The Ultimate

Mini guide
to property development investing

MATTHEW CALLAHAN

THE ULTIMATE MINI GUIDE TO PROPERTY DEVELOPMENT INVESTING 1

 Published by The Open Corporation 2013
www.opencorporation.com.au
www.openwealthcreation.com.au

© 2013 Matthew Callahan

This publication is copyright. All rights are reserved.

Except as permitted under the Copyright Act 1968 (Cth),
no part of this publication may be reproduced, stored or
transmitted by any means, electronic or otherwise, without
the specific written permission of the copyright owner.

Disclaimer
While reasonable care has been taken producing this book, no guarantees are
given in regards to the accuracy of its content or the material provided in the
web links. Property investing/development is a complex field and it is ever
changing. Every person’s circumstance is different, and therefore no reader
should rely solely or partially on the information in the book or the material in
web links provided by the author. Any person or organisation reading this book
or obtaining the material provided in the web link is responsible for their own
investment decisions. Open Corporation, its directors and employees are neither
liable, nor responsible for the result of any actions or losses incurred, whether
whole or partial, from the use of the content, information or tools provided.
The author is simply sharing information that he personally uses himself when
investing.

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About the Author

As an investor in many different asset classes over the years and a

former banker, Matthew Callahan outlines his personal investment
journey and how the lessons learnt have come to form his views on
property development investing and why he believes it is a good
vehicle for building wealth.
Matthew lives in Melbourne with his wife Kate and their young
family. When Matthew isn’t exuding the merits of property
developments and raising capital for Open Corporation he is a full
time Dad to Alice & Ethan and a part time triathlete.

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 Table of contents

Introduction 5
What is property development? 7
My journey 9
Let the investing begin! 10
A bigger piece of the investment pie 11
Foreign exchange trading anyone? 14
A real-life foreign exchange experience 15
Vital flow information – the real truth 16
The quest continues 17
Fatherhood & a priority change 17
Enter property 19
Leave it to the professionals 21
So what?! What’s the difference? 24
Risk 27
How much property development can Australia handle? 28
Dispelling more misconceptions 29
A note on self-managed super funds (SMSFs) 30
How syndications work 31
A quick guide to building a risk profile 32
Product Disclosure Statements and
Information Memorandums 32
PDS/IM Checklist 33

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introduction
‘The best investment on earth is earth.’
Louis J. Glickman, Real estate investor & philanthropist.

Have you ever said to yourself, ‘I wish I knew then what I know
now’? Most of us eventually reach this conclusion about some part
of our lives.
For me this revelation occurred a few years ago. I’d been an investor,
mainly in stocks, but with some residential property dabbling.
It wasn’t until I concluded my own property development that I
thought ‘Why haven’t I been doing this for years?!’
My learning curve was steep, but the expertise I gained from doing
my own property development was priceless. It helped me realise
that over the long term, the magic of compounding returns from
one project into another was an exciting prospect for future wealth.
I’m now fortunate to work with a team of experienced property
developers. Each day I speak with clients eager to grow their wealth,
I’m excited to introduce them to the property development world
my colleagues and I enjoy.
I’m an advocate of direct property investment in multiple forms.
It’s a vital part of my investment portfolio (including residential
property and it is one of the most popular means of investing).
The strategy of residential property investment is sound. In fact,
I’d encourage you to read my colleague Cam McLellan’s book My
four year old The Property Investor. Not only is it easy to read, it’s a
useful guide to investing in residential property through Cam’s real-
life experiences. You can find a copy at www.openwealthcreation.
com.au. However, few investors realise that the strategy of building
a residential property portfolio, though sound, isn’t the only game
in town.

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 My goal in writing this guide is to:
• reveal the merits of property development and
• dispel the myths many people I talk to have about investing
in property developments.
By reading this guide, you’ve already shown a desire to seek other
investment vehicles for your hard-earned cash. I hope you find
this guide enjoyable and informative and I warmly welcome your
questions and comments.

