Mastering Feasibility for Successful Real Estate Development Projects with Dino Di Donato of MoneyQuest Australia

[00:00:04] Well, welcome to The Residential Developer Podcast. I'm the host, Nathan Battishall, and I'm really privileged today to have Dino, the Principal of MoneyQuest Wollongong, Camden and Ramwick. Good to have you in today, mate. Thanks, Nathan. Good to be back.

[00:00:18] Good to have you back. And Dino's got so much insight and value to bring from a finance perspective. And first time we had Dino come in, we just touched on feasibilities. And I think it's a really critical part of looking at a site, looking at a development and determining the viability of a site.

[00:00:39] With Dino's background in finance, but also accounting and his passion and just his knowledge and skill set around that area of feasibility, I thought it was a really fitting episode to discuss feasibilities when it comes to a project.

[00:00:56] Dino, do you want to just give us a little bit of an outline of what led you to, I guess, being someone who, I guess, has become a bit of a key piece in that feasibility space? Why is that an important factor for you? Look, for me, it's the most critical factor, right? It will determine whether the project's viable or not viable even before you go and try to get a loan or do anything.

[00:01:19] So it's really important that all the key pieces of the puzzle are not only, don't just listen to a builder or a real estate agent, but you do some DD on every little piece of the puzzle to make sure that it stacks up. And very important that you sort of look at the what if scenarios as well that come into it. So for me, it's the first piece of any puzzle. And what I'm seeing a lot of people are doing their own feasibilities at the moment, which is good. So they're not coming completely raw, which they were probably two or three years ago.

[00:01:49] So I think there's a lot of good education like your podcast and other ones out there and other sort of media that people are actually doing their own feasibilities. But just getting it a little bit wrong sometimes. So it's really important that not just the numbers are right, but what's the backup of those numbers? Yeah. Yep. And a lot of it's de-risking as well, too, isn't it? Like I know you're really big on de-risking. Or too big sometimes. Yeah. But I think that's a good thing.

[00:02:15] And I think you'd rather be someone who probably pushes more towards de-risking a site than over-inflating a site. Because I think there can be too much of that at times where people do get excited about a location or a site or a project. Look, that's the biggest issue at the moment. That is basically everyone is over-inflating their sites. It's until you break it down and then you sort of, you know, add in the realistic approach.

[00:02:42] It's sort of – I've seen projects come in at 50% margin and you bring it down to 10% or 15% with not too much there, right? So it's sort of like it's really – people just get too excited listening to who – someone at the barbecue or someone somewhere else about it somewhere. And, you know, and then all of a sudden they get into it and they haven't actually really done their numbers properly. Yeah. Or done their background checks. For example, if the real estate agent told you it's going to be selling for $1.5 million each, you might want three or four real estate agents to get that.

[00:03:11] Then you look at comparables yourself. Go on to RP data. Do some research. See what's sold in the place as well as using your three or four real estate agents. Talk to a buyer's agent as well. They'll know as well. So really dig deep into that and take a conservative approach. Yeah. Same with the builder, right? So you might get a build contract and it might sort of be $2,500 per square meter or whatever it is. You need to see, you know, what's their finishes, what they've done, what else is out there. Talk to some different builders. Talk to yourself, Nathan, in your experience and see, like, is it really going to be that? You know?

[00:03:41] Is it sort of what's going to happen? What's in the build contract? Yeah. Really, really critical. You know? Like what is included, what's not included? Yeah. You know, what if they hit rock? What does that actually mean? What if you need extra? Contribution, subdivision. Or contributions and the time contributions, right? So at the moment you might do a FISA when it's $20,000 a site. Yeah. It might be going to $50,000 in two years' time. And if you're not finished in two years' time, you might be up for that.

[00:04:03] So there's all those type of – and then the other thing too that I see a lot of mistakes is people not factoring in the GST correctly. If it's margin scheme or not margin scheme. And not just that, they might be leaving the GST in the sale price and then putting out exclusive GST in the build cost. And therefore, you've got a double whammy. It happens a lot. People not factoring in even the small costs like land rates, council rates.

[00:04:28] Because if you've got a big subdivision, for example, or a big townhouse development, there could be some considerable money in the rates, land rates, council rates on a big site, right? You might only use a part of that site, but it could be a big cost there. That's factored out. But the loan term, like I've mentioned previously, getting that wrong and not factoring your proper interest costs over the life of the loan, it's a big one. You've also got calculating fees correctly, actually calculating the drawdown rates and interest on that.

