Welcome to Property Development System, Financial Feasibility. Guys, just before I forget, if you like the channel make sure that you click on the subscribe button, and don’t forget to share if you would like to share this video with your friends and family. Let’s get into the video straight away. We’ve got financial feasibility. Before I actually go ahead and explain you what exactly is involved in financial feasibility or I show you an application that I use for financial feasibility, for connecting financial feasibility on property developing projects, let me first explain you a concept.
It’s a very important concept and it’s the underline basis of all property development feasibility studies. Make sure you watch this next video carefully and don’t forget to leave your comments, I’ll read all of them. If you got any queries or anything, leave your queries in the comments and I’ll try and answer them. Let’s watch the video.
Let’s look at this table. What I’m trying to explain you in this table is the fact that if you look carefully, if you look at GRV, you’ll see that it’s 500,000 constant all through out. Don’t look at the land value, look at construction, it’s all constant all through out, doesn’t matter where you’re building. Look at consultants, it’s all constant all through out. If you look at council contribution, in this scenario for example it’s a townhouse development and it’s a full townhouse development for example, and so I put in 4% on land value. In Victoria usually as a thumb rule for council contribution, if you’re putting full townhouses on a block of land, council contribution are approximately 4% of the land value. That’s what I put in over there. See how that changes with respect to the land value.
If you look at marketing, that also stays constant, why? Because the GRV, which is the Gross Realization Value, what this means in layman’s terms is the sale price of the unit that you’re developing. Gross Realization Value is another term for the sale price. If you go down you’ve noticed that everything else stays constant. It does not matter where you’re developing this, but the constant construction, and the total development cost will more or less come to be the same. Everything in the middle from this section down here is actually going to remain constant. What’s going to change is your land value right here. You say, “Why wouldn’t the GRV or the sale price change?” We’re talking about one suburb, and we’re talking about 3-bedroom townhouse, and if the market says that 3-bedroom townhouse in XYZ suburb can only sale for 500,000 dollars, the market doesn’t allow you to sell it for more than that.
However if you go and buy the block of land, and you pay more for the value of the land, see what happens at the bottom. If you’ve got 500,000 and you paid 120,000 for the land, you paid 260,000 for construction, 5,000 for consultants, and then you pay 4,800 for council, you paid GST let’s say 10,000, you paid marketing, 2.5%, miscellaneous and so on. Your total development cost was 432,300 and your total profit was 67,500. Your development margin was 15.66% which is not bad. However, everything being constant, the more you pay for the land, the less your development margin is going to be because there’s no way you can actually … Just because you’ve paid 10,000 dollars more for land, that doesn’t mean you can sell your end product at 10,000 dollars above the market. The market doesn’t allow that, that’s going to be constant. Every time that happens, you lose 2.72% of your profit. As you go on, if you pay 20,000 dollars above the market, you’ve actually lost 5.31% of your development margin and so on and so on.
As you see that if you pay too much for the land, say for example 180,000 you’ve started going into negative here. There’s no viability left in the project at all. Basically a 10,000 increase in land value will cause an average reduction of 2.33%. If you look at the same example from a different angle, let’s look at this portion here, you’ve got GRV at 500,000, but if you pay more for the land, let’s say over here we pay 120,000 but over here I pay 130,000, I’ve got to sell my townhouse, or apartment, or unit at 512,385 to be able to still make the same amount of development margin. Every time I pay more for land, I’ve got to sell it at least at that price.
What this table is telling you is that everything else remains constant. If all is the same and remains constant, anytime you pay more for land, you got to be able to recover that in the end value. If you can’t recover that, what’s going to happen is you’re going to start losing that much from your development margin. Basically your profit will start evaporating every time you start paying more for land. This is a very important concept. Honestly, I actually paid 35,000 dollars just to understand this concept. Lot of people know it, all the different valuers live by it, but a lot of people charge a lot of money to understand this. Today this concept is free for you.
Thanks for watching the video. All links are actually in the description, if you would like to download a free resource, which is the free property blueprint, you can do so from my website by clicking on Free Blueprint, and you should be able to download everything. Make sure you check out propertydevelopmentsystem.com.au and also the links in the description below. I’ll see you next time.
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