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What is property development?
In a nutshell, property development is the process of buying land
and improving it such that the value rises more than the cost of
changes.
Property developments come in several different forms, but for the
purpose of this guide we’ll discuss two: ‘land only’ and ‘built form’
subdivisions.
Land only subdivision entails the acquisition of land which is then
subdivided and sold. The process generally includes earthworks,
roads, footpaths, green areas and services (e.g. drainage).
Built form subdivision involves the acquisition of land which is
then subdivided with houses, town homes or units constructed on
each lot.
In general, the processes involved in developing a parcel of land
are:
Due diligence
A process involving extensive investigation by the property
developer regarding the potential land acquisition. This may
involve environmental reports, architectural drawings and even
the likelihood that the local council will approve the plans. This
process may take several months and cost thousands of dollars, but
it’s designed to provide a high level of certainty that the developer
will be able to convert their vision into reality.
Land Acquisition
Once due diligence is completed to the property developer’s
satisfaction, terms and conditions are negotiated. Generally
speaking, the developer will negotiate the best possible conditions
under which they need to operate. This may include development
approval, timeframes or financing.

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 Planning
This involves developing a design for the land and negotiating to
obtain all necessary permits. Simply put, this part of the process
is about ‘what’ the developer wants to build and asking the local
council for approval.
This process can take 6 to 18 months, depending on the property
developer’s intentions for the land. The developer may engage
town planners and needs to work closely with the local council.
The developer may not always obtain approval for every aspect of
the development and therefore needs experience and creativity to
ensure the best possible outcome for the project.
Construction
Once the property developer has obtained approval for ‘what’
they’re going to build, they must submit to the council plans for
‘how’ they’re going to build the property development.
If it’s a land only subdivision, engineering plans will have to be
submitted regarding the contouring of land, drainage and other
environmental factors.
If the property development is built form (e.g. town homes, units)
architectural and building plans must also be submitted. This
involves a builder, engineers and other consultants to ensure a
successful project.
Marketing and sales
The branding and promoting the end product (whether it’s land
only or built form) often requires the help of marketing specialists.
Getting the right branding and marketing are crucial. You must
understand the right target market to sell to, given the style,
location and pricing of the property development.
As financing may depend on obtaining a number of pre-sales or
off-the-plan sales, it’s important to start this process early.

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Sales are often conducted through local real estate agents
or wholesale groups (provided the Developer has the right
relationships). Their job can be made easier if the right branding and
marketing have been achieved. Highlighting the significant stamp
duty savings a potential buyer can achieve is an important factor
when marketing and selling during the early stages of construction.

My journey
My desire to grow my wealth didn’t start with property development.
Rather, my investment journey was scattered with a few potholes
and the odd dead end.
I didn’t come from money and, as the youngest child of eight, I
knew that if I were going to grow my wealth, it had to come from
within me.
Investors have various reasons for wanting to grow their wealth.
For me, it started with quality education and a desire to never
stop learning. Education is expensive, so I had to postpone wealth
building and be the starving student (complete with two-minute
noodles!) first.
Once I’d paid my dues, I began my formal career. I also began my
more passionate career to growing my wealth. My initial goals were
of the material accumulation kind: a sports car, a big house on the
beach, trips to exotic locales and some nice suits to impress the
boss.

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 Let the investing begin!
I knew that to grow my wealth, I had to be involved in the money
game somehow. Banking seemed a logical place to start. (After all,
they had plenty of money and I’d always wanted to own one as a
kid!)
Fortunately, my work involved me in the management of company
pension plans, which were predominately invested in the stock
market. Not unexpectedly, I gravitated towards stock market
investing too.
I looked at the historical price charts, read the popular financial
press and spent not nearly enough time studying annual reports.
Looking back today, I realise I took the easy way by adopting the
market’s ‘herd mentality’. If a stock got a good write-up and the so-
called ‘experts’ recommended it, I figured it must be good.

Herd mentality. It’s not easy to go against the pack. You need to take
a great deal of time to research the market. And you must have the
discipline to get out if a stock is going against you. Warren Buffet, one
of the most successful investors in modern times, doesn’t give specific
stock recommendations to the public. I drew a big lesson from this.

I wish I could say I was a successful investor back then, but I wasn’t.
Yes, I had some good months – but was I achieving my goals? No.
Over the years, my gains were minimal.
You’d think that with the kind of knowledge I was accumulating,
I’d have been more successful. It was only once I started investing
in property developments that I realised my equity trading history
was, at best, a gamble with long odds. My suits were still well and
truly ‘off the rack’.