[00:04:56] So you really have to model it in a lot more detail than just writing a couple, oh, I'm going to sell it for a million bucks, build 500, make 500 grand profit. That's got to do a lot more detail and a lot more DD on every aspect of it. Yeah. And I guess the challenge for a lot of people, and look, it's probably not as bad now as it was, say, when things were really booming.

[00:05:17] The problem is I found land was selling so quick or development sites were selling so quick that people had to get in and make risky acquisitions. Because the problem is they go on the market if you didn't make an offer within sometimes even a day. Exactly right. At least now it is sitting there for a while, so you've got the time to do your DD.

[00:05:40] But that can be one of the trickiest things, I guess, in terms of time to be able to do your DD. Yeah. Especially too if you've got like an old house, for example, that you want to knock down or two houses and knock down and put six or ten or whatever townhouses. There'd be other people in the market that might be wanting to be their first house, right? Yeah. So sometimes you're competing against someone who can only afford that site for their house. Yeah. And you want to knock it down and build something.

[00:06:05] So the different sort of competing priorities of it does make a difference and you're maybe paying too much for something that you should have. Because obviously the value is in the land that you're buying, right? Yeah. So if you're buying land too expensive or a house or whatever it is too expensive, that just absolutely kills everything. Yeah. Yeah. And there's really no – you hit on some things before that I thought were really critical. You really can't shortcut on your DD. Like – and I think that's where people can come undone where they do take shortcuts. Yeah.

[00:06:34] They don't want to put the time into – they'll just ring one agent. Just because the selling agent told you you'll sell the products for 900K. Yeah. Of course they're going to tell you that. Exactly right. And the thing is too, you've really got to do DD on every aspect of it. Yeah. And not just trust people. And then get someone else like an asset broker or someone else or yourself, Nate, your team, just to review their feasibility. Like have a second pair of eyes, you know? Yeah. Pull it apart. Yeah, pull it apart.

[00:07:04] And don't just – yeah, always have an extra person to pull it apart. And then also really important to do sensitivity analysis. Like what happens if it's seven months longer? What happens if the build costs go up 15%? What happens if it goes up 2%? What happens if the sale price tanks? What happens if interest rates go up or down, you know? Yep. Which is hopefully – they might go down next year. It didn't happen yesterday as we know. So it's really pulling apart the numbers and then also who's giving you the quotes.

[00:07:32] Like so this build up, for example, it's really hard to get build quotes at the moment from builders, right? They're always there so busy and they can charge for it. So if you're going to be running off a square metre rate, you've got to be really make sure that that square metre rate that you're saying, if you're locked, sloped or whatever else, it's going to be different, right? So you've really got to talk to some other experts to make sure that what you're sort of – if you're only getting a high-level quote, that it actually is realistic, you know? Yeah. Yeah.

[00:07:58] So, yeah, unfortunately it's really hard to get three actual proper quotes from builders these days. But you probably should try. Yeah. And it means paying a bit of money for it. Yeah. Also, you know, maybe engaging in QS early on if it's a big enough site. Yeah. Maybe engage them to do a high-level, you know, to make sure that those costs would be in line with what your builder is sort of saying. Yeah. And hopefully you've got some contacts in that space that they can help them out. So, yeah, look, there's so many areas that it can come unstuck, you know?

[00:08:24] And if you're basing it on a 15% or margin or 19% internal rate of return, there's not much room to move if things go wrong. Yeah. So – but at the moment most of the margins are pretty low. Yeah. So in order to do a job, you're going to have to, you know, do it for that sort of smaller margin. Yeah. Yeah, no, you're right. And I think you made a good point. Like I think it's gone are the days where people just come in with a piece of paper.

[00:08:55] There's so many tools out there now. There's programs, software. Yes. Or the old spreadsheet. You can't beat the Excel spreadsheet. Exactly right. If it's built well. Yeah. I know a lot of accountants even out there now that will actually help who is specialising in investments and developments who will even help clients build a spreadsheet. Yeah. Yeah. Well, you know, I use an off-the-shelf system. Yeah. And I've sort of tailored that to myself to make sure all the tax and everything's in there correctly. And it's actually a really good system that I use.

