| |
| |
|
|
Real Estate |
|
Real Estate Feasibility Study (Cost Side) - $1.2 Billion Developer Tells You How To Do One
There are two sides to real estate development feasibility study: The Cost Side & The Income Side. I am going to concentrate in this article on The Cost Side. Having told you that a feasibility study is vital when applying for finance, it is however, just another cog in the wheel of the property development process. To help you come to grips with the term, feasibility study, it might help you if I call it a, Financial Analysis, of all the costs and income revenue that tell you if your development will produce a profit. Where To Start? When you are at the very beginning of preparing a feasibility study - I mean when you are just thinking about buying the land on which you propose to develop a building, your initial cost figures are liable to be a bit 'rubbery.' They're general - they are not exact and can't be exact, because all you know at the beginning is the 'asking price of the land.' Hopefully the land cost will be less than the asking price after you complete the buying negotiation. Can you see that there is going to be a difference in just that first item of the feasibility study - land cost? OK - if you accept that, you'll also accept that the associated land costs will also vary. Items like conveyance costs, legal charges, stamp duty, adjustment of utility charges and other costs. That should demonstrate to you that a feasibility study goes through several stages. The first stage uses figures that are the 'best' figures you have available at the time. The last stage is when all your cost figures are firm and final. But as you are only at the stage of deciding to buy the land or not, you figures are "general and loaded with safety" - in dollar terms. Let's be clear about what I mean here. For the land cost you would use the full asking price and all the associated costs, at full calculation for your initial entry in the feasibility study. Then if you negotiated a lower price you are safe. If you first feasibility study shows a satisfactory profit return for the risk of doing the development, you will proceed and gain legal control of the land. Well, to gain control, you must have concluded a negotiation on the land sale price - so you have now "firmed up" on one of the cost items. Hopefully it is lower than, or the same as the figure you allowed in the feasibility study. In the first feasibility study you will allowed a figure for the fees of the design consultants. People like the architect, the engineer and so on. Well now you have to engage them to create the initial design for you and again this is a negotiation that will either be within your feasibility study allowance or not. The next major item in your feasibility study will be the constructions cost. If your development comprises ten town homes, that are aimed at the luxury end of the owner occupier market, your market knowledge may tell you that you should allow $180,000 per to town home or $1.8 million to build all ten. Your design team will have to design well within those cost parameters and after the initial design is complete in preliminary format, you will need to get a few master builders to give you a price. If you are well within the $1.8 million, then you may decide to leave the $1.8 million figure in your feasibility study. This would be smart if the buider's figure was say, $1.7 million. The extra $100,000 acts as a safety buffer as you are only pricing off non-detailed preliminary design plans. Now. let's say it's your intention to sell all these town homes at a profit, so you have allowed some marketing costs to cover sales commissions, brochure printing etc. in your feasibility study. At this stage the biggest figure is the sales commission and so you have been out talking to agents and so you have a good idea that your figures are OK. At this stage we have wrapped up all of the "major" costs except the finance costs or interest on you borrowed development finance. By now, hopefully you will have bought my e-book, and know how to go about seeking development finance the correct way and not the dumb way. So you will not only know the best interest rate, but more importantly, have the correct type of loan and on the correct "terms" - you know the small print stuff. At this stage everyone I teach wants to buy a software program so that they can get all the calculations done "easy like." Well I have a problem with that - I know, and believe, that for you to get to know your development intimately, you have to go to the trouble of doing the feasibility study figures manually - it is only adding, subtracting and multiplying some figures. It is not difficult and the benefit is that you get to "know" the importance and interplay of each figure on the end result, being profitability. So a simple spread sheet broken up into months on an XL is all you need. In month one you buy the land for $286,500 and associated costs of say, $21,700 so you enter a figure of $310 ($308,200 rounded up to $310,000 - you have added a bit of safety in this one item) Note: never use the full figure allways round up and take off the last three zeros - so $310,000 becomes $310l; $3,500 becomed $3.5 and $800 becomes $8. This makes it easier to read and creates less mistakes. You then spread the design costs across the page to reflect the negotiated deal you did with the designers. Then the construction costs - marketing costs and so on. You can divide these individual costs up into a many smaller items as you wish. But the real thing you are doing is setting out your best estimate of the flow of cash that is required from the Lender and also from your own equity funds - the Cost Cash Flow. Once you have these figures spread across the page you add then vertically for a total monthly figure - and also horizontally for each item total. Hopefully the big development cost total in the bottom right hand box is equal to the vertical and horizontal totals. It is - great; go to the top of the class. Earlier I mentioned that you will have concluded the terms of your development loan. Well, let's say that the Lender has agreed to lend you 80% of your costs. This means you have to provide 20% from your own capital resources. Having got the monthly totals you can now calculate 80% of each figure, because this is the amount on which you will pay interest. It is these figures that you now calculate interest on each monthly cash flow and arrive at a total cost of the finance for your development. You now add the total interest figure to the Cost Total and arrive at what we call the Total Capital Cost of your development. There are a total of about 44 item headings that make up the Cost Side of a Feasibility Study. Author & $1.2 Billion Developer, Colm Dillon, Has Written The Best Selling 'How-To' E-book, "Residential Development Made Easy," With Readers In All States Of The USA, Canada, Australia, New Zealand, UK, Ireland and 79 Other Countries Of His Independent Web Site, http://www.realestatedevelopmentcoach.com/ez
