Let's get real here - most property development projects don't happen overnight. If you're going through the permit stage and building dwellings at the end, then you can be talking at least a couple of years before you see any profit from the project.
And many of us have pesky little humans in our home who like to get fed. Bills to pay. Financial responsibilities. Which is why it's logical to ask the question - should I pay myself a project management fee monthly throughout the project?
That's a question that results in me giving my favourite (and most frustrating!) response - it depends.
Let me start breaking that down by repeating something I always say when it comes to the journey of becoming a full-time property developer - don't give up your day job. At least, not at the beginning.
There's nothing wrong with having the goal of resigning to become a developer - but that's not the same thing as doing it on day one.
I've covered this in detail in other articles, but essentially you should always start out with property development being a side hustle. Now, maybe you can work 4 days a week instead of 5 to fit in doing what you need to do for your first project, but if you're efficient with your time you can still do it whilst working full-time. It might even be that you choose your first project type specifically because it won't require much of your time.
Once you've completed one project successfully, tuck some of that profit away as a nest egg. Then do another project, just to prove the first one wasn't a fluke.
By now, moving to part-time hours is something to consider, particularly if you're ready to handle more than one project at a time.
When you have enough funds tucked away to pay yourself a wage for the duration of another project, plus more, that's when you're ready to give up your day job altogether. Hooray!
But wait! I can hear you thinking. If the goal is to pay myself a wage, why not just do that by paying myself a property management fee from the project? That way I don't need to keep my job.
Good question. So let's take a look at the reasons why you need to receive a wage each month. I've already covered the obvious one, which is we all need money to live on.
The other major reason is for serviceability. At some point, particularly with smaller projects, lenders like to know there's money coming in the door. And no, it's not because they're closet philanthropists who care about your wellbeing! They just want to know that if things go a bit pear-shaped, there's income available to make loan payments.
While paying yourself a fee does help with the serviceability angle, it creates a couple of problems. First up, the money to pay that fee is essentially coming out of the future profit of the project. In other words, when you get to the end of the project, instead of receiving $X in profit, you'll receive ($X-PM fees) in profit.
This can have major negative consequences to your project feasibility. The extra expense of your fees along the way may be enough to drop your project returns below what a lender will consider safe. If your ROI drops from 20% to 12%, for example, a lot of lenders will say no, too risky.
Anything that reduces your bottom line will make lenders nervous - and that includes potential investors, too.
Another issue is that if projects are paying your wage, every time you finish a project you technically "lose" your job. Essentially, it looks like you're job hopping regularly, which doesn't give lenders confidence about your stability.
There's also another angle to consider if you're using investor funds as well as your main lender. By pulling profit forward to pay yourself a wage along the way, you are pulling that money from borrowed funds. So you're effectively discounting the funds you receive by the interest rate you're paying - and investor rates can be substantial. If you take all your profit at the end, that won't be the case.
Now, let me be clear here - I never say never. There are times when paying yourself a project management fee might make sense or simply be necessary.
But as a general rule of thumb, I'd much rather see you keep a job initially, build up your nest egg in a bucket entity of some kind, and then pay a wage from that bucket entity when there's enough saved up for you to leave your job. This also has the advantage of showing a steady wage from one source over an extended period - great for serviceability.
As a sideline on this very sensible and logical approach, I've heard some property gurus suggest you should jump straight into the deep end and the pressure of making ends meet will force you to take action that leads to success.
Personally, I can't think of anything worse. Property developing is already a high stakes, high stress game for many people - why on earth would you add panicking about how to pay for food this week to the mix? Far better to be making calm, rational decisions from a place of peace, than adding the pressure of making ends meet.
Being sensible isn't sexy, I get that. But I'd rather see you reach a point down the track where you have financial reserves and projects on the go, so that leaving your job to become a full-time property developer is a no-brainer.
