How to conduct preliminary development feasibility assessment in under one minute?
Best tool to conduct preliminary development feasibility assessment
One Minute Feaso is a One Minute Feasibility Application. It is undoubtedly the best tool to conduct Preliminary Development Feasibility Assessment. It is one of the most used tools that I use in my arsenal. The reason I created it is to quickly and easily vet development projects and potential development projects and figure out exactly :-
1)What should you be paying for the land?
2)What are the costs involved?
3)Whether or not a project has any money in it, in other words, it helps you calculate residual value of land.
One Minute Feasibility allows you to run a preliminary development feasibility assessment quickly and easily on a myriad of development projects from townhouses, townhomes, apartments etc. quickly and easily without becoming a nerd in the process.
One Minute Feasibility Overview
So let's get into it. It's super, super easy to use. And I'll just quickly go through everything that its got here:-
1) One of the first steps is to go through is the Setup.
2) Then we work out what the Acquisition Costs are going to be: Acquisition costs are the different cost that we look at and we allocate a percentage to all those costs.
3) We figure out what will the Construction Estimate be : This is going to be super easy to do when using the One Minute Feasibility. There are 2 different ways to work out construction estimates and I'll explain everything in detail below.
4) Next we estimate the Sale Values: When you are developing a townhouse, unit etc, you would want to know what will you be able to sell it for?
5) One of the most important is the different Cost Heads, we will go through in detail later.
6) Time and there are 2 aspects to time , I'll explain that as we move forward.
7) Then we have Targeted Development Margin which is the amount of money that we want to make and based on the amount of money that you want to make, you would decide what you would want to pay for the land.
What does that mean? What it means is that if you want to take that X amount of risk, and you're going to borrow money to do the development, In doing so there is a certain amount of return that you want on all your costs. That is what a Targeted Development Margin is.
Now just imagine if you put that amount in the One Minute Feasibility Application based on your cost this tool calculates the figure(amount) that you should be paying for land, which is fantastic!!.
8) Then finally we get into another aspect where I show you all the different Metrics that you'll get back after you've done the feasibility.
8) And then we will deep dive into Capital Raising and what money you need to raise when you work with Investors?
You would want to figure out how much money do I need to raise and what sort of return you can offer to your clients? All that is coming up.
9) Finally a look at What is Sensitivity Analysis? How to do a Sensitivity Analysis easily using One Minute Feasibility? and how it helps you keep an eye on different scenarios anytime you are doing a development? .
Below is the One Minute Feasibility Application Overview . We will continue our discussion on How to SetUp Your Project Feasibility When Using the One Minute Feasibility next.
One Minute Feaso
Run Numbers On Potential Development Project In Under One Minute
Without becoming a geek in the process...
How to setup your project for preliminary development feasibility assessment?
SetUp In Lead Developer Suite > One Minute Feaso
In order to Setup the One Minute Feaso, what we need is the:-
1) Address of the property that we are going to run the numbers on .You would first need to type in you project name and address .When you type the address details and select Google map it comes up with the address.
2) Tax for example, GST, VAT or In case it is not applicable, then you select NA and X% Rate of tax in case its applicable.For Tax code you select whether your project has GST or VAT or whether it's applicable at all for example, in Australia GST is about 10 % similarly in New Zealand I think it is about 15 %. So if you are from New Zealand, you will change GST% to 15 percent.In case its NA just type 0 against X%.
3) Currency symbol: The last thing that you need to select is Insert currency symbol. So say, for example, you want to use pounds or euros or whatever. And you'll notice that if I put a dollar sign here, it is going to go ahead and put the dollar sign on everything that is a dollar value.
That is all you have to do in terms of setting up your projects so that you can quickly run numbers on it, all it is, is that you have your name and tax and currency details. Below you can see an example of a project Setup in a One Minute Feaso.
We will continue our discussion on How to Add Acquisition Costs When Using the One Minute Feaso next.
Property Development 101: The Feasibility Study
How to add Acquisition Costs In One Minute feasibility?
Acquisition Costs In Lead Developer Suite > One Minute Feaso
Land Value : Acquisition costs are basically what you're going to pay to a lawyer or a solicitor or attorney who actually settle the block of land for you or the conveyancer for example.These are your legal costs. Also how much are you buying the property for? And the third thing is stamp duty, and it would probably have a different name depending on which part of the world you're from. If you look at Australia, UK, South Africa it is known as stamp duty.
