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Developers profit margin

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  • 19-04-2017 8:26pm
    #1
    Kaiser74
    Registered Users Posts: 44 ✭


    Hoping to start property development in a few weeks. Hope to purchase land/property and develope in South county dublin initially. I will sub contract the construction phase. What percentage should I put on the project as developer prior to sale on the open market? Thanks


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    #2
    tabby aspreme
    Registered Users Posts: 3,857 ✭✭✭tabby aspreme


    As much as you can get away with, with questions like this the Boooom is definitely Baaak


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    #3
    listermint
    Registered Users Posts: 33,736 ✭✭✭✭listermint


    No hope this is a real question. Sorry .


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    #4
    martineatworld
    Registered Users Posts: 1,139 ✭✭✭martineatworld


    47%


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    #5
    Kaiser74
    Registered Users Posts: 44 ✭Kaiser74


    Yes this is a real question and I hope your right about the boom!
    If profit is 47% what is that calculation based on. Thanks


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    #6
    Kaiser74
    Registered Users Posts: 44 ✭Kaiser74


    Obviously the builder will get his 15% or so profit but what is the developers profit? Can anybody share some light on this for me..
    If I can drawdown this promised funding where is the greatest profit in construction, site and build 5 bed or period house and convert to 5-6 apparents?


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    #7
    Hollister11
    Closed Accounts Posts: 5,482 ✭✭✭Hollister11


    Do I smell a boom?


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    #8
    Kaiser74
    Registered Users Posts: 44 ✭Kaiser74


    Is there a profit out there in constructing for example a 5 bed on sites or converting period houses to apartments?
    I don't believe there is a boom out there however there must be a profit to be had?


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    #9
    antoinolachtnai
    Registered Users Posts: 9,776 ✭✭✭antoinolachtnai


    Kaiser74 wrote: »
    Is there a profit out there in constructing for example a 5 bed on sites or converting period houses to apartments?
    I don't believe there is a boom out there however there must be a profit to be had?

    Why do you think there is a profit to be made for the developer? It is cheaper to buy an existing house than to build one according to the society of chartered surveyors, when you factor in the profit margin.

    Work out what you can sell the houses for, what they cost to build, what the land cost and what it costs to finance the project and you will find out the profitability.


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    #10
    Kaiser74
    Registered Users Posts: 44 ✭Kaiser74


    Thanks for your reply.

    If what you say is correct there is no point in building any residential properties. No point in being a developer. I disagree however. I believe those figures to be inflated slightly. Don't forget the builders profit is included in the build price. These figures were based on a 3 bed. I'm talking about land in an affluent area and building a large house... If what you say is correct then there is no profit in construction??


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    #11
    Kaiser74
    Registered Users Posts: 44 ✭Kaiser74


    Look at it another way... If I gave you €20million to invest are you telling me a developer not a builder can't make a profit, don't want the money?


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    #12
    antoinolachtnai
    Registered Users Posts: 9,776 ✭✭✭antoinolachtnai


    Well what interest rate are you going to charge me on the money? How much capital do you want me to put up? How long will you give me? That's what it's all about.

    Building high-end houses on-spec is a much riskier thing to do than building three-beds. It is much harder to shift them if there is a downturn.

    Could you just get permission, split it into sites, service the sites and sell them off one by one?

    I didn't say there was no money in construction. I questioned whether there is any money in property development when you take into account all the costs. Construction and development are quite different businesses.


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    #13
    Kaiser74
    Registered Users Posts: 44 ✭Kaiser74


    Thanks for that.
    Let's say €20m no gaurantee or collateral, interest rate was 12% per annum over 3 years.

    Yes rolling investments with the site being purchased with planning then building house with obvious view of a return based on house prices in the area.
    This would be developers money then sub contracting the build. Build timeline approx 6months with 4 projects on the go at once.