Why make life harder than it has to be? Paying yourself a project management fee is an option, sure, but think long and hard about whether it's really the right decision for you before taking that step.
And many of us have pesky little humans in our home who like to get fed. Bills to pay. Financial responsibilities. Which is why it's logical to ask the question - should I pay myself a project management fee monthly throughout the project?
That's a question that results in me giving my favourite (and most frustrating!) response - it depends.
Let me start breaking that down by repeating something I always say when it comes to the journey of becoming a full-time property developer - don't give up your day job. At least, not at the beginning.
There's nothing wrong with having the goal of resigning to become a developer - but that's not the same thing as doing it on day one.
I've covered this in detail in other articles, but essentially you should always start out with property development being a side hustle. Now, maybe you can work 4 days a week instead of 5 to fit in doing what you need to do for your first project, but if you're efficient with your time you can still do it whilst working full-time. It might even be that you choose your first project type specifically because it won't require much of your time.
Once you've completed one project successfully, tuck some of that profit away as a nest egg. Then do another project, just to prove the first one wasn't a fluke.
By now, moving to part-time hours is something to consider, particularly if you're ready to handle more than one project at a time.
When you have enough funds tucked away to pay yourself a wage for the duration of another project, plus more, that's when you're ready to give up your day job altogether. Hooray!But wait! I can hear you thinking. If the goal is to pay myself a wage, why not just do that by paying myself a property management fee from the project? That way I don't need to keep my job.
Good question. So let's take a look at the reasons why you need to receive a wage each month. I've already covered the obvious one, which is we all need money to live on.
The other major reason is for serviceability. At some point, particularly with smaller projects, lenders like to know there's money coming in the door. And no, it's not because they're closet philanthropists who care about your wellbeing! They just want to know that if things go a bit pear-shaped, there's income available to make loan payments.
While paying yourself a fee does help with the serviceability angle, it creates a couple of problems. First up, the money to pay that fee is essentially coming out of the future profit of the project. In other words, when you get to the end of the project, instead of receiving $X in profit, you'll receive ($X-PM fees) in profit.
This can have major negative consequences to your project feasibility. The extra expense of your fees along the way may be enough to drop your project returns below what a lender will consider safe. If your ROI drops from 20% to 12%, for example, a lot of lenders will say no, too risky.
Anything that reduces your bottom line will make lenders nervous - and that includes potential investors, too.Another issue is that if projects are paying your wage, every time you finish a project you technically "lose" your job. Essentially, it looks like you're job hopping regularly, which doesn't give lenders confidence about your stability.
There's also another angle to consider if you're using investor funds as well as your main lender. By pulling profit forward to pay yourself a wage along the way, you are pulling that money from borrowed funds. So you're effectively discounting the funds you receive by the interest rate you're paying - and investor rates can be substantial. If you take all your profit at the end, that won't be the case.
Now, let me be clear here - I never say never. There are times when paying yourself a project management fee might make sense or simply be necessary.
But as a general rule of thumb, I'd much rather see you keep a job initially, build up your nest egg in a bucket entity of some kind, and then pay a wage from that bucket entity when there's enough saved up for you to leave your job. This also has the advantage of showing a steady wage from one source over an extended period - great for serviceability.
As a sideline on this very sensible and logical approach, I've heard some property gurus suggest you should jump straight into the deep end and the pressure of making ends meet will force you to take action that leads to success.
Personally, I can't think of anything worse. Property developing is already a high stakes, high stress game for many people - why on earth would you add panicking about how to pay for food this week to the mix? Far better to be making calm, rational decisions from a place of peace, than adding the pressure of making ends meet.
Being sensible isn't sexy, I get that. But I'd rather see you reach a point down the track where you have financial reserves and projects on the go, so that leaving your job to become a full-time property developer is a no-brainer.
Why make life harder than it has to be? Paying yourself a project management fee is an option, sure, but think long and hard about whether it's really the right decision for you before taking that step.
