Risks vs Rewards.
Risks vs Rewards.
Throughout the development of your property career, you will find yourself asking yourself questions like… what does a good deal look like and why can I get finance for this deal but I cant get finance for that deal? This all comes back to this thing called risk vs reward.
If you really understand this concept of risk vs reward, then you will be able to make some good decisions.
The first thing that you really need to aware of is that the majority of banks, financiers and finance partners consider a development as financially viable if it is 17.5% or more ROI. This is a very important figure that you need to know about. At my property business, we do not work on anything less than a 30% ROI because of the amount of risks that are involved as you go through your deal. But it is subjective. What a good deal looks like to you. might not be what a good deal looks like to me.
Something also to consider is what a good deal looks like to you, might not be viewed as a good deal from your finance partner. So, it is important that you understand the mechanics to whether or not a deal is worth pursuing.
So, there are three main risks areas when it comes to any kind of development. The first risk area is planning. The second risk area Is development and the third and final risk area is exit. These are the big three things that you need to be thinking about.
Very often banks, challenger banks and finance partners might not want to get involved within a development until you have secured planning permission, and this is because planning is perceived as a substantial risk.
The development risk is all about the risk involved whilst you are building and developing the property. This is where your due diligence, your professionalism, and your understanding of the builders that you are working with comes into play.
This is one of the biggest elements. Finance people such as banks, individual partners and equity partners all want to know how they will get their money back. Therefore, a secure exit strategy is incredibly important to the viability and limiting your risk.
The higher the risk, the higher the reward needs to be. So, if you look at your deal and you think that it is really straight forward. there is no planning involved, the development is really easy, and you have already got a buyer who want to purchase it once it is finished. Then you have a very risk limited profile meaning that the ROI of the deal can be reduced.
Where as if you are looking at a larger development that will require you to go through planning, new build aspects and when it comes to exit you will have 30 flats that you will need to sell of plan. Then that starts to become more higher risk. However, with this higher risk, you will be looking for a bigger reward.
Ultimately you need to be asking yourself, would I invest in this deal?
This risk vs reward element is something that you will find as you progress throughout your property career. You want to be in a world where you are getting great profits whilst delivering great value to the wider economy. So, make sure that you are thinking about these three main risk areas when it comes to you and your property deal.