Betting the farm

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I was talking to a financier friend last night and inevitably the name Jim Raptis came up. HE is a major developer on the gold coast and his company is in financial trouble exacerbated by the current financial drama world wide.

My friend, who has worked with developers for many years, said basically all developers went broke at least once because they continually “bet the farm” on their next development.

They would take all the profit from a project and invest it all in the next one using the same leverage.

Make 200K, use that as a deposit on a 2 million dollar project.
Make 1 million on that and put that into a ten million dollar project.
Make 5 million on that and buy a 50 million dollar project etc.

Can you spot the fatal mistake with this system?

Well I think there are 2. Firstly and most seriously they are staying 90% geared. As the projects get bigger they are still only allowing themselves a 10% buffer for error. As the projects get bigger there are more and more opportunities for things to go wrong and eventually a big enough project can sink them.

The second thing they are doing wrong is not taking a % of their profits and safely investing it, either in keeping their own stock OR investing it somewhere else.

So “nearly all” developers go bust because of this, so I’m told.
How could it be fixed?? Well that’s why I mention all this because it could be fixed so easily.

All they need to basically remove this risk completely is……….

Investing rules!!

If they said that 25% of every projects profits was to be invested outside of property development that would solve it.
If they said that 5% of everything they built they would sell to a family trust and keep that would solve it.
If they said that from

0 to 2 million max gearing 90%
2 to 10 million max gearing 80%
10 to 100 million max gearing 75%
that would solve it.

The power of rules never ceases to amaze me!!

There is a company here on the Coast called Meriton and the owner of that company went bust many years ago and decided that he would never ever be beholden to a bank again. So he set some rules for himself. Today he is worth billions, is the largest developer of apartments in Australia and is so profitable that he builds entire high rises with hundreds of apartments and keeps them as rentals. Imagine being able to build a 300 or 500 million dollar building and keeping it, (with say 300 units returning $500 a week each!!). The power of investing rules

So how are you going sticking to your rules so that you can….

Stay Safe ~ (Dean Letfus @ www.MassiveAction.co.nz)