How to tell if your project is feasible
So, you want to be a property developer to make some extra money? Everybody seems to be doing that – it’s the favourite topic of conversation at the dinner party table. You’ve heard stories of people making all this extra cash for seemingly little effort. You don’t want to be left behind so you race out on the weekend, scour the Saturday paper and the internet, talk to the real estate agents and you find what the agent says is a great development site, so you make an offer. Suddenly it dawns on you; you ask yourself “Is my project feasible?”
If this is you, you’ve already made several mistakes.[The following may also apply even if you already own the property.]
Firstly, don’t assume that feasible property development is easy or takes little effort.
Secondly you need to make a realistic assessment of your financial circumstances and capacity. It’s very likely that you will require some loan funds and therefore will need a willing lender.
You will therefore need to formulate a strategy based on your financial capability and capacity for risk. This is the crucial next step. If this involves others, e.g. your life partner, bring them on board early.
Once you have identified your capabilities and your strategy [it’s ok to have more than one] start looking at properties in locations that suit it and get to know the area very well.
Your property development strategy may be a renovation or a subdivision or perhaps some townhouses for example. If so, you need to have a good understanding of the likely values attributable to that completed subdivision, renovation or townhouse development. And you need to have a good idea of the costs associated with doing it, both a part of the ‘is it feasible’ equation.
What is ‘Feasibility?’
This is what a project being feasible is all about. It’s about making some money or increasing your equity in the property at the end of the day – i.e.Profit. Is there a financial gain for all the time, effort, risk and expense that it will involve? Is that gain / profit worth it? If the answer is “YES” then that project may be feasible for you, though it may not be for others.
You would be surprised how many people jump into things without properly considering this.
Whether or not it is feasible will depend to a certain extent on the profit margin. What is feasible for some may not be for others. To determine that you are going to need to run some numbers and to do that you will need to do some homework and burn some shoe leather.
What you should do to ensure or tell if your project is feasible.
Running the numbers – step by step:
In the preliminary stages, homework shouldn’t cost you too much cash – more a case of time talking to relevant people. In doing this you will be starting to build what could turn out to be an invaluable asset for your profitable future – a development team.
- Discuss your thoughts and ideas with your partner if you have one. I’ve seen many a plan fall apart over as a result of not doing this.
- Talk to a lender or better still, several lenders to determine your capabilities and their appetite for the sort of project you are contemplating. Also, ascertain their costs and outlays. Get to know the financing landscape more thoroughly.
- Find an accountant with experience in property to discuss the taxation implications of what you are contemplating and suitably structuring yourself. I.e family trusts, corporate entity etc. After all, isn’t what really matters is how much of the money you generate ends up in your pocket rather than the tax man’s? Don’t underestimate the importance of doing this.
- Visit the local Council[s] that cover the area[s] you are interested in. Ask to speak with a planner there or, better still, make an appointment rather than just talk to the person on the front desk who may only be a clerk. You want some general but specific information about zones; what’s allowable etc., such as minimum lot sizes and frontages for what you are proposing to do. Learn to use the Council’s online resources – in fact get a good handle on those before your appointment.
- Start getting a better idea of your other costs such as stamp duty & conveyancing. Talk to your solicitor about other likely costs relating to generating new titles or perhaps a body corporate depending on your proposals.
- Embark on your marketplace research – start talking to a variety of real estate agents and attend open inspections. Remember the agent is acting for the seller. Consider the services of an experienced buyer’s agent, preferably one with appropriate specialist knowledge.
- Start talking with other professionals in areas your proposal may require, e.g. Builder’s, Surveyors, Architects, Building Designers.
- If this is all a bit much you could speak with a competent ‘Project Manager’ who will handle much of the project side of things for you and probably offer some advice prior to committing on a particular site.
- Formulate a checklist or spreadsheet as you go, noting all the relevant cost centres of your project & also what you might be able to sell the finished product for [revenue] if that is your goal. After a while doing this some properties will stand out as being good or bad buys. Also consider as a holding proposition, where you will avoid costs of sale, marketing and taxation. Consider rent versus holding costs.
- When your spreadsheet throws up some positive numbers you will know that it is looking like it’s feasible. The size of those numbers will determine if it can be financed and if it’s worth doing. Get another opinion on your numbers [or facets of them] from more knowledgeable and experienced people such as a builder, trusted real estate agent, accountant, project manager etc.
- Finally, be aware that markets do change over time. Don’t assume that real estate prices always rise as they can also fall. The property market is cyclical. If you are going to heavily commit yourself to financing, consider that at the end of your project will be the time when your borrowing is highest and potentially most expensive. Therefore, you don’t want to be hanging on too long before generating some cash flow from sales or rents, potentially placing you into a forced sale situation. Include a contingency item in your feasibility calculations.
Follow all these steps and if the numbers are all looking good and positive it’s likely that your project is feasible