Our Blog

Brilliant Tips – Is there Profits in Your Property?

It’s time for stage three of property development and some bloody brilliant tips on financial feasibilities. That’s right, this is where we look at the numbers and start to get excited about the potential profits for our pockets. I have been working on this for the last month and its a pretty chunky section. To give it justice I have broken it up into a few sections which we will send through May and June.

In this email, I am going to show you how to do a quick profit calculation on a development site.

Feasibility is the measure of how possible something is – if it works, if it can be done – it is feasible. So when we talk about financial feasibility, we are talking about whether it is workable from a profit point of view.

Just about anyone can go buy a block of land and build a house on it – but can you make money doing it? That’s the trick to being a successful property developer as opposed to a failed or broke developer!

Making profit from property development is very achievable and the biggest key to making this happen is to crunch the numbers at the beginning before you commit to the project, in fact it is the feasibility that tells you whether or not to commit.

Quick Calculation
A good, detailed feasibility can take a few days to put together. And it usually takes dozens of feasibilities to find a good deal. You want to avoid wasting days or even hours on pointless feasibilities, and that is where the quick calculation comes in. Before you commit the time to doing a detailed feasibility on a project, do a quick calculation first to see if it’s worth going any further with research and number crunching.

A quick calculation can be done on the back of an envelope or napkin in a couple of minutes – in fact in the development industry its often called a “napkin feaso” or “envelope feaso”.

You need 5 figures for your quick calculation:

1.  End Retail Value – how much will you sell the built properties for?
You need to be conservative and realistic about the sales prices for the properties once built. Again don’t calculate based on what you would like to sell them for, you need to look at what the market is actually going to pay. Use evidence of actual sales of similar properties to help you calculate this figure. Ask real estate agents what they believe they could be sell for, and take 10% off their estimation – you always want to over estimate on costs and under estimate on income when doing a feasibility.

2.  Purchase Price – how much are you buying the property for?
You need to calculate a real purchase price, not just what you would like to pay for it. If the property is on the market for sale with a set purchase price this is easy. If it is going to auction, you wont have an exact figure – ask the agent what they expect it to go for and add 10% on top of that.

3.  Construction Costs – how much will it cost to build?
You will need to get an idea of a build quote for the whole project including landscaping, drive ways, finishes etc – you want a quote for a completed build border to border. At this stage it will be a bit of a guestimate and will not be as detailed as the build quote you would use for a detailed feasibility. A good way to get a figure for this is to contact 3 builders and ask for quick quotes and then use the average.

4.  Consultant Costs – what will it costs to plan & deliver the project?
Your consultants costs cover a lot of things, in the quick feaso we are pooling all these things into one category. Consultants would include your architects, draftsmen, engineers, certifiers, town planners – anyone you need to help you plan and manage the project through to completion.

5.  Interest Costs – how much money will it cost to borrow money?
If you have to borrow the money to develop your project then you will almost certainly have to pay interest for borrowing that money. This is often one of the biggest costs of developing. Work out how much you will need to borrow and then work out the interest rate. Make sure you calculate how long you will need to pay the interest for – interest over 12 months will cost you double the amount it would for just 6 months.

Deduct all the costs (item 2-5 above) from the total income (item 1 above) and you will have a profit figure.

You would only consider a development after doing an initial feasibility like this. Then you would go on to do some more research and a more detailed feasibility. I am going to tell you about one of CCORP’s students, Catherina who purchased a property after doing a feasibility and research and bagging herself a good deal as the area was rezoned shortly after she purchased – nice!

Case Study: Cathrina
Location: Waldara, VIC
Time: 2006 to present
Description: 16 acres of raw land subdivided into 14 x 1 acre lots
Profit:  $948,690 – $1,277,470

The story:
Cathrina and her husband purchased 16 acres of farm land zoned Rural Living with the intention of subdividing. Under the Rural Living zone they were able to subdivide into 5 acre lots. After doing their feasibility they purchased the land for $725,000.
At time of purchase they were aware that the area was under consideration for further rezoning. Some 18 months from date of purchase the area was rezoned from Rural Living to Low Density Residential. The approved rezoning imposed a 1 acre minimum lot size. Catherina had plans drawn up for a 14 x 1 acre lot subdivision.

Planning Permission: A planning permit for the development was granted on the 23rd November 2009. The property when purchased housed a number of old sheds, a piggery, fencing and the likes all which needed demolishing which Cathrina and her husband got involved in to get everything cleared.

Pre-sales: The property has recently gone to market and last month they got their first sale across the line. Carthrina requires 3 pre-sales before the bank will release funds for construction which will cost $606,287.

Financing: Cathrina and her husband have invested some of their own money into this deal, they have a third investor who has also put money into the deal and they got bank finance for the rest.

Consultants:
“My husband and I have been hands on through the whole project; however we have also relied heavily on our engineer/surveyor. He has prepared all the documents and plans for council. He has sourced all the contractors, put out for tenders and quotes on our behalf. This has saved us a lot of time and effort.

We sourced the expertise of a landscape architect who has designed our entrance feature to the estate, assisted in the correct choice of trees and plants relevant to the area and prepared all landscaping plans for council. She has also sourced all contractors and suppliers for the landscaping. When construction begins we will project manage the landscaping based on all the information she has provided. We will be guided by our engineer when the construction begins and hopefully we will manage this as much as possible ourselves.”

Difficulties:
Cathrina was fortunate enough not to experience too many difficulties during the process. She does say however that patience is a virtue as dealing with the council’s time frame can be frustrating as in her case, getting approvals and the time it took for the council to process things was a lot longer than expected.

Motivation:
“We drive past the site regularly and have regular meetings (formal and informal) with our surveyor/design team and the real estate agent etc.” Cathrina also loves getting on site as often as possible, getting down and dirty and really being a part of this development. Cathrina also said that discussing her project with other CCORP students helps her stay on track and keep motivated.

oOo
Profits
In development it’s not enough to just know the cash figure of profit, you also want to know the percentage of profit. You could do a project and make $200,000 and think that is brilliant. Who wouldn’t want 200k in profits?! But is it brilliant in comparison to the money and time invested? What if $200k represented a 6% return? You could make that same return if you put the money in the bank and put your feet up. In property development there is definitely a level of risk involved and for the level of risk you want to know there is a big potential upside – doing a feasibility is one of the most important stages in pursuing a development.

The profit percentage in development is often referred to as the MDC – Margin on Development Cost. This is calculated by dividing your profits by your development costs which will give you a percentage of profit and this percentage is known as your MDC.

Software
Caculatiing your MDC is so much easier when you have a good feaso software. When you start to do your detailed feasibility you will realize that there are a lot of expenses to calculate and keep a track of. If you are trying to do this with paper and pen it can be easy to forget something or wrongly record a figure or calculation.

A professional Feasibility software is the best way to go if you are serious about doing a development project. Developing property could help you make thousands, hundreds of thousands and potentially millions of dollars! Don’t muck around and cut corners when it comes to the important things and your feasibility is definitely one of the important things. Invest in a good software that you can rely on.
Next issue, I will be sharing with you part 2 of the feasibility stage where I will go into more detail on doing feasibilities and some other factors that need to be considered. For now, why not try doing brief research on a potential development site with the above information and decide if its worth looking into further.

Cheers
Carly