[00:09:25] There's plenty out there that you can use. So you don't need too much to actually be able to do it. So – but, yeah, look, the good thing is most people are coming with more than just, you know, Yeah. something which is great. But still haven't got that – the DD is still not done properly. No. That's what I'm seeing. Not many people come with three real estate agent quotes or benchmark their costings from their builder. Yeah. You know, or factor in some of the smaller ancillary costs.

[00:09:53] That can make a little bit of a difference as well. Yeah. So – And it's all well and good to put contingency on the build, but I think it's important to put contingency on all the pre-build elements too. Yes, that's right. Like – and I guess the problem is you probably – I'm sure you see people, they're basing their interest rates on the best, the best, the best of the best case scenarios. That's right. That's right. And the lowest loan term as well, right?

[00:10:22] So, like, look, the biggest things I see wrong are interest and fees calculation. I see the GST wrong as well. Yeah. And just missing some, like, smaller costs, but that could add up. Yeah. But they're the three biggest sort of mistakes that people make. So it's important that's why they talk to us or other people to help them through it because even if they've got a spreadsheet, they could still get it wrong. Yeah. You know? Yeah.

[00:10:49] So it's – yeah, it's just important to talk to an expert to help you out. Yeah. But at least a good thing is they come with something, which helps us too, right? Yeah. So when we're helping and we're not sort of starting to scratch, we'll go back to them. You might want to go and benchmark those costs. Yeah. You might want to go and, you know, talk to this person. So I might know the area, for example. Or you might know the area. Yeah, yeah. And go, well, I know this agent in that area. Go talk to them as well. Yeah. So just ensure.

[00:11:11] And I think – I think that's why I think – and look, every investor and developer is different, and I think it is important to pivot and look for locations where margins are high. But my thoughts are, if you do your research right, I think – I'm a personal believer of actually picking an area that's profitable. Yeah. And getting to know that area well. Yes.

[00:11:35] Because the problem is if you're – and I've seen this where someone's got a scattergun approach where they've got a site out of Dubbo, they've got a site in Wollongong, they've got a site on the central coast. And the problem is it's impossible to become a specialist and knowledgeable on every little suburb and area across New South Wales, let alone Queensland or Victoria. Do you find it's valuable just to pick an area and get knowledgeable on it? Yeah, 100%.

[00:12:02] Because then you would also have the referrals of who's a good builder in the area, who's a good real estate agent. So all those sort of local knowledge that you can't get. So you might go to an area you don't know. In that same area, there might be a really good part of the area and a really crap part of the area. Like, you know, in places in Wollongong, for example, right? There's one suburb. They might have houses at $500,000 and houses at $2 million, right? In the same suburb. So if you're not from that area, they don't know. You might be buying something in the wrong part of that area. Yep. Yep.

[00:12:28] So local knowledge and sticking to one place that you know well is critical for deadlines. Obviously, the larger scale group is a different story. But if we're talking, you know, sort of under 10 mil type people, you don't want to go outside where you sort of know or know of people that can help you there. Yeah. Because it's like anything, like referring to a local doctor, you know, referring to a dentist that's really good or a surgeon. Yep. It's the same thing. A good broker, good accountant, good designer. If you don't know, you can just pick anyone.

[00:12:58] So I 100% agree with that. Like stick to the areas that you know or know someone that can help you in that area. Don't be going to different places that, you know, just from a builder perspective. And I think you hit that point and I just want to emphasize it even more is you just can't take shortcuts in your DD, in your due diligence, in your feasibility process because the reality is there's no shortcuts. That's right. It takes time. Yep. It takes time.

[00:13:28] You've got to be able to get on the phone, do your own research. You might have to go and buy a couple of programs. You might have to get RP data. Yes. You might have to invest in some things that are going to give you the tools and the skills. But even if you don't want to invest in that, there's still, you can go and look at what's sold in the last three months. Don't look at what's sold in the boom two years ago. That's right. Because it's useless. That's right. It's a business, right? So you should be approaching this, whether it's a duplex or 50 townhouses, it's a business.