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Before you tell yourself you’ve been doing it wrong for years, let
me clarify. My investment activities were short-term, with no long-
term time horizon.
Equities, bonds and other investments still form a small part of my
investment portfolio but my investment time horizon is now more
than two years.

Tip
Investing in anything takes time, dedication and, above all,
expertise acquired over a long period. Before you decide to
go it alone, ask yourself if you really have the time needed
to dedicate yourself.

A bigger piece of the investment pie

Why does property form a relatively big part of my investment
portfolio? It’s all about control and execution.
Let me explain.
If you buy into a managed fund that holds BHP Billiton shares (and
many do) what control does the fund manager have over BHP and
its decisions that will ultimately grow your wealth?
The answer is little to none. What’s more, the stock has two
outcomes: it goes up (you make money) or it goes down (you lose
money). Excluding any dividend you may receive, that’s it!
One of the reasons I have such affection for property development
is that as the development manager, you can manage and control
your investment if the environment changes.
For example, at Open Corporation, our primary goal is to develop a
site, sell it, make profit and move to the next development.

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 In our developments, this has always been the outcome. But let’s
say property prices come under pressure and go down. Due to the
nature of developments, this is by no means a disaster. Property
developers have direct control over what happens if a project
encounters changed conditions. The managers can choose to:
1. sell a completed product (e.g. houses, units) at prevailing market
rates or
2. rent the product until the market recovers and then sell (as my
colleague Cam says, ‘property is like a bad haircut, time will
eventually fix it’).
Most property developments have a profit margin of around 20%.
So, unless the market dips by more than 20%, the chance of losing
part or all of your capital is small relative to other investment types.
However, this is provided the property development doesn’t rely on
excessive debt (another thing an experienced property developer
will effectively control), which can tip the scales if prices do fall or
costs increase substantially.

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According to RP Data, during the global financial crisis (GFC) the
median residential house price in capital cities dropped by only
10%. Compare this to what happened with shares: the ASX200
dropped by over 50%!
I agree that lower property prices mean returns aren’t as good. But,
due to the profit margin, you could still expect some returns over
a longer timeframe.
Compare this ability to manage a development given a negative
economic impact with your fund manager’s ability to control the
stock you own. I take property development every time. How I
wish I knew then what I know now!

Tip
Thanks to a built-in margin, property developers have more
flexibility to manage a positive outcome if conditions move
against them. If you don’t have the time, expertise, or capital,
to pull off a property development on your own you should
consider investing with a property development manager
who can take care of everything, including site acquisition,
to give you peace of mind.

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 ‘I have never met a man who could forecast the market.’
Warren Buffett, Chairman and CEO of Berkshire Hathaway.

Foreign exchange trading anyone?

By participating regularly in investor expos across Australia, I’ve
been fortunate to meet many attendees. I get frustrated, however,
when I meet investors who fancy themselves as foreign exchange
or ‘forex’ traders. They’ve attended all the seminars with the
soothsayers extolling their charting wisdom that, so long as you
interpreted the historical forex price charts correctly, you can
make a fortune.

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Like forex, technical analysis (or basing your investments on charts) is
poignantly described by Eugene Fama, the father of modern finance, as
‘astrology’.

With today’s technology, the thought of trading on a real-time

forex platform with tradable quotes ticking across multiple screens
would make people feel like they were Captain Kirk on the bridge
of their own spaceship hurtling at warp speed to planet Financial
Independence!
The notion of trading on such a platform, in the comfort of your own
home, would make anyone feel like a big-time trader. How could
you lose? The soothsayers teach you all about risk management
systems, including when to buy and sell, and you aren’t risking all
your capital at once. Besides, the forex charts never lie … right?

A real-life foreign exchange experience

As my formal banking career continued, I was exposed to the forex
market – in part as a trader for the bank, but primarily as a forex
salesman to regional banks and large corporations.
This experience dramatically impacted my view of forex as a means
to grow wealth (and it’s why I feel frustrated when I meet would-
be investors). My chief concern is the lack of information traders
have, which dramatically increases risk.
Let me give you a real-life example.
While working at the bank, I was seconded to a regional treasury
department in Manchester UK – where some of our best clients
were English premier football clubs. These clubs used the bank for
their forex requirements whenever they were acquiring new players
from Europe. They sold us Pounds Sterling and we sold them Euros
so they could make the purchase.