MORE RESOURCES:
Real-Estate - Google News |
|
|
|
RELATED ARTICLES
Real Estate Investments Real estate investments come through a variety of different options. However, whether it is a vacation property, a first home, an early retirement house, or a rental property that you find appealing, real estate investments are all the rage, and are quickly becoming one of the safest investments available, especially in our less-than-perfect economy. For Sale By Owner - Use This Tip To Sell Your Home Quicker and At a Better Price Your house is for sale by owner (fsbo), Along with columns of countless other FSBO's in the Sunday paper. This one little trick will enable you to have your Ad Noticed by more potential buyers. 5 Hot Tips for Successful Real Estate Investment The last downturn of the global stock market saw millions of 'every day' investors having their fingers badly burned. Overnight life savings were eaten away, retirement funds went into decline and the economic forecast for all of us who had any money invested in stocks and shares was gloomy to say the very least. How to Make the Real Estate Market Work For You and Get The Most Money How to make the Real Estate market work for you and get the most money. Dad always said that Real estate is a good investment because they don't make it anymore. Investing in Residential Real Estate: Achieving Positive Cash Flow When investing in real estate, it is highly desirable to achieve positive cash flow on a month-to-month basis. This is true even if you are counting on property value appreciation to supply the bulk of your desired return on investment. Should you Sell your Home yourself? Should you sell your home yourself? Yes and no. Yes, you should leave the option of selling on your own open and no, you shouldn't rule out using the services of an agent to help you sell. Relocation Humor: Why I Bought A House The Rental Experience in South FloridaReaders: This is based on a true experience -- only slightly exaggerated -- part of my life of adventure.If I had read my own book, Making the Big Move, and followed my own advice, none of this would have happened! A word to the wise . Refinancing Your Home Loan? When Should You Refinance Your Home? If you have a current mortgage and are unhappy with the interest rate or the amount of the monthly payments, it is possible to refinance your home and eliminate your problems. But before you call your lender, there are some questions that you should ask yourself in order to determine whether or not it's the right time for refinancing your mortgage loan. Home Appraisal Values Are Critical To most, owning a home is a necessity, but sometimes it is a matter of pride or a business investment. Home appraisal values become relevant if one wishes to sell his house. Invest In Real Estate - But Where? Where should you invest in real estate? If you know an area well, and have enough experience investing in real estate, you can make money almost anywhere. However, there are always places that are better or worse for real estate investments - places that have a better demand/supply ratio. Is 100% Annual Return On Investments Possible With Low Risk Land Investments? In last week's article, we discussed how substantial profits could be made by investing where baby boomers may want to relocate or buy a second home. This seemed to confuse readers since they were thinking that our web site is about preconstruction and preconstruction to them means buying condos?? In this article, I hope to broaden your horizons considerably. Property Investing Secrets 6 Property Investing Secrets:What No One Ever Tells You-How Real Estate Agents Size Up BuyersHere is the most important rule you must know about property investing: present yourself with confidence to the real estate agent. If you're property investing and trying to buy your first property and you have never really dealt with a real estate agent, you're probably not going to get a bargain. New or Old House? A lot of buyers think that a new house is the way to go but it's important to have some knowledge of quality and of the builder. New paint, carpet, doors, windows and cabinets are a quick and easy sell. Selling Your Home on Your Own - Examples of Problems and Solutions What can go wrong? About a gazillion things, but this is true if you're working with a broker, too. A broker is probably more experienced than you, and may well have confronted and solved your problem on a previous home sale. Curb Appeal First impressions do make a difference when selling your home. Oftentimes, before making the phone call to schedule an appointment, a homebuyer will drive by your home to determine if they may be further interested. Real Estate Investing: Infomercial and Mentoring Scams Flipping through late-night infomercials recently, I saw two real estate get-rich quick schemes, and I couldn't help but wonder why people still fall for those old scams? Has anyone really talked a seller out of his home for no money down with owner financing lately?Real estate infomercials do great harm to beginning investors, who waste hundreds of dollars on old information. Worse yet, those beginners soon get discouraged and miss out on the true (and profitable) adventure of real estate investing. Find the Right Apartment Quickly and Easily Using an Apartment Locator Service You've probably seen the ads or heard about apartment locators. But what do they really do and why should you choose an apartment locator to help you find an apartment area?One of the biggest reasons to use an apartment locator is the fact that there are hundreds of apartments to choose from. 3 Strategies For Buying Property With No Money Down Everyone has heard a story or read about someone who bought a property without paying a single dime as a down payment. But how does this work?There are several "classic" methods commonly used to purchase real estate with no money down. Home Staging Strategies Who are you preparing your home to sell to?You, as a home seller, have two initial choices.1. Internet Battleground for Future of Residential Real Estate Real estate agents are gearing up to face the biggest shift in their industry since it's beginning. No longer the first in the path of homebuyers and sellers, agents have gone from top feeders to the bottom feeders with real estate consumers in just a few years.
|
|||||||||||||||