[00:13:56] So if it's your business, what would you do before you go and invest money somewhere? You want to protect it, risk mitigate it. You want to make sure that the profit's there before you go and do it. You don't go and buy potatoes for $10 and sell chips for $5. Yeah. So you don't do that, right? So don't treat your development that way. I'd be telling people you treat your development, regardless of how small it is, as a business. Because it is a business, right? It's a commercial transaction. You are buying for commercial profit. It's buying, building for commercial profit.

[00:14:25] So really, my view is treat it like a business. Therefore, have risk mitigation. Really, really important to know your exit strategy. I'm very big on that. You need to know your exit strategy. That's critical. Start from your exit strategy and work backwards. And then get all the in between DD as much as you can and get as many quotes or benchmarking as much as you can before you pull the trigger. That sounds like a lot. And people just want to buy it and build it. Yeah. And look, that could work. Don't get me wrong. And it has worked before.

[00:14:52] But in this environment at the moment, where land's expensive, the margins, and it's a hard – like, you can make money. People are making money every day. Right? So there's plenty of work out there, plenty of opportunities. I see it all the time. So I'm not saying there's not. It's just that you've just got to make sure that you do it right. But yeah, there's heaps of opportunities at the moment. You've just got to be patient, don't you? That's right. And look for the right side. That's right. I always say no to the nine to get the one really good one. That's right. And I think that's where a lot of it comes back to that element of loyalty too.

[00:15:21] Like, I talk to a lot of people at the moment that are struggling to – let's talk about build costs just for a moment. Yes. If you've done six projects and you've used six different builders – Yeah. The problem is you haven't built loyalty – Yes. – among your team. Now, for the sake of saving 20 grand, 30 grand, I get it. I get it. Or potential saving. You might not get that saving. You might think you've saved it, right? You might think you are.

[00:15:51] That's right. Whereas I find – I always say, like, if you get the right builder, you want to build a long-term relationship. Yeah. If they know the returns, you've got to get the numbers you've got to hit, provided it's realistic. Yeah. Don't go to – if it's a $1.8 million build and you're trying to make that builder squeeze it into 1.4 because you ran your numbers wrong, well, that's on you. Yeah, that's right. Good luck finding a builder that can do it. Yeah. You're going to get sold to a project volume-type builder who tells you you can. And they'll be in $2 million.

[00:16:21] That's it. You get stung in the back end. Yeah. Whereas you get the right builder, they'll be able to help you in that feasibility phase because they know you're not a tire kicker. They know you're not just using them for a quote. Yeah. And then you're going to go to 20 other different people. And they might have some ideas where you can save money in the build as well, right? Exactly. They might have that, right? But if that builder has been working with the designer, like then at the start of the process, they would have sorted all that out initially. Yeah, that's right.

[00:16:45] And for a builder, it makes sense to them if they know you might want to do one a year or one every couple of years. You get the right builder who values relationship. And if you're someone who values relationship, when you build that – Which a lot do. Which a lot do. A lot do, yeah. Yeah. They love working with a client where they don't – they know how they work. They know how they think. Well, they know that lenders are used. They know when their drawdowns are coming to you, right?

[00:17:11] So if they know that you're using this lender and they know this lender's drawdowns take a week, they'll be very comfortable. So like they don't know, right, themselves. If they go to someone else, they might take three weeks or four weeks for a drawdown. Exactly. Because builder's cash flow is really important, right? So if you're part of the team, not only can they help at the start, but even the builder will feel more wanting to help you as well because he knows he's going to get paid. Yeah. And have you found from a lending point of view and just segueing a little bit – Yeah. Have you found that's a key thing for you? It is.

[00:17:38] If that's a good client of yours for you to get to know that builder – Yeah. – from a borrowing point of view just so you can build that trust and relationship. 100%. I like to know about the builder too, right? What financial position the builder's in as well, right? Because the last thing I'd want my client is to go to a builder that's not financially stable or not. So you can't always know, but a lot of times you'll know who they are or you'll find out or you can talk to them and get some information. But it's really important to know the builder. And also too, when we're picking a lender, we're going to make sure that some lenders might –

[00:18:06] you know they're a bit of a pain in the backside with the drawdowns and the QS and everything. And you know this builder might not like that, right? So you don't want to impact your clients. You might have to go to another lender that might be a tiny bit more expensive, but you know they'll get their drawdowns in a week or whatever, which might help that builder too. So you've sort of got to play that sort of role around because the last thing you don't want to do is upset a builder, not getting paid on time. Yeah. Even though it's not the client's fault, if we got experience with knowing that lender has that potential,

[00:18:33] we might have to switch lenders at the start and do that sort of thing. So those little things that people don't see do make the whole project better for everyone. Yeah. And obviously feasibility is so critical in this space where you are doing developments for this type of lending. What are some things that you're finding are satisfying lenders in terms of what you're seeing in a good feeso? Yep.