Stamp duty/Property Tax : is an ad valorem tax of the levying of tax or custom duties these are proportionate to the estimated value of the goods or transaction concerned.Thats just a definition I got off the Internet.
But simply put, what it is? Let's say you're buying a block of land or any property for that matter for a million dollars and if it does have stamp duty its usually a percentage of that amount on top of the sale value.
So if I'm buying something for, let's say $1050000 and there's a stamp duty or an ad valorem tax which in Victoria, where I'm from, is 5.5% (It could be a different value or a different percentage in your part of the world) you put that value. In case you don't have any such duty you don't have to worry about it, just type in zero. Nothing would be added to the value of the land over there(see Example 1 below).
The Acquisition Costs are the costs that you can claim as part of the cost of the land when you're purchasing.
Even costs for setting up a different trust or a separate company that is going to hold the land for you is also Land Acquisition Cost. However, that cannot be claimed as part of the cost of the land.
Under Legal Acquisition Costs the legals that you spend on purchase of the land ,
In case you hire a Conveyancer (Conveyancer term is used in the UK, New Zealand, Australia and South Africa is a person trained to deal with all aspects of property law).
Then you have a lawyer who coordinates with your bank and with the seller.
There could be other people involved in the other authorities who might have a lean on the property or who might have a mortgage on the property.
There could be some property taxes owed to a local government body those costs get involved in here. So that's the person, that legal guy or the legal entity that is handling your transaction. Those are your legal costs.
So, for example, my legal costs are 1% then I know that, $1050 will need to be paid to a conveyance or lawyer. And those are my total acquisition costs.(see the Example2 below)
If in your part of the world there is a stamp duty, put that in and you know, that will be added to the costs of the land over here. If you're planning to buy a block of land and you get the list price whatever the listing prices for that block of land, put that in there. Select GST if its applicable if it's not just select NA and nothing will get calculated over here.
GST : If it does apply to you and it's a commercial property which is usually applied on top of that, as soon as I select GST, I get a section which says check and all it is trying to do is trying to figure out whether or not I have a margin scheme that applies to me. Now, this is only applicable to people from Australia Im not sure if this applies in New Zealand.
What it is, is that there's a margin scheme. The scope of this course does not actually include me trying to explain you what margin scheme is, but you've got to put that in. In case you have selected GST and you a have a commercial property, margin scheme does not apply to it . That's why it gives you a check over here, saying "Hey, check this out" .If you select no over there, that checks going to disappear.
But at anytime you're doing a feasibility on something and you select yes when you buy this property, GST applies, It is going to warn you to do a check on the margin scheme. When you're entering the value of a residential block of land, there's no GST applicable on buying residential, if it doesn't apply to you, don't worry about it. Just skip on it. Don't worry about what it says about check or any of that and keep moving on. And that's pretty much it. On the Acquisition Costs.
We will continue our discussion on How to Estimate Construction Costs When Using the One Minute Feso next.
My 26 Question Due Diligence Checklist Revealed
How To Estimate Construction Costs when doing your preliminary development feasibility assessment?
Construction Estimate in Lead Developer Suite > One Minute Feaso
3 Things you need to calculate your Construction Estimates
Under Construction Estimate in the One Minute Feasibility all you need to do is find out these 3 things:-
1) The Number of Units that you will be developing. Whether you're developing apartments, townhouses, condominiums it does not matter so long as you know that when you buy a block of land, how many of those units are you going to develop.
2) You need to find out what is the average area of that unit that you're going to develop, is going to be .Whether it's square meter or square feet it doesn't matter but you need to figure out an average size of the built area because that's the basis for you to calculate the construction cost .
3) Cost Of Construction/m2 OR Construction Cost per unit. You need to basically have a ballpark figure of what that unit is going to cost you for construction.This is super important and you can find this out easily. Whatever area that you're at and if you've got developments going on in that area, usually those construction sites have details of the builders working in the area. Pick up the phone, call them up and ask them for estimates .Tell them what you are planning doing a development say there are 10 townhouses to be built in there. Ask them what is a ballpark figure to build a townhouse which is X square meters in size of the built area?
Now they might come up with saying it's going to cost you about say $375000 in order to actually build a unit, a townhouse. So you can either go with the square meter rate or the square feet rate or you can go by a ballpark figure for that.
Why are we actually doing this?
