I have been asked in the Housing thread to give an example of Number use in property.
There are 3 very important components in ALL business whether that business be Property/Trading or general business. To some this maybe old ground but to many I'm sure will be new and exciting when applied.
Here I will present the basics.
Regardless of what "A Business does" there are only 3 ways to grow it.
(1) Decrease costs of doing business (efficiency,buy better,reduce overhead)
(2) Increase margin (profit).
(3) Do or sell more. (increase turn over).
All of the above produce a set of NUMBERS and its these numbers with which we must work closely with if we are to grow financially. EVEN if you dont have a business YOUR Business is YOU and your finances.
Bad Numbers mean that your business is failing or the Business venture your about to enter into is likely to fail.
Good numbers are the exact opposite. We should all be working on the 3 basics throughout or Business life and even in retirement.
As I have been asked to present a specific example related to Property I will give 2. One for those who dont Develop but are either investing or thinking of investing in Property and one as an example of looking at a small developement. I will only go into BASIC detail.
Purchasing an IP (investment property).
Basic numbers ONLY (you should add in Tax benifit from the interest component AND depreciation,this does have a large impact---bring this up with a good accountant when your serious. Ofcourse there are establishment costs and yearly costs)
Always start from the top and work BACKWARDS.
Cost of Property (Lets say) $400,000
Possible return (lets say) $18,200/year
Cost of "Money" (finance,lets say 8% interest only) $32,000.
In this case you are NEGATIVELY geared seriously so.Any increase in interest would be very stressful to most.
(1) Buy better (Lets say you steal it due to whatever) $370,000
(2) Higher Rent (Lack of rentals highest bidder ) $20,000/year.
(3) You supply 35% deposit $ $130,000 cost of $260,000 at 8% = $20,800
These are almost positively geared numbers (include tax benifits and depreciation and they will be positive.)
These figures are indicative of todays possible investments here in Adelaide,6-9 years ago they looked VERY different. The worm will turn on THIS TYPE of investment but not for Many years!
What about NOW?
As a developer and investor (I was in that 6-8 yr bracket),The NUMBERS for the above investment are NOT attractive,so I look for other opportunities.
Here is the latest BASIC numbers,I'm working with a syndicate (3 of us all business owners,2 general and one solicitor (A handy member)).
24 acres industrial land (There is a shortage all SMALL acre blocks sell off subdivisional plan). The NUMBERS
Subdivisional developement costs Turns this to 21 acre lots once roads and cualdersac is implemented.$1.8 mill
TOTAL cost $4,800,000 to 5,400,000.
Return on sale 21 X $500,000 (2 sold at this price 2 mths ago).= $10,500,000.
40% to be sold off plan BEFORE developement.
I know to most these are rediculous Numbers but the point is you can do the exact same with much smaller developements---the NUMBERS MUST add up.
If they dont the investment is NOT a good investment.
Do you consistently have positive expectancy for your Business---what are your NUMBERS. (I have written much here as have others on Positive expectancy,if interested search it).
How can you GROW your business?
The 80/20 rule.
You'll find in all your endeavours that you'll invest 80% of your time in pursuits which return 20%.
By recognising the 80% of your return which comes from 20% of your effort you can and should isolate your VALUABLE time into these areas and drop those which WASTE the 80% of time.
Most in trading spend 80% of their time ANALYSING and only 20% (if that) on the important NUMBERS which make 80% of the profit!!
No different for any business or any property deal.
dont waste your time trying to make something work that will only generate 20% return.
Why spend 20 yrs being the most articulate Elliott Wave Practitioner (As an example and not pointed at anyone),when this time may well only increase return by 20% in the whole scheme of BUSINESS.
When you live by the above one day the LIGHT gets well and truely turned on --- to most this may well be embroiled in arguement which will take up 80% of their effort---I think you see the point!