Property investors are always on the lookout for the next lucrative opportunity, and they are always looking for new ways to discover those hidden gems in the real estate market with the highest ROI potential. Sometimes, this means that you’re shopping for existing properties that you’re planning to spruce up and sell for a profit or lease to long-term tenants to generate rental income, but whatever it is that you have planned, all of that is part of property development.
Perhaps you have found a promising piece of land in an up-and-coming neighborhood or an existing investment property that needs to be renovated to gain its true market value and attract affluent buyers. That’s all great, but before you dive into the development project, you need to assess whether or not your idea is truly feasible. With that in mind, let’s go over the important steps that will allow you to create a solid plan, predict the revenue potential, and minimize expenses along the way.
Calculate post-sale gross revenue
First and foremost, you have to have a clear idea of the gross revenue potential of your investment property within the current socio-economic state of the real estate market, as well as in the event that the market undergoes a shift from the moment you start the project to the moment it hits the online listings. This will tell you right off the bat whether or not it’s worth your while to commit to such a financially-exhaustive project in this market, or if you should look for other lucrative opportunities in the neighboring markets.
Be sure to leverage industry and local real estate market data as well as your analytics tools to find out the going price of similar or identical properties in your area, how much they’re selling for (if they’re selling at all), and whether or not the cost of the development is worth the projected return in the long run. Talk to local contractors and real estate agents, and ask around with other developers to learn about their experiences with these types of projects.
Assess the cost of the project
The goal is to sell your investment property for more than it cost you to develop it, obviously, so the next crucial step is to assess the cost of the project in detail. We will touch upon the extraneous expenses such as the contingency fund later on, but for now, let’s focus on the essential costs of your real estate development project. To asses the realistic ROI of your project, you will need to compile a list of all the expenses pertaining to the development of the investment property.
These include the cost of the land where you plan to build, the costs of the construction materials, the contractor fee as well as the costs of architects and designers, and other charges that directly affect the feasibility of the project. Now subtract the project costs from your projected gross revenue and you will have obtained your gross income.
Consult with your property development team
Most importantly, you have to keep in mind that property procurement and development is not a one-person job. Rather, this is a complex and lengthy project that requires the input of numerous industry professionals, all of whom will contribute to research and analysis to ultimately determine if your proposed project is feasible.
Feasibility assessment is one of the key focuses of every experienced property investment company nowadays as well, as property investors need to work with actionable data generated by the people who know the industry inside and out, as well as the local housing market and its trends. By working with an experienced team, you can obtain detailed feasibility studies to eliminate all doubt and plan a straight path for your entire project.
Build an emergency fund
There is no telling what might happen during the development process, or what might cause the project to stall. Typically, though, there will be nothing that an influx of cash wouldn’t be able to fix, which is why it is imperative that you allocate financial resources towards a contingency fund.
If you allow your project to stall, you are not only losing money, but you are also letting your window of opportunity to slowly close, allowing affluent buyers or tenants to seek out more promising properties. With that in mind, be sure to set aside 10% of the construction costs to safeguard the project against unexpected circumstances.
Funding options for property development
Finally, be sure to analyze all available funding options to discover the one that will allow you to stay in control of the project but also provide sufficient working capital to see the project to its completion. You will need to find specialized lenders that deal in auction finance or bridging finance options, but you can also take out a commercial mortgage if you own other investment properties and would like to combine multiple properties into a single mortgage.
While you might think that you have found the ideal property or the ideal plot of land for ground-up development, be sure to refrain from making any concrete decisions before you’ve assessed the true feasibility of your project. Use these tips to figure out if this is the real estate opportunity of a lifetime, or if you should move on to a different, more promising opportunity.
This article has been contributed by Tracey Clayton.