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    #14
    tabby aspreme
    Registered Users Posts: 3,857 ✭✭✭tabby aspreme


    Op , what is this land you are going to buy shortly zoned for , 3, 4, 5, bed houses , is social housing included , remember to keep a few quid for the chopper


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    #15
    Kaiser74
    Registered Users Posts: 44 ✭Kaiser74


    Site with pp for I large house.


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    #16
    antoinolachtnai
    Registered Users Posts: 9,776 ✭✭✭antoinolachtnai


    They are charging you 7.2 million for the money. If this is 40 houses worth 500k each, you'll need to make 180k on each site to pay the financier before you take your own profit on your equity (which admittedly is very little). That is difficult.

    Things would need to be very buoyant and you would need world-class management to build and sell 40 houses on a new site in 3 years. It is certainly possible, but it will be difficult and expensive.

    Why build at all? Service the sites, flip the property as fast as you can.

    There are ways to do it even less capital intensively.

    Presumably the finance company want a mortgage on the land as collateral?


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    #17
    Kaiser74
    Registered Users Posts: 44 ✭Kaiser74


    antoinolachtnai wrote: »
    They are charging you 7.2 million for the money. If this is 40 houses worth 500k each, you'll need to make 180k on each site to pay the financier before you take your own profit on your equity (which admittedly is very little). That is difficult.

    Things would need to be very buoyant and you would need world-class management to build and sell 40 houses on a new site in 3 years. It is certainly possible, but it will be difficult and expensive.

    Why build at all? Service the sites, flip the property as fast as you can.

    There are ways to do it even less capital intensively.

    Presumably the finance company want a mortgage on the land as collateral?

    We'll assume they hold the deeds until property sold.
    I was thinking of splitting the 3 years into 6 month projects ie build 4 property's on individual sites then sell all in a 6 months timeline. Profit of 20% on sales. Once sold reinvest that money and repeat for next 6 months. Over the 3 years accumulated profits should be enough to service the origanal loan and interest payments plus a profit. Obviously if 6 property's need to be sold per 6 months then so be it.
    Also interested in other capital saving measures you mentioned


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    #18
    antoinolachtnai
    Registered Users Posts: 9,776 ✭✭✭antoinolachtnai


    Kaiser74 wrote: »
    We'll assume they hold the deeds until property sold.
    I was thinking of splitting the 3 years into 6 month projects ie build 4 property's on individual sites then sell all in a 6 months timeline. Profit of 20% on sales. Once sold reinvest that money and repeat for next 6 months. Over the 3 years accumulated profits should be enough to service the origanal loan and interest payments plus a profit. Obviously if 6 property's need to be sold per 6 months then so be it.
    Also interested in other capital saving measures you mentioned

    what price point had you in mind?


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    #19
    Kaiser74
    Registered Users Posts: 44 ✭Kaiser74


    antoinolachtnai wrote: »
    what price point had you in mind?

    Sales prices in 2-3 million per property
    Also looking at converting large house to 2 bed apartments- selling at 450k+ depending on location


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    #20
    CONM
    Registered Users Posts: 166 ✭✭CONM


    Kaiser74 wrote: »
    Site with pp for I large house.

    Honestly not too sure to take you seriously or not, if you are serious do you really think it's a good idea to get involved in something at this level with such limited knowledge and experience?

    But anyway, the bulk of a developers margin is generally in obtaining a good planning permission. And obviously any margin is completely based on the market price, a developer can't just decide to add 20% to their costs and expect to get it. Its completely down to what the market can bare!


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    #21
    Kaiser74
    Registered Users Posts: 44 ✭Kaiser74


    CONM wrote: »
    Honestly not too sure to take you seriously or not, if you are serious do you really think it's a good idea to get involved in something at this level with such limited knowledge and experience?

    But anyway, the bulk of a developers margin is generally in obtaining a good planning permission. And obviously any margin is completely based on the market price, a developer can't just decide to add 20% to their costs and expect to get it. Its completely down to what the market can bare!

    Thanks for your reply.
    Obviously no drawdown on funds until profit established and costed professionally beforehand.
    I agree the market will determine the profit ultimately but believe the model I've sugested is manageable.
    Refusing €20m is a hard thing to do ...