What we are trying to do is run numbers on the side in under a minute. And the reason we do that is because:-
a) We haven't got all the information yet. All pieces of the puzzle not yet given to us.
b) When you are trying to make an offer on something and even when you are trying to determine whether this site is feasible or not and whether or not this site has any profit left in it you cant be doing a detailed feasibility on every site that you come across that you feel is a potential site.
c) There is not enough money and there is not enough time for anyone or any developer to do a full, detailed feasibility on site, specially in the Preliminary stage, where at this stage an Agent gives you a call or you came across a site that you think has potential for development.
d) At the Preliminary stage you want to save time and you want to save your resources so that you can run numbers and figure out whether or not you need to go a step further in this project. So that's where we are at.
So let's look at what it looks like when we type these 3 numbers in the One Minute Feasibility-
3 Simple Steps to get Construction Estimate using Lead Developer Suite > One Minute Feaso
Lets see how we can enter in all the details required under Construction Estimate:
Say we want to construct 10 Apartments on a block of land.The Average built area of the land is 100m2 and cost of construction we have found out from a local builder is $1650/m2. This is how easy it is to get the construction estimate from the One Minute Feasibility
Step 1 : First of all type in number of units or apartments you wish to construct next to Land Value Units which in our case is 10 we simply type in 10 for the number of units in the One Minute Feasibility.
Step 2 : And you figured out what the average build area per unit is going to be say its 100 .
Step 3 : The other thing that you need to select is that construction costs per square meter or square feet by talking to local builders. Incase you have selected GST, everything will show up as GST automatically you do not need to worry about it .Now say my cost of construction is $1650 /m2 just simply enter that in.
That's all you need to do in this section in order to get to a value that you can use in your property development feasibility for construction.
Now when we do these numbers, we do it for each individual unit because we are averaging out the numbers for the entire project. And that is the only way to do it really quickly and efficiently.
Construction costs/ m2(sq. ft.) Vs Construction Costs/ Unit feature
Another option you can select in here is that of Construction Costs/Unit. Now, that's a ballpark figure you got when you picked up the phone and called a construction contractor or a builder asked them what is it gonna cost me to build say a townhouse, 100m2 a two bedroom, one bathroom. And the builder said to you. Look, they average about 200000 thousand with the median finish. And that's the number you are going with over here. In this case you need not worry about the typing in the Area 100 m2 .you just type in the amount given by builder to you .For this you make sure you select construction costs per unit.
The One Minute Feasibility incorporates both the options that you can be use depending on what information you can get easily to calculate your construction estimate.
If however you've got more details or if you've done this before or if you have run numbers on similar projects before and you know what Construction cost/m2 is going to be, you go with construction costs per square meter or square feet. And in that scenario you must know the value to put in like built area because otherwise you wouldn't be able to get the accurate number for construction.
Lets look at the example above .Lets say Construction cost /m2 is $1700 and it includes GST in the example above and number of units is 4.The Average built Area is 150 because I'm building 3 bedroom 2 bathroom ,standard finish units .My Total Construction Costs/Unit will be $255.000.
Thats Construction Estimate , I'll catch you in the next section where we can continue discussing How to Allocate Various Costs In you Property Development Feasibility when using the One Minute Feaso next.
how to finance your property development project?
How To Allocate Various Costs In Your Property Development Feasibility Assessment Using One Minute Feasibility?
Sales Value in Lead Developer Suite >One Minute Feso
Next we move forward to find out the end value of the unit that you are planning on developing on your site.
So if you're developing townhouses or apartments, a two-bedroom apartment or a three bedroom townhouse whatever you are developing you find to find out how much is it selling for in that area (see picture below).
You need to do a preliminary research and find out that if you were to develop say 10 townhouses on this site, what is the going rate or the market value that you are selling them for? Now, that's where this sale value or the GRV, which stands for Gross Realisation Value that's where that kicks in.
Cost Heads in Lead Developer Suite > One Minute Feaso
In the above picture let's look at the Costs. In terms of Costs the Land Value per unit gets automatically calculated in the One Minute Feaso you don't have to worry about it. Construction and Consultants, they are all triggered by these percentages and I'll go over them in a second. Then you've got Council Contributions or Statutory fees. And I'll explain what it is in a second too. Moving forward you have Marketing and Miscellaneous Legal's. All these are different kind of allowances .
So let's get into it. In terms of Costs all you need to figure out is that, If you, for example put four townhouses in this area how much will you be able to sell each one of them for.
Now let us assume that amount is $850000. You enter that amount next to GRV(Sales Value) all the other things, they get calculated here automatically for you.You don't have to worry about the Value of Land and all the other Cost heads.(Refer to the Example 1 below)
How to Allow For Contingency In your preliminary Property Development Feasibility assessment?