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 As these transactions often exceeded ten million Pounds Sterling,
they affected the forex market.
My concern was (and remains) this: what hope does the average
forex trader have of knowing about these and other global
transactions?
Answer: None!
Just as a fund manager can’t control BHP, forex traders have no
control over their market. Worse, they’re likely to be ‘underwater’
as they have no built-in margin. By this I mean there’s no value-
add when you buy currency or shares. Your break-even price is the
price at which you bought (including all closing costs).
With property development, however, the end product’s break-
even price may be 20% lower than the prevailing market price.

Vital flow information – the real truth

The truth is that amateur forex ‘traders’ not only have a 50/50
chance (at best!) to make money, they’re also oblivious to global
market events that could impact their position at any moment.
Still not convinced? Consider this.
According to the Bank of International Settlements, the forex
market trades around US$4 trillion every business day. Large
banks and global institutions account for the vast majority of this
volume. So, unless you work in a large dealing room and have a
bird’s-eye view of the financial flows being transacted minute to
minute, you’re simply flying blind.
Amateur forex traders never have this vital flow information that
can affect their trades.
I’d prefer a far better market gauge before jumping in as an amateur
trader.

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Tip
Never trade forex as a means of wealth creation: you simply
don’t have all the vital information!

The quest continues

I grew up in Canada and was fortunate to travel abroad as my
banking career progressed. I was even more fortunate to meet my
future wife, Kate, while working in Dubai.
Kate was born in Melbourne. After several years in the UK and
Dubai, we decided to settle in Melbourne (not the ideal time zone
for my illustrious investing career!)
Given my history, you’d think I’d put my hard-earned cash under
the mattress and never look at another investment opportunity.
I was also rapidly concluding that equities and especially forex
simply weren’t worth the risk, given the return.
Then something profound happened ...
I became a dad!

Fatherhood & a priority change

Becoming a dad was one of the best things that had ever happened
to me. Yet it was scary to think how I was going to provide for this
new bundle of responsibility.
Remember how I told you about my need for education and my
desire to live in a bigger house and have an expensive car? Well,
I continue to carry that education philosophy with me to this day
and want to instil it in my daughter Alice.

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 But my priorities changed from material accumulation to an
overwhelming desire to give Alice the best education I could afford.
Not just an academic education, although this is a key ingredient,
but to be able to afford her life experiences that will help formulate
part of that education; and the odd trip to Disneyland!
I was already worrying how I could fund this bright future. So
imagine my reaction when Kate told me we had a second child on
the way 2½ years after Alice!
My eyes widened as I contemplated the returns I was going to have
to make, now that I’d just doubled my education costs. Time was
not on my side and I was starting to think that inheritance was my
only way out!
Yes, my priorities had changed and my determination to build my
wealth was even stronger.
In short, I no longer cared about tailored suits!

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Enter property
After seven years of working in the Australian financial industry,
I became disillusioned with my superannuation. Financial advisors
claiming to be ‘unique’ or have an ‘edge’ were simply ‘singing
from the same song book’ (i.e. peddling the same managed equity
and balanced funds) as everyone else. In short, they were merely
brokers for big managed funds.
I became even more disillusioned when my super grew one year,
made far less the next, then lost the gains from several previous
years. To compound my frustration, the fund manager was making
money despite my (lack of ) returns! Why was he driving a Mercedes
while I took the train?!
My wealth-growing investment options were starting to narrow.
At this time, I noticed that my neighbourhood was undergoing
renewal. Small property developments were replacing old and
derelict houses. Whether it was my ego, or my wish to give my kids
an education, I believed that with prudent investigation I too could
have a property development.
But when I enquired about a property for sale in my area, I asked the
real estate agent what ‘STCA’ meant. Once I learnt that something
so basic within the real estate industry stood for ‘subject to council
approval’ I knew I was way out of my depth. (and I could tell, so did
the real estate agent, by his tone of voice!)
I had no idea how to get council approval. I didn’t even know what
I needed approval for (though the property’s sign suggested four
units).
After researching the market and learning much more about the
council development approval process, I realised this was a major
risk for any project.

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 I identified several property developments in my price range. I
believed that if the end product was correctly priced for the current
market, I’d succeed.
In conducting my own due diligence, I
investigated all costs I’d conceivably face
if I chose to invest in and manage my own
property development.
Most importantly, I ‘sussed out’ various
builders to ensure I didn’t get a shark.