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    #22
    CONM
    Registered Users Posts: 166 ✭✭CONM


    Kaiser74 wrote: »
    Thanks for your reply.
    Obviously no drawdown on funds until profit established and costed professionally beforehand.
    I agree the market will determine the profit ultimately but believe the model I've sugested is manageable.
    Refusing €20m is a hard thing to do ...

    Okay, well how I would do it personally is by basing it on current market sales and working your way backwards... Taking away VAT, build costs, professional fees, site cost, etc... That will leave you with your margin for the particular site, given the market in recent years there has been an enormous variation in developers margin/return on capital invested.


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    #23
    Kaiser74
    Registered Users Posts: 44 ✭Kaiser74


    CONM wrote: »
    Okay, well how I would do it personally is by basing it on current market sales and working your way backwards... Taking away VAT, build costs, professional fees, site cost, etc... That will leave you with your margin for the particular site, given the market in recent years there has been an enormous variation in developers margin/return on capital invested.

    Yes profit margins can vary.. I suppose I'm asking if the business model of buying sites building 1 off houses and selling the correct way to invest the funds..?


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    #24
    Victor
    Registered Users Posts: 78,290 ✭✭✭✭Victor


    Kaiser74 wrote: »
    Profit of 20% on sales.
    You have no idea where property prices will be in three years. I know a guy who bought apartments on Clanbrassil Street circa 1995 for €35,000, by 2000 they were worth €100,000 and they are probably now worth €300,000. Look at how that affects your margin.

    If you go to the beach and going swimming, and if you can't keep your feet on the bottom and head over water, then you are out of your depth. You are currently halfway to Holyhead and worn out from treading water. Your enthusiasm is to be commended for what it is, but not you swimming abilities. You need to listen, not demand.

    Property is not like running a shop. If I'm Aldi and I want to open a new shop, I will know exactly how much it will cost to run the shop, how much to buy and distribute the goods, to build the building (where a standard Aldi building is used, otherwise I'll be hiring someone to work that price out for me. I will know what my market size is, what percentage of the market I will take, who my local competitors are. I will know what my contribution to head office costs will need to be. I will essentially know everything. The last criteria is site cost. If the site costs X and that leaves me with a profit margin of Y. If Y is acceptably large, the project will go ahead. If too small, it won't. If it is too large, I will be checking my figures and asking myself what assumptions are wrong and if I should be building two stores. I know all these things because I have done it many times before.

    The thing with property development is that no two projects are the same. Even building two identical buildings next door to each other can have different costs, sales prices and turnaround times.

    You are 3-4 years late in buying land. That takes a huge chunk out of your margin.

    You have not indicated that you understand what costs you will incur and how you will minimise those costs.

    You have not indicated that you understand what price you will receive and how you will maximise those.

    If you are paying 12% interest, the only people making money will be the liquidators.


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    #25
    J.pilkington
    Users Awaiting Email Confirmation Posts: 1,331 ✭✭✭J.pilkington


    Kaiser74 wrote: »
    Thanks for your reply.
    Obviously no drawdown on funds until profit established and costed professionally beforehand.
    I agree the market will determine the profit ultimately but believe the model I've sugested is manageable.
    Refusing €20m is a hard thing to do ...

    You are talking rubbish, no company / institution will offer you funds to drawdown (let alone €20m !) without a solid detailed business plan signed off by professionals in the industry.

    The type of questions you are asking are the type you would expect to see in an ordinary level junior cert business studies paper!


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    #26
    Kaiser74
    Registered Users Posts: 44 ✭Kaiser74


    J.pilkington wrote: »
    You are talking rubbish, no company / institution will offer you funds to drawdown (let alone €20m !) without a solid detailed business plan signed off by professionals in the industry.

    The type of questions you are asking are the type you would expect to see in an ordinary level junior cert business studies paper!

    As I already stated no drawdown without prior agreement. This is obviously based on professional oppinion.