Construction Costs and Allowance
The Construction Costs will get calculated automatically the only thing you need to put in here is a % for Contingency. So if you've got 5% contingency in your construction costs, this is what the banks like to see. Any time you're calculating Construction Costs and you haven't got a contingency unit the banks are gonna ask you to actually go and add that contingency . They usually like to see a 5 % contingency in there.
In the example below T stands for GST . If in case you have selected GST the letter T will appear here under the Costs so you know that value includes GST. If GST is not selected the T will not appear.
Allowance% this could be different based on which part of the world you're from, but a 5 percent contingency is a must must thing to have in your construction costs. So let's say we've got 5 percent contingency here. If it's 10. I'll just add 10 over there. If it's five. I'll just leave that at five.
Consultant Cost and Allowance
Consultants are usually charged or calculated when you're doing your broad strokes feasibility or a back of the napkin feasibility or one minute feaso . The way we calculate the consultants in the One Minute Feaso is (please refer to the example above)
a)Costs for each unit the entire first section on the left , is costs calculated for each unit.
b)The total cost on the the right hand side
In the example above what I'm doing is in allowing about six percent for consultants. That would include all my architectural drawings, quantity surveyor , if there are all sorts of reports, such as an arborist report or energy report or any kind of other report, engineering ,my working drawings , construction issue drawings, all that is included for per unit and is based on the value of the construction.
Diving a bit into consultant costs allowance .Let us assume if your site hasn't got a permit. So say, for example, you go from blank site that has got nothing on it or a single house on it, and then you want to develop four townhouses on it. You have to go through a planning process. You have to go through your local government authority or a council. Apply for a planning permit or a development approval, so to speak, or change of zoning. I think in US it's called Zoning. When you go through them or I have students in Canada, they say It's called a municipality in Canada, I think.
When you go through that, you get is a building approval that is what you can actually build on the side, what the setbacks going to be ,how high can the building go, Also those things like the density of it, which is the highest, best possible use of the site. So if you've done my other course, Property Development System courses , I go into a lot of detail, about all those things in there.
But for the purpose of this one minute feaso, we are trying to figure out what our allowance for consultants is going to be I'm going to allow 6% for each unit and on the overall project, about $64000. Any more than that would be an overkill for a project this size.
Council Cost and Allowance
When you come to Council Contributions. Each council has a different way of calculating this. This would inevitably be applicable to you. Does not matter where you are from in the world. Because what is happening is you've got a site which only has a single house or hasn't got that main development. That site is actually hooked up with council services or your local government areas, services that are provided. What are services? There is a stormwater , a sewer, all those things, all your water connection and all those things.
Now imagine a site which only has a single dwelling at the moment. The amount of load that it actually generates on the existing infrastructure is not that much. But suddenly you can now put 10 townhouses on it or you can develop a 50 apartment building on it. Suddenly, that new load is going to be way too much for the existing infrastructure. So your local government or your council or even municipality might ask you to upgrade those services because you are trying to now maximise the site. So that's what these contributions are for. We call them Council Contribution, that's what they stand for.
In Australia, in Victoria, where I'm from, it's very easy to calculate them.There's a given percentage but even in Australia if I move from Victoria to Brisbane to New South Wales, they all have a different way of calculating this. You can easily go on their website or pick up the phone and call your local authorities and ask them how do you calculate these contributions? If you are developing something they'll give you a formula you can use to calculate these costs.
For the purpose of the One Minute Feso, you need to calculate these manually because these can't be standardise. In the One Minute Feso you need you can play with this percentage and come up with your council contributions.
With your GST, you would find out whether or not you are going to have a Margin Scheme with it. Margin Scheme is within the scope of this feasibility. I believe that if you are at the feasibility stage, you would understand what a Margin Scheme is. It's a way of off setting and taking off the GST from the land value so that you're paying GST only on the value additions that you've done or the construction, anything on top of the land costs that's what it is. So if it applies to you, you select yes or no.
If you're not sure what this is or you want to understand what this is, you need to get the Property Development System full course to be able to understand, because there is a section where I explain what GST Margin scheme is and how it works and so on, just in a conceptual way so that you can to understand and get your head around, why is this important and why would this apply to you or whether it doesn't apply to you? . If there is Margin scheme you select Yes. If it's not, you select. No. And you'll see that your GST percent is going to start changing. Now this GST is the net GST liabilities, so to speak. So it's not your gross GST that will be collected. You don't have to worry about how that's calculated, but it's calculated the correct way.