My final step into the first property development was to review all
the investment experience I’d acquired while building my wealth.
I then distilled five characteristics I felt I needed on my investment
checklist. Below is what I actually wrote in 2011. This high-level
visual of various investments was very telling!

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My due diligence paid off with respect to finding a builder. I found
not just a good one, but a great one. He was instrumental in helping
me build my financial model and helping me to avoid many of the
pitfalls that afflict the ‘recreational developer’. He gave me the
confidence to move forward with the development. Without my
builder, I’m not sure I’d have proceeded.
From this sound financial modelling base, I then managed the
project and it allowed me create a product that was in demand by
being at the right price point.
I’d achieved a high return with relatively low risk. Not surprisingly,
this early success increased my desire to invest in more property
developments.
However, as I look back at this first project, I realise my success
came down to due diligence and finding a good builder. I wonder if
my lack of experience would’ve hindered my ability to complete the
project if something had gone wrong. Would the end result have
been the same?

Leave it to the professionals

My great builder’s name was Steve. During our interactions, I told
him how much I enjoyed property and wanted to do more. We
chatted about my career experiences and Steve suggested I meet
his son Matt.
Matt, already a top developer, was growing a company with his
brother Allister and their business partner, Cam. They were
ambitious, successful and very knowledgeable about the property
development industry. After friendly discussions with these
partners about their vision for the future, I realised I wanted to join
them.

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 While I didn’t need to be hired to invest in their projects, I saw
a symbiotic relationship: I could help them drive this exciting
business forward by using my financial expertise in capital raising
while continuing to grow my wealth by investing in the projects
being developed.
Fortunately, they liked my Canadian accent and thought I could
take a joke or two. And so I was hired!
I’ve since learnt a great deal about property development with
Open Corporation. This experience has convinced me that:
A. property development is a great way to build wealth and
B. investing via a ‘syndication’ structure (described soon) further
reduces risk.
Let me explain ...
One of the biggest risks I took with my property development
was using all my cash. I also used my house as collateral for a
construction loan from the bank. If things really went pear shaped,
my family would lose their home.
As you can imagine, convincing my wife this BIG risk was a good
idea was one of the toughest hurdles I faced. (It made dealing with
local councils look easy!).
As you’ve seen, my builder and I managed to pull it off. But
hindsight and new expertise made me realise how dangerous this
approach was. Part of my saving grace was that I could draw on my
strong financial modelling, my existing relationship with the bank
and my understanding of what banks look for when determining
whether or not to lend money.
Additionally, as an investor in our syndicated property
developments, there’s no recourse against bank loans. In other
words, no bank can hold you, as an investor, personally liable if a
loan isn’t repaid.

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I enjoyed project managing my own development and the profit
it produced. But to make any project successful, you must actively
manage the process.
As the project manager of my own development, I’d have to
negotiate the construction loan with the bank, manage the builder,
develop a marketing plan and work regularly with the sales agent.
During many sleepless nights, when things weren’t going to plan,
I’d think, ‘If I fail, how will I educate my kids?’
Then the light bulb went on. I realised I could achieve similar returns
(with less hassle) through syndications as I could by managing my
own project!
Open Corporation taught me that by investing in a number of
developments through syndication offerings, I was spreading my
projects across different states, thus further reducing my risk with
geographic diversification.
Now I could sleep soundly, knowing the project was being
managed by an experienced expert whose job was to look after the
development’s day-to-day running.
I could be a passive investor, diversify my risk and make good
returns.
My experience has provided me with a better understanding of
what constitutes a good investment, given the risk profile. Today
I’m an investor in most of Open Corporation’s developments. Those
that I haven’t invested in has been because of the high demand
from investors like you. Considering that most of our projects are
returning upwards of 20% per annum this high demand really isn’t
surprising.
As you might imagine, I’m also very proud to be an equity investor
in the company itself. My wealth creation goals are once more on
the up and up – and I can almost see my children’s degrees hanging
on the wall!