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    #27
    Victor
    Registered Users Posts: 78,290 ✭✭✭✭Victor


    Kaiser74 wrote: »
    As I already stated no drawdown without prior agreement. This is obviously based on professional oppinion.
    Obtained from the internet?


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    #28
    Kaiser74
    Registered Users Posts: 44 ✭Kaiser74


    Victor wrote: »
    You have no idea where property prices will be in three years. I know a guy who bought apartments on Clanbrassil Street circa 1995 for €35,000, by 2000 they were worth €100,000 and they are probably now worth €300,000. Look at how that affects your margin.

    If you go to the beach and going swimming, and if you can't keep your feet on the bottom and head over water, then you are out of your depth. You are currently halfway to Holyhead and worn out from treading water. Your enthusiasm is to be commended for what it is, but not you swimming abilities. You need to listen, not demand.

    Property is not like running a shop. If I'm Aldi and I want to open a new shop, I will know exactly how much it will cost to run the shop, how much to buy and distribute the goods, to build the building (where a standard Aldi building is used, otherwise I'll be hiring someone to work that price out for me. I will know what my market size is, what percentage of the market I will take, who my local competitors are. I will know what my contribution to head office costs will need to be. I will essentially know everything. The last criteria is site cost. If the site costs X and that leaves me with a profit margin of Y. If Y is acceptably large, the project will go ahead. If too small, it won't. If it is too large, I will be checking my figures and asking myself what assumptions are wrong and if I should be building two stores. I know all these things because I have done it many times before.

    The thing with property development is that no two projects are the same. Even building two identical buildings next door to each other can have different costs, sales prices and turnaround times.

    You are 3-4 years late in buying land. That takes a huge chunk out of your margin.

    You have not indicated that you understand what costs you will incur and how you will minimise those costs.

    You have not indicated that you understand what price you will receive and how you will maximise those.

    If you are paying 12% interest, the only people making money will be the liquidators.

    Thanks victor.
    Not demanding anything. Obviously if enough profit it goes ahead if not it won't. I too have a background in construction with a family construction company. I did not assume that all projects were the same in fact they are not. The points relevant here is wether the land cost will cripple profit and wether the sale prices are agreeable. All costs understood and will be costed prior to submitting same.


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    #29
    Kaiser74
    Registered Users Posts: 44 ✭Kaiser74


    Kaiser74 wrote: »
    Thanks victor.
    Not demanding anything. Obviously if enough profit it goes ahead if not it won't. I too have a background in construction with a family construction company. I did not assume that all projects were the same in fact they are not. The points relevant here is wether the land cost will cripple profit and wether the sale prices are agreeable. All costs understood and will be costed prior to submitting same.

    Indications are that property prices will rise. However this is obviously no gaurantee. The hope would be that it will remain buoyant for 3 years min.


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    #30
    Bigus
    Registered Users Posts: 4,939 ✭✭✭Bigus


    Kaiser74 wrote: »
    Indications are that property prices will rise. However this is obviously no gaurantee. The hope would be that it will remain buoyant for 3 years min.

    Hope is not a business plan .

    And 12 % is not sustainable, unless property was bought at 2012 levels.


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    #31
    J.pilkington
    Users Awaiting Email Confirmation Posts: 1,331 ✭✭✭J.pilkington


    Kaiser74 wrote: »
    As I already stated no drawdown without prior agreement. This is obviously based on professional oppinion.

    Okay so
    - you don't own the land
    - you haven't a fairy how to set sales prices
    - you are going to sub all the construction work out
    - you haven't a fairy how to request quotes / price jobs
    - you have no business plan
    - you are asking silly questions on an internet website which is mainly frequented by people trying to pass their time i.e.unlikely to be able / be willing to give helpful advice
    - you have no planning permission
    - have not decided whether to build apartments / houses

    And you want to start the building work in a few weeks.

    Which African country was the financier a prince? Are you off to a western union tomorrow to wire an admin fee to him before he release the €20m to you?

    Mid terms ha?


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