Marketing agent's commission any time you sell your development, these are your selling costs. You go to an agent and you say, look, can you get all these sold? And the agent say, look, whatever they sell for I charge 2.2 % commission and you put that in there, usually in the area that I operate in it's about 1.5% to 1.8% so I've allowed for 1.7 percent and that's including GST.
Now, the only other thing that you actually need to manually input is the Miscellaneous Allowance for each unit. If you look at the example above for the entire project is about $28000.
Now these are your settlement costs. So say, for example, you sold 4 units, and a conveyancer or a lawyer is involved in order to coordinate everything with the bank, with the buyer who's bought your unit. Somebody would need to coordinate with their lawyer or their conveyancer in order to coordinate everything where they all exchange all these bank checks with each other, where the money comes back to the developer.So we need to make an allowance for that
Also there's our marketing allowance, for example you need to get a hoarding up where you need to get some brochures done, you need to get some photography done you make an allowance for these costs per unit.
If you're not sure what this total cost is, just go to a blank sheet. Put down some estimates and add them in there. I usually allow anywhere between $7000 to $10000 depending upon the type of project that I'm doing. So over here I've allowed $7000 for that unit and on overall project I've allowed about $28000.
At this stage, you need to figure out when you are selecting your finance costs, what you need to select is your finance costs the LTV or LVR/ LTV, which is your Loan To Value Ratio . The maximum money that you can borrow, is your borrow going to lend you the money based on your total costs? So that LTV that we've got, which is 60 % for example, or 80 % and so on.
Whatever that percentage is, you need to figure out if that is going to be a percentage of total cost. TDC stands for Total Development Costs is it going to be based on GRV, which is the Gross Realisation Value? Can your lender lend you money based on Total sales that you're gonna make or are they going to lend you money on Total Costs that you got to incur?
So those are the only things that you need to find out. And if you don't know what these are, all you have to do is pick up the phone, call your broker or call your local bank and say, look, I'm planning to do this development. What sort of lending do you do? And they will tell you that, OK, we'll give you a 60 % LVR are or 80 % LVR, . So they you want you can select the right metric, so to speak, total cost or total sale. So think of TDC total costs and think of GRV as total sales. So you can select any of these two so that you can calculate your finance costs (This will also be be further explained in funding tables under project timeline below). We will continue our discussion on How to Estimate Your Project Timeline for Your Development Project When Using the One Minute Feaso next.
Lead Developer Feasibility Suite
4 Powerful property development feasibility applications
Including Real Estate Pro Forma
How To Estimate Your Project Timeline For Your Development Project when conducting your preliminary Property Development Financial Feasibility?
Project Timeline In Lead Developer Suite > One Minute Feaso
Moving on to next thing that you need to know is your Time.
a) That includes the time its going to take you before you start construction. Let's say you sign a contract, you settle on the block of land and from that point to the point, you start construction.
b) Time its going to take you for Construction Period .
Why the time it's going to take you before the Construction? . Because if you're zoning and all those things aren't ready yet, what happens is that you need to go through a planning process. You need to get all your reports ready. You need to go consult different professionals, get them to Ok your development. And then go through your local government authority in order to be able to get approval for the development. Also during that time, you may have settled on the block of land or you may not have settled on the block of land. So you need to figure out what that holding period of that land is actually going to be.
This is because there are two different ways in which Finance works . There is a different set of financing for just buying an investment property and then there is a different set of financing for construction, when it comes to development and starting construction. Hence there could be two different interest rates. It could be lower just to buy a property and hold it. It could be a little bit more expensive, especially when you are developing it, because it could be a commercial loan depending upon the size of the development.
So that's why there are two time periods. One of them is the holding period before you start construction. And then another but construction period.
Finance -Land Holding Period
So let's look at how all these things come together in the One Minute Feaso. In the Example above we've got Finance - Land (Holding Period). Under that we've got Land Loan -Finance. When you go and buy a block of land you say, look, I should be able to borrow 80 % of the value of the land. Let's say from the example above you are buying for $1050000 and you can borrow 80 % of that.
The idea of doing a development is to use as less of your own money as possible, because the less money you use of your own, the greater return you can get on your own money because you only use, let's say, 20 percent or so of the total cost or 30 percent of the total costs and so on.
So if you're doing your entire development with your own money, that means you already bought a block of land. say, for example, you've been sitting on an ancestral property where which was handed down by a grandfather to your father and then it came to you and all debt is paid off. There is no debt on the property and you've got your own money in order to be able to start construction, I'd still say don't use all of your money, go and borrow the money because otherwise your development margin, which is 33.2% in the above example, is going to be exactly the same as the return on equity.
