THE PROPERTY DEVELOPMENT PYRAMID
What is The Property Pyramid
In this article I am going to look at the concept of "The Property Pyramid" and how it is an important idea to consider when you are planning the next steps in your property journey.
The Property Pyramid is a fairly simple idea that essentially states the easier/cheaper a project or task is to complete the more people will be trying to do it. So projects that sit at the bottom of the pyramid are low risk, low return projects that every man and his dog are trying to make money from, these sorts of projects are very common but often impossible to secure because everyone is trying to buy them.
Alternatively at the top of the pyramid you have expensive, complicated and potentially risky projects which can be much more profitable and which the average person is either too inexperienced or not funded well-enough to tackle.
Basic Property Pyramid
Above is a very basic illustration of The Property Pyramid. At level one as a renter you have very little involvement with property, no money invested and almost no risk, around 25% of the country falls in this category.
The next step is a home owner with no investments, around a third of our population sits here. You are involved in the house you own and you may make some money from it if the markets are kind but you may also lose if we have a down-swing.
The next step up is a person who owns a single investment property. This step again has fewer people with less than 10% of our country owning an investment property. This is a jump from the previous two steps because the investment is purchased for the purpose of making money, which is a big difference from buying a PPOR or renting a home.
The pyramid then continues to get smaller and smaller with only around 2% of Australians owning 2 or more investment properties and fewer than that being actively involved in developments.
As mentioned before as the number of people shrinks the potential profits and risks increase. As a renter you will not be making any profits from your home and you have no risk. As a home owner you might make some profits(if the market is kind). As an investor you would hope to make some profits over time but you might be lucky to gain a couple of % a year. As a developer you can realistically make more than 100% a year if you are good at what you do.
Property Development Pyramid
When we focus in on the top end of the pyramid and look at members of the community actively involved in property we can expand this pyramid even further.
Level One - Cosmetic Renovations
This is the level where I started my development journey. Properties will be relatively cheap (usually around $500,000) and projects will be short and low cost. At this level there are a large number of people who can afford to buy a house and there are a large number of people who have the risk appetite to complete a low cost renovation. You will find feasible projects out there but they will be hotly contested and they will sell quickly.
Level Two - Splitter Blocks
This level is slightly higher as the potential profits can be very good but I think every developer in Brisbane is always searching for the elusive splitter block making them extremely hard to find. We managed to secure one during our first year in property, we bought it off market and sold it on very quickly for a tidy $60,000 profit but I can almost guarantee if we had not chanced on it off market we would not have even had the opportunity to offer before someone else snatched it up.
Level Three - Small Sub-Divisions (1 into 2 or 3)
As we climb up the pyramid, projects become more expensive and more complicated, which means less people will be looking for them. At this level there is still lots of competition in the pool and lots of people looking. It is possible to find great projects but you need to act quick. There are fantastic profits to be made around this level but risks are also starting to increase and if you do not do your due diligence properly you may lose a lot of money.
Level Four - Larger Developments/Sub-Divisions, Structural Renovations
Once you reach this level the air starts to thin. There is still a lot of competition but fewer people have $1,000,000 or more to put into a project and fewer people still are willing to risk that much money. At this level of projects it is possible to make returns of 200%+ a year or more and you can really build some incredible wealth here however, the risks grow with the reward. When engaging in a larger project it is absolutely essential to do as much due diligence and research as possible as there can be big, costly unknowns that can take inexperienced developers for everything they own.
Level Five - The Golden Egg
This level is a bit different from the others as it is referring less to a type of project and more to the complexity/difficulty of a project and your ability to see gold where others can't. There will be properties that you come across when you are searching that seem impossible to make sense of and many of them will be, however if you can find a play and value add where other people can't then there will be no competition and you will be able to secure it at a great price. Properties like this are few are far between as there are always many very intelligent developers on the hunt but just keep an ear to the ground and an open mind and who knows what you might find.
What to take from this?
We are all part of The Property Pyramid and usually we will start somewhere at the bottom. There is good money to be made at the bottom of the pyramid and that is exactly where we started with our cosmetic projects however, it is important to remember that the higher up the pyramid you can move the easier it will be to find a profitable project. The old saying that money makes money is very true here but also that experience makes money.
Whether you have a lot of money and experience or not it is important to be able to think outside of the box and identify value in properties that other people cannot see. If you can do this then you will be able to find great projects no matter how high up the pyramid you are looking.
My final point is directed to those starting out on your journey. Just remember that there are always profitable projects to be found! Do not be disheartened if you can't find them right away as there are lots of people looking for the same thing you are. If you stick at it and try to always do things differently to the crowd you will be moving up the pyramid in no time!
Thank you so much for reading! As always this article is based on our experiences and point of view and should always be read as such!
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