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 So what?! What’s the difference?
You wouldn’t be amiss to ask: ‘OK, but just like equities and forex,
isn’t property development about predicting the market?’
The difference between these investment types and property
development can be explained with three concepts:
1. Value add.
2. Execution.
3. Underlying (hard) asset.
Value Add
Property development is about taking a (relatively) raw piece of
land and creating value by building an end product that someone’s
willing to buy.
The idea is that the sum of the end products is significantly higher
in value than the raw land.
It’s really no different to buying chips (fries) at McDonalds. They
buy raw potatoes from farmers, add value to them (transport,
wash, cut, fry) then sell them to you with your burger.
As you can well imagine, the price per kilogram McDonalds pays
for potatoes is dramatically less than the price per kilogram you
pay for chips.
There’s nothing wrong with this; it’s a matter of adding value and
creating a product that’s in demand. Property development works
on the same concept, as you can see below.

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Execution
The process of taking raw land and developing it into homes buyers
wish to purchase is no easy feat. But an experienced property
developer can avoid the pitfalls of land purchase negotiation,
engineering and environmental reports, building costs, financial
modelling, marketing, branding, sales and so on.
In short, you’re investing in people – the expertise of the
development manager.
A good development manager positions the end product in the
market at a price competitive with prevailing like-for-like products.
I agree this involves an element of market analysis. But on this
basis, a good property developer isn’t trying to predict the market
and isn’t relying on growth. They’re using actual sales figures to
determine today’s price to ensure they can achieve the desired
financial outcome.
Property development gives you extra margin through the value-
add process. Market predictions, like those required in equities or
forex investing, aren’t all you have to hang your hat on.

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 Yes, market prices may go down, but a good property development
has a margin built into its expected returns to compensate for a
downturn. Alternatively, if market prices go up, investors can
expect to see a better return.
Underlying (hard) asset
With land purchase, one thing’s certain: it never goes away. This
is an important attribute. Further, it cannot be destroyed and you
can’t make more of it. But with equities, the value can be completely
eliminated. Public companies can go bankrupt. Forex prices can
fluctuate to levels not seen again for years.
This is a big point of difference.

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Risk
‘Risk comes from not knowing what you’re doing.’
Warren Buffett.
The topic of risk is so important, it has its own section in this guide.
Another concern I hear from potential property development
investors is that it’s too risky, given the returns.
This is a valid and important concern to address.
Had I not done my own property development first, I wouldn’t have
believed the projected returns of the syndications I now invest in,
given the risk.
Each time you hand your money to an institution to invest, there’s
some element of risk. The negative impact can vary from not
reaching a forecasted return to losing everything.
The ‘risk return trade-off ’ (also known as the ‘efficient frontier’) is
demonstrated in the graph below. The return for each asset class
comes with a corresponding increase or decrease in volatility
(i.e. risk). For example, property offers a ‘moderate’ return with a
comparable risk.
Yet this graph considers asset classes in general. I’d therefore argue
that picking a well-managed property development, with good
margins, in a desired or growing suburb, will move your returns
to a higher point on the return scale, but not with a corresponding
increase on the volatility (risk) axis.
What’s more, diversifying across multiple property developments
in different geographic locations can further reduce risk.
This makes good property development a superior investment
option, in my opinion.

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 How much property development can Australia
handle?
The press report daily on Australia’s economy. Some pundits try
to extrapolate the latest data. But every factoid can be interpreted
many different ways!
For me, the economics are simple. Australia is a developed country,
with a growing population, well-defined legal and social structures
and a wealth of natural resources. Like all counties, it’s still
vulnerable to economic cycles. But Australia remains a desirable
immigration destination and its land is a fixed quantity.
In other words, I take a long-term approach. This is consistent with
the National Housing Supply Council’s 2011 State of Supply Report.
Among its findings was an estimate of 12.0 million households by
2030, an increase of 3.3 million households between 2010 and 2030.

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In its report, the Council believes there’s a cumulative shortfall of
186,800 dwellings (June 2010) that’s likely to increase in coming
years. Good news for property developers!

