Subdivisions when compared to trading is an extremely simple
process to make equity.
With trading a good foundation is that, the market is
still a zero sum game, but with property development and subdivisions, there is
only so much land available and the rest is water. We are not creating more
land, so that places the odds in the developers favor to make money, as the
population grows. Where as a trader has to factor in the zero sum game issue. (Generally speaking)
It is all in the due diligence, but that can be made simple
if you create a system (or a robot) to help scan and filter the market for
potential opportunities.
The thing about subdivisions is it is a cost plus profit
system with a fixed time line. A developer can quite quickly come up with a
formula to work out if a potential house(or block of land) that is for sale can be subdivided, then have
a system to work out the base cost and exit strategy. The developer can then
work out the sale price and difference between the purchase price, subdivision
costs, town planning, (construction if applicable) and then sale price, all
that = profit margin.
If the development profit margin is enough to compensate for
the risk, it is a no brainer. If there is not enough in it then keep looking.
Like stock options, property development can have a time
line and expiry date. This is good for peace of mind, strategy, and planning. Knowing
the time line to things provides clarity. It is also good for cash flow, and/or
done correctly can create instant equity.
The benefit from a risk perspective is the time line.
Buy and hold property investments do not provide a time
line, so an investor/developer will never really know the return on investment,
nor can an investor/developer work out a proper business plan and strategy and
exit strategy. It’s all kind of up in the air and then common words like “it is
a 10 year plan” start coming out, as the investor needs to throw out some sort
of figure and going that far into the future is always pretty safe.
But Subdivisions can provide an investor with an actual
strategy. The real benefit to me is;
1)
It has a fixed time line
2)
A cost basis can be worked out or put another
way the cost of goods sold (COGS) can be worked out.
3)
A profit analysis and risk management system can
be built
4)
An exit strategy can be created before the
investment takes place
It is like trading the stock market. In fact, I use the same
sort of process as one of my trading systems;
1.
Look for undervalued properties
2.
Look for opportunity to subdivide where the land
is already zoned ready for creation of titles
3.
Simple excel spreadsheets provides formulas on
cost basis
4.
Run Comparative Market Analysis (CMA) reports to
find out the sale price of similar properties
5.
Profit factor is easily workable.
6.
Custom built Kelly formula can be applied to
provide a guide line on how much to invest into the particular development
opportunity.
7.
All this can be automated to a level
The point is that subdivisable properties provide developers
and investors an easy way to get into the investment world without spending
years build systems and robots that trade at a zero sum game level. The odds
are always stacked in the developers favor and a developer can easily work out
the profit potential for a subdivisable property.