[00:19:00] And what are some things you're finding that are coming back with discrepancies and holes? You've probably already touched on some of it. But I think it's important because I think this is a really critical key area that I know I want to be an advocate to see this lift in the industry. Yeah. For people to get smarter, better at running their feasibilities and taking the time and giving it the due diligence it deserves to do it properly. Yeah. So are there things that are…

[00:19:29] Yeah, definitely. So there's two things that you do as well. So with the feasibility, you've got the equity side. And so you can do what's called a funding table for the lender. So what that is, is showing how much equity you're putting in and how much debt is needed at all the different spots. That's the first thing. So the bank can see that. It's okay. Well, this guy's putting in this much money. He needs this much. And that's a really good start to sort of see what sort of debt equity position the project's in. So that's sort of a bit on the side of the feasibility, but it does play a part with the lender in conjunction with the feasibility. Yeah.

[00:19:59] So – and then you go to the feasibility part of it. Look, the real – the key thing is having it packaged up for the lender in a way that it sort of – if they go to their DD, it's not going to look silly. So if you go in with a $1,000 square metre rate for a build contract or a really high thing, they're going to just look at you and go, no.

[00:20:21] If you go in there with a 70% margin on cost, now, thing for a development that's 20, 10 hours or somewhere, they know straight away it's sort of like not there. So it's really – it's hard. It's picking – making sure that if they go and do their checks, which they're going to, right, it stacks up close. Yeah. So that's why – while you're doing your checks, it sort of lines up. So there's no real magic formula except for if you've done your DD properly, the bank's going to do pretty much the same DD as what you've done. Yeah. Right? They've got their own contacts.

[00:20:51] They've got their own QS. Some of them have internal people that do DD on builders on the larger projects, right? They might – if on the larger projects, they might come and put a project manager in charge as well for the project. So realistically, it's just with the feasibility, make sure you get your GST right. Make sure you get your loan term right. Yeah. Make sure your interest and fees are calculated correctly. Yes. And then what we talked about before about really benchmarking your costs and your sales, right? Yeah.

[00:21:20] So – and then having a funding table to go with it so that way they can see the debt and equity sort of position of the project. Yeah. And then coming down to the margin, making sure that margin is realistic, make sure the internal rate of return is probably above sort of 19%, 20% because that – obviously, the length of time plays a big part on the internal rate of return. Can we just go back to that? Because I think – obviously, you and I know what that is.

[00:21:45] But can you just break down quickly for a listener what that is, the internal rate of return? Just break that down. Yeah. It's really just about – so basically, it's about your cash flow of the business, right? So basically, it's – so for example, if you can go to a bank and get 7% or a term deposit of 5%, okay, on this project, you're making 19% return on that project. So based on the length of time, the internal return is calculated on the length of time, right? Yes.

[00:22:13] So that's why it's not the exact same number as the margin on cost. Yes. So it's really no difference to you going to put shares in and getting 8% back. Yeah. Back, it's basically – so it's your internal rate of return based on your cash flow of the time of the development. So if you have a lot of cost up front, that internal rate of return is going to be not as good. If you've got a long term, then it's going to get lower. Yeah. So realistically, it's just your return on your investment but based on the length of time that happens.

[00:22:43] Is that – that's where a lot of developers can come unstuck, would you agree? That's right. That's right. On development costs. But if you go an extra year or six months, that internal rate of return is not going to be very profitable for you. Yeah, yeah. But they should be pretty close, you know. Yeah. But again, there's lots of other – it's just about the cash flow part of it. Yeah. And in terms of your feasibility that you do – Yep. You can look at both. Both of those. Both. And you can run the different scenarios.