Dispelling more misconceptions

Throughout this guide I’ve argued that property development
investing is a solid way to grow your wealth, given the risk.
The investing mechanism I now use is generally through
syndications. Unfortunately, I get the impression many everyday
investors think syndications are mysterious, complicated and not
worth their attention.
Before the GFC, self-managed super funds (SMSFs) weren’t a
widely used superannuation investment vehicle. Now people are
starting SMSFs in record numbers.
Syndications are becoming more widely used as their merits are
fully understood. Syndications pool small amounts of money to
make big profits relative to the original investment. Each investor
receives ownership in the syndicate (which owns the development)
proportional to their original investment.
Countless times I’ve chatted with potential investors who’ve said
they can’t invest in property developments because they don’t have
enough money or don’t want to tie up their money for ten years.
Yet some of our investors invest as little as $15,000 and the average
property takes merely two years to complete!
Syndications don’t require you to invest additional cash (unless you
invest in stages, e.g. 50% now and 50% in three months). Once you
make your initial investment, that’s all you have to contribute.
Syndications are a passive investment. You leave the project
management to the experts while you sit back and watch your
property develop through regular newsletter updates.

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 Syndications invest in the development of the project, not the
purchase of the end product.
Generally speaking, syndication investing means there’s no recourse
to the investors should the bank loan not be repaid. However, a
good property developer will ensure this is never a concern. Refer
to Low gearing (debt or leverage) in the PDS/IM Checklist.

Tip
When investing in managed property developments, instead
of going through an industry fund, go directly to a property
developer who manages the project.

A note on self-managed super funds (SMSFs)

While it’s not in this guide’s scope to discuss SMSFs, I can say that at
least 75% of our investors use their SMSF to invest in our property
developments. I therefore encourage you to talk to your financial
advisor or accountant. (I know my super fund is getting a boost!)

30 THE ULTIMATE MINI GUIDE TO PROPERTY DEVELOPMENT INVESTING

How syndications work (step-by-step)

THE ULTIMATE MINI GUIDE TO PROPERTY DEVELOPMENT INVESTING 31

 A quick guide to building a risk profile
Analysing risks vs returns on any investment is critical. Over the
last few years, I’ve been fortunate to be intimately involved in the
acquisition, approval, development, capital raising and marketing
of a number of property developments.
Because I’ve been involved in all aspects of the property development
process, I’ve gained a unique perspective on growing wealth.
Over the years I’ve learnt it’s important to understand all aspects of
a potential investment before you invest.
Below is a guide to help identify what to look for.

Product Disclosure Statements and Information

Memorandums
Of the many potential risks a property development faces, some
are riskier than others.
Important information is contained in the product disclosure
statement (PDS) or information memorandum (IM). Along with
this guide, the PDS or IM is another important resource to help
educate you on the merits of investing in a property development.

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Property developments have more ‘moving parts’ than many
investment vehicles. So it’s important to ensure you understand all
aspects of your potential investment before you commit.
Interestingly, most first-time developers don’t fully understand
how to ‘control the levers’ that make or break a development.
Each property development has unique characteristics, so expand
your education by asking lots of questions. If you don’t like what
you hear it’s time to ask yourself, ‘Is this the right development for
me to invest in?’
It’s crucial you don’t get emotional about a potential investment. A
logical approach helps you stay focused and identify which project
aspects may warrant further understanding or disclosure.
There are plenty of development opportunities out there, so move
on to another if the one you’re analysing doesn’t stack up for any
reason.
Below is a checklist of what to look for when reading a PDS or IM.

PDS/IM Checklist
Development approval
All property developments require local council approval to
undertake the project. While gaining this approval before raising
funds for a project may seem logical, it’s often not the case. Property
developers in the process of obtaining council approval may look
to raise funds to continue the application.
The danger, of course, is that the development doesn’t proceed.
Even if it does, it may not be as profitable as advertised by the
developer if the council reduces the number of units or town
homes for which the developer originally applied.

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 Tip
If the council development approval isn’t in the PDS or IM, ask
to see a copy.

Fixed build price

Apart from the land purchase, the development cost (which can
include civil and road works and/or building constructions) is a
major expense.
To eliminate the risk of cost escalation, the property development
manager should fix these costs with the relevant third party provider
before raising capital (or at least be very certain the quoted costs
will be the agreed price when construction starts).
Any change to this cost can have a major impact on investment
return.

Tip
If the quoted build price isn’t in the PDS or IM, ask to see
a copy.

Initial investment only

Invest in property developments that require an initial investment
only. You don’t want to learn, after making your initial investment,
that unless you invest more money in a property development
project, it may not be completed.

Tip
Your initial investment may comprise two or more payments,
separated by anywhere from two weeks to several months.

