you don’t necessarily make the most money with development deals, because of inherent risks and uncertainty, don’t assume highest risk equals highest profits in your bank account.

Property valuation and due diligence: You are primarily wanting cash flow and reliable cash-on-cash returns because in real estate, property itself produces the income for your return on investment.

While the numbers are generally used to support valuation, comparable sale analysis is king when valuing properties because property is only worth what someone is willing to pay for it.

In residential “yield” is often used instead of “cap rate”. Capitalization rates are used as the primary metric in property valuation.

safe as houses
Safe as houses

Cap rates are a very simple way of calculating the return on a building. Essentially, capitalization rates tell you what percentage of the funds you paid for the building comes back to you annually.

It’s just an easy metric to use; for example, if you have a 6% cap rate property and it’s at a 6% debt interest rate, you can easily see it is neutral leverage and isn’t returning any money.

Cap rates do have flaws and the biggest is everyone assumes cap rates in a specific sub-market to apply to every property within that sub-market. Simply this assumption isn’t true.

Every single property has its own nuances which makes it more or less appealing to potential investors.

If you get too clinical on only measuring cap rates, you could either be overvaluing or undervaluing your building. You really need to analyze each property/building and the market thoroughly to get a sense of how much value it is truly worth.

Another weakness, while cap rates are great to use in a city like Melbourne where buildings are constantly being bought and sold,
there’s considerably less data in other regions without as many sales taking place, so the numbers may not be reliable.

Basically due diligence means you are making sure the deal stacks up and doesn’t have more holes than a slice of swiss cheese.

Sellers want to sell their property at the highest price and investors have an interest in closing the deal.

Safe as houses, buyers need to protect themselves; due diligence is generally broken down into two components:

(1) You analyze the property at a micro level and then in the macro.

In the micro, you look at the building itself. You check the market to make sure projected rent prices at the property/building actually make sense, and people are paying those prices at similar properties in the area.

Next, you look at macro trends. You then dig deeper to make sure the tenants are in good financial shape. This is especially true if you are buying a single tenant building or more tenants in general.

You look at what other investors are paying for comparable buildings to make sure you aren’t over-paying. It’s also important to look at macroeconomic trends in the region you are investing to make sure the submarket can sustain positive economic growth over time.

Safe as Houses

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Simple Project Management 101

Project management is the discipline of planning, organizing, motivating, and controlling resources to achieve specific goals.

 

Project management is the application of knowledge, skills, tools, and techniques to a broad range of activities in order to meet or exceed your renovation or property development needs…perhaps including stakeholder needs and expectations from a project.

Project management ensures available resources are used in the most effective and efficient manner.  It is a combination of steps and techniques to keep a project’s schedule and budget in line.

The project management process is the planning, organisation, monitoring and control of all aspects of a project and motivation of all involved to achieve project objectives safely within agreed time, cost and process criteria…

project management
Project management consists of five stages…

Here’s how to apply these five project management tips for scheduling resources and achieving maximum end results:

  1. Initiating
  2. Planning
  3. Executing
  4. Controlling
  5. Closing

Projects are best allocated or managed by a group of people. As project manager, you need prepare, plan and allocate tasks to the right people on your project team.

What happens if you try to do all tasks yourself or if you don’t allocate right tasks to right team members? You can seriously slow down your project progress and success, however you can avoid this by scheduling resources more effectively…

project management
Project management use processes and techniques designed to minimise the chances of delays or budget over-runs.

Project management tip 1 – assign resources to tasks: The first step is to assign people to work on your project tasks. Create resource profiles for each of your team members and allocate right tasks to right people.

If you don’t know who should be taking the lead on a task, simply ask. Talk to the individual or their manager and if you do get it wrong, they will no doubt tell you and you can quickly assign someone else.

Project management tip 2 – check who has time available: Using the resource planning features makes it easy to see who has time available to take on more tasks.

These team members are under-allocated, so they have some slack in their day to do additional work. That can either be on your project, or on another project.

Project management tip 3 – check who has too much work because some people on your project team may have too many tasks allocated to them. Again, you can use the resource planning reports  to check which people on the team are overstretched.

Having too much to do can put additional stresses on your team members and reduce morale in the team, so it is good to know you can see who might be struggling with a large workload.

Project management tip 4 – monitor progress regularly: Tasks change on projects all the time, and someone who had too much to do last week may have made lots of progress and is now managing their tasks effectively within the available time.

Equally, someone which was under-utilised may find they have a lot to do as a task has turned out to be bigger than they expected.

Check your resource scheduling reports regularly to ensure the team is making progress and everyone has a good understanding and balance of work. You’ll also be in a better position to identify if someone becomes available to pick up new tasks.

Project management tip 5 – reallocate tasks as necessary: If a tradesman or professional consultant has too many tasks, you can reallocate some of their work to another person which has the experience to do the job.

Talk to both people before you make the change online in your project management software, so they know what to expect when they next check their task allocations.

Reallocating tasks is a way of spreading workloads across all the members of the team and any other experts, so it is a good way to keep morale high and make the best use of everyone’s skills.

Preparation, planning within the processes of project management means proper scheduling which enables you to easily allocate tasks to the right people, plus you get confidence in knowing they are all working on the right tasks at the right time.

Project management is a professional discipline which combines systems, techniques and people to achieve a renovation or property development objective within defined parameters of time, budget and quality, employing creative problem solving processes designed to recognise and solve problems as they arise, and also to proactively anticipate and avert potentially detrimental situations…

Project Management