[00:23:13] Yes, definitely. Definitely. Yeah. It's really important to know the internal rate of return because you want to know what return are you actually making? Not just a margin on your cost. But your money's tied up for X amount of time. Yeah. That's different than just making a profit on your costs. Yeah. Yeah. So that's an important measure to know, you know what, yes, this project is profitable. Yeah. Because my money's tied up for this much time. Yeah. And yes, it makes this much money. Yeah. Compared to what I could have just put that money in the bank. Yeah. Yeah.

[00:23:41] I bought some shares and made, you know, 8%, 9%. Yeah. And so when you're packaging up that feasibility for the lender. Yeah. Are they wanting to see that scenario? Yes. Well, they will always show them. Yeah. And they definitely do. They definitely do. They always do a back-calc. So the value always has a back-calc of the land value back to a sort of a 19% internal rate return on the land value. That's how they value the land based on a back-calculation of the project as well. Yeah. Yeah.

[00:24:11] So basically, yeah, definitely. They definitely want to see both. And I'll be saying, look, you'd be looking at probably around that 19% or 20% for internal rate return. Yeah. And at least 15% marginal cost minimum. Yeah. Yeah. So essentially when you're helping someone fund a development like this, that's part of your service. Of course. That you don't do all the running around for them. They've got to play. They've obviously got to do their homework. Yeah. You'll give them homework they need to do. But in terms of packaging up. Yeah.

[00:24:39] Once we're ready to go through, I'll give them my feasibilities, my sensitive analysis. And in every sort of scenario, you'll have an internal rate return, a marginal cost. All package stuff. Yeah. Easy. Yeah. Even nice graphs, Nat. Yeah. And they look good too. So, yeah. So, look, we're doing that definitely. Yeah. Depending on the size of the project, right? Depending if it's needed or not. Yeah. Yeah. But on the larger stuff like this one we're talking about now, definitely. On the smaller duplexes, I can do it depending on if it's needed or not. Yeah.

[00:25:08] Well, like you said, more and more people are now getting educated and coming with fairly good high-level feasibility. Yeah. Yeah. Yeah. Templates? Yeah. But, look, I think it's important for people to get smarter at this and get better at this. And we've never lived in a generation where there's probably more tools than ever. That's right. The amount of feasibility. Believe me, they market to me day in, day out all the different feasibility softwares. Yeah. Yeah. Some are Excel, some are online programs and different ones.

[00:25:38] So there are tools out there. There's plenty out there. It's, again, it's the DD that you do for the numbers that go in. To import. I know we've said it about five times, but I think it's really important to keep saying it. No, I agree. You're dead right. I mean, anyone can do numbers right. I can go and check your numbers now, but they mean nothing. Yeah, exactly. Yeah, exactly. So I think to really sum up today, I think do your homework. Don't shortcut it. Spend the time. Take the time.

[00:26:04] Which, for me, I'm a big advocate on getting sites off market for that reason because you're not rushed in the DD process. Or if you can, get a 30-day exclusive DD period. And show an expert who knows feasibility to help you. Yes. Just that's it. Not to help you, but just to run their eye over it too if they don't want to do any work on it. Yeah. It's just important that someone else looks at it and make sure they might pick something up that you've missed.

[00:26:34] Yep. Yep. Excellent. And look, I think we'll make sure we put your details in the show notes. I just think you're invaluable when it comes to doing these type of projects. So even if you're listening and you're looking to do a larger project, Dino is definitely experienced in that space, in the larger project space, both smaller as well. But obviously, today's episode, we've been talking a lot more around the feasibility. So look, I'm sure you've got a lot of value out of this episode today.

[00:27:02] And we've probably only just scratched the surface on how in-depth we could go into feasibility. But look, make sure you take the time to do your homework, spend the time. Is there anything, one last thing you want to say to any listeners who I guess have got value out of this episode around feasibility? Yeah. Feel free to reach out to myself and my team if they want any further information. We're more than happy to help anyone, any size project. Yeah.

[00:27:31] We are commercially accredited in all the majors for any loan size. Yeah. And as small as you can go. So we'll do $1 or $100 million. It doesn't really matter for us. Perfect. Again, about the relationship. So for me, it doesn't really matter what the loan size is or how big or small the project is. Great. Excellent. Well, look, make sure you like, share, subscribe, share this episode around if you've got heaps of value out of it. MoneyQuest's details and Dino's details will be in the show notes. So feel free to reach out to his team.

[00:28:00] Hope you enjoyed this episode. We'll see you next week.