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Contingency
As discussed, the PDS or IM should reveal all costs, and major
expenses should be fixed through negotiations with third party
providers (e.g. builders, contracts).
Nevertheless, property developments are a major undertaking and
it’s important to include a contingency or ‘buffer’ to expected costs.
Unforseen costs invariably creep into projects. So it’s prudent to
add a contingency of 5% to 10% of construction costs to a project,
depending on complexity and size. Advertised returns should
include this contingency. That way, you can draw comfort knowing
that if the project does have cost overruns to the extent of the
contingency, you still achieve the return.

Tip
A contingency should be explicitly quoted in the financials of
the property development’s PDS or IM.

Low gearing (debt or leverage)

An important component of financing a property development
is debt. As with personal finances, however, too much debt can
increase risk, restrict cash flow and lead to financial distress.
The benchmark is to ensure a project’s debt doesn’t exceed 60% of
its value. This loan-to-value ratio (LVR) is also called ‘gearing’. For
example, if a project is valued at $2.0 million, debt shouldn’t exceed
$1.2 million.

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 Tip
Property developments with some gearing enhance returns
because investors don’t need to put as much money into the
project, however, too much debt can put a project in jeopardy.
It’s a balancing act!

Presales
Achieving some presales (i.e. ‘off the plan’ sales of end products
before construction begins) helps ensure a profitable development.
Presales ensure that part of the debt is paid off at the earliest time,
thus reducing interest costs.
Presales may be a prerequisite for obtaining finance (but not if a
low level of gearing [debt] is required to fund the project).

Tip
If a project you’re determining to invest in doesn’t require
presales, ensure the debt level is lower than acceptable levels
(see section Low gearing above).

No sales price escalation

Financial modelling is a key part of project development. It provides
a detailed analysis of all costs, revenues and timings.
As not all elements of this analysis are known when writing a
PDS or IM, assumptions are often made. While this is normal and
acceptable, the reader (you!) must determine if these assumptions
are reasonable.
Some PDSs contain a ‘price escalation’ assumption. This assumes
the project will get a higher price for its end product than what’s
available in the market today.

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This dangerous assumption makes a project’s advertised returns
look better.
If higher sales prices are achieved, this return to investors should
be considered value added – not assumed.

Tip
Look for projects that explicitly state that they assume no price
sales escalation. If they don’t, ask for the assumed price growth
escalation figures and determine if these are reasonable for the
area in which your project resides. You can get this information
by asking local estate agents and researching the area on
popular real estate websites

Stress testing
Sophisticated developers use this process to determine the impact
of various prices or costs on the development and determine
revised projected investor returns.
Examples of changes that may affect a project are sales prices or
construction cost. Time is another factor that can impact returns.
A PDS or IM should contain a matrix or table showing how your
return will be affected given a particular change.

Tip
If the PDS or IM doesn’t contain this information, consider
what the impacts might be.

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 Compliance
The investment community is heavily regulated by the government.
It’s important to ensure any investment you make is through a
manager or property developer that has an Australian Financial
Services Licence (AFSL). This way you ensure they comply with rules
and regulations designed to protect investors. Also, compliance
with the Australian Securities and Investment Commission (ASIC)
is equally important. This ensures a high level of disclosure.

Tip
Be wary of property developers that are unregistered or
unregulated – they may be ‘back yard’ or ‘first time’ operators
trying to raise money. You may not be getting the full story!

In summary
When reading the PDS or IM of any potential property development,
it’s vital to look for the above-mentioned risks and the developer’s
robust plan to manage or mitigate (i.e. reduce but not eliminate)
them.
If you can’t find these things, investing in that development may
be too risky.

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About Open Corporation
At Open Corporation we’re passionate about property. So much
so that we want others to be energised and excited about property
too.
That’s why we have investors from across the spectrum: from mums
and dads to high-net-worth individuals to professional property
investing organisations.
We’re always keen to talk with potential investors to dispel myths
and educate them about this exciting class of property investing.
I hope this guide has gone a long way to doing that. Please drop
me a line and let me know if you enjoyed the guide or want to chat
about how you can become one of our investors.
I look forward to hearing from you!

Matthew Callahan
Head of Retail Funds
Open Corporation
mcallahan@opencorporation.com.au
T. 1300 649 564

THE ULTIMATE MINI GUIDE TO PROPERTY DEVELOPMENT INVESTING 39

 NOTES

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