Investors profiled in the April 2009 issue

Brisbane developments

Q: Did Michael know much about the building trade before he started? How did he get to know a good builder and does he always use the same one? Also, what is the process he goes through when he has identified a block and is going to start subdividing and then building?

A: I didn’t have a background in building, mine was a business and economics degree rather than a trade. I have stuck with the same builder to construct most of the houses and subcontracted out tradesmen to finish them. I’m happy to say I’ve used most of the tradesmen repeatedly because they’ve done a good job. I do always check their work and prices just to make sure they do the right thing. If there are people I’m not happy with I won’t hesitate to change. – Michael

Hitting the wall

Q: My wife and I started our investing around the same time you did but I was wondering how you were able to borrow so much in such a short amount of time? I realise you have sold a few properties at, as you say, reasonable profit, but I assume you are investing yourself with a job earning under $100,000 per annum? How have you avoided hitting the borrowing serviceability wall? We seem to have hit it and we have two outright shares plus two half shares in properties worth approximately $2 million with debt of $1.75 million. How do you keep borrowing?

A: Whenever you borrow money you’ll always “hit a wall”, as you say, when the banks say you’re at maximum capacity. This is due to your income and how the bank views that income as only being able to afford up to ‘x’ amount of borrowings. I borrow through a company I have started. This company makes regular sales of my new properties. As a result the company has a higher income and therefore higher borrowing capacity than an individual on a salary. – Michael

Costs and profits

Q: I travel past Michael’s estate each day going to work and have watched its progress over the past few years. I have a question for you on how you've done it all. You said the land cost $440,000 and the costs to develop it were $450,000 and you sold it all for about $1.2 million. This netted you about $300,000. The question I have is this: How did you fund the $450,000 worth of sub-development costs? It’s my opinion that you can use a loan to buy the property in the first place, with a 10 per cent deposit of $44,000 but that the costs of sub-development need to come from cash, not borrowed because they don’t actually exist in tangible items. How did you do this project then? Did you have the $450,000 cash or did you borrow it somehow?

Also, if the total project cost you almost $900,000 and selling it off you made almost $300,000, this means you would have made about $38,000 on each block if you sold them for $150,000 each. Is this correct? I didn’t think a 300 to 400-sqm block would have sold for $150,000 18 months ago. Is this what you did?

A: With revaluations after a subdivision and healthy capital growth a lot of costs can be borrowed due to the increase in equity. Some of my development costs included building on some of these sites. Again, building costs can be borrowed. It was these new houses I built which pushed the average sale price up.
So to answer your question, no, I didn’t sell the blocks for $150,000 each. It was actually closer to what is a bargain by today’s standards of $100,000. As I mentioned before, not all blocks were sold as land only, as you have assumed. The new houses constructed sold for much higher. – Michael