Now, the way you increase that return on your equity is by leveraging it, by borrowing the money and paying the cost of borrowing.
So going back to the example above you've got Land Loan Finance here, you've got LVR or the Loan to Value Ratio LTV as it's known in the US. You've got 80 % of that and then you've got your interest rate.So lets say you can borrow the money for 5% . And because you've already settled on the block of land, or you have already started your planning process and you know that in 6 months time you should be ready for construction. So you allow a holding period of 6 months ,you know that, this is gonna be how long your holding period will be. I should allow by 12 month for construction.
So you need to figure out 3 things.
1) What is the money that you can borrow from your lender just to buy and hold a property while you get go through the planning process?
2) What interest is going to cost you and
3) For how long are you going to hold it for?
These are some ballpark numbers where you're trying to figure out this whole feasibility in under a minute. And once you've got your land sorted, your next port of call is to actually figure out what you can borrow for construction,
Finance -Construction , Funding Table & Finance Costs
Now for Construction.We've got this Funding Table right here. What that funding table is telling you is that we've got Debt -LVR/LTV say 70% .What this means is that what is a maximum amount of money that you'll be able to borrow when it is time for construction(see example below).
This is based on what you have selected under Finance Cost ( also go through finance costs under Cost Heads above).Whether you have selected TDC or GRV.In the second example above we can see that for the Finance Costs $28,153 we have selected TDC which is based on the Total Costs and not GRV.That means that you go to a lender that is going to borrow your money based on your total costs.
So you figure out what that number is and you put that number for Debt -LVR/LTV. Let's look at another example let's say it's 65%. So you put that 65% over there. That means $ 1,618,459 is the money that you'll be able to borrow under TDC. If this was GRV, the calculations are then based on the figure $ 2.009,091(see example below).
Based on that you are also able to figure out the amount of money that you will need to put in from your own pocket because this is super duper important. A lot of developers get caught because they have not been able to figure out what the model money that they will need to come up with in order to do the development. They get into a project thinking that they've carried on for a while and then be able to get rid of it when they can't get rid of it. They will either incur a loss or they'll be into all sorts of trouble.
What you need to figure out is what that money is going to be based on the money that you can actually borrow.When it comes to construction loan, this would include the cost of the land in it.
Moving ahead, you've got your 65% and then you've got your Loan Draw -Utilisation. Now, what is that? What that means is that when you are borrowing money for construction, you're not going to borrow the entire loan amount from day one. It is all done progressively as the project unfolds, as the project is built. Your builder or your your construction contractor is going to give you a progress claim. If it's a smaller project, you have the ability to approve it yourself. But if it's anything bigger than three, four townhouses or three, four apartments, your lender is actually going to force a quantity surveyor or a third party involved to come and inspect what your builder has already done and then release the money accordingly.
So in order to account for that in under one minute we use Loan Draw Utilisation in the One Minute Feso. So if you put 60%, that means that's the speed at which your money is going to come out. So when you extrapolate everything and you'll see in Lead Developer and all those things, we extrapolate everything out on an S-curve. So because we are doing everything under a minute and we don't have the luxury of having all the details in place. So we do it in a ballpark figure.
Now we've got 60% and the percentage of interest that you will be charged for construction .Then you've got your construction time. The construction time here again must be included its very important . Its the time it actually is going to take you to return the money back to the lender .How can you return the money back to the lender? The only way you can return the money back to the lender is when the pre-sales that you made or the project, the all the units that you sold to somebody else, they have paid you for those units. And that's called a settlement.Once that settlement occurs, that's when you're going to get your money back.
In the above example lets say the construction time is 12 months, but I know that building four townhouses is not going to take me 12 months. It could be done in 10 months and I have allowed 2 months extra in there. But if you think the construction is going to take 12 months, you'd allow 14 months for construction in here so that you've got that buffer of 2 months in there and you calculate the interest for it. So you rather have that buffer built into this, as a habit. You'll see that as you start doing bigger developments or you start getting detailed with all those developments. You'll be able to do your feasibility is more accurately than just throwing out numbers without thinking.
So let's change construction time to 14 months at this stage (see the example below). And based on that, you will get your finance calculations done. And these finance calculations then go into a loop and they go into a loop about 10 times in order to come up with a probable value based on what you put in.
Once you got all those things, One Minute Feaso calculates and tells you that you're making 24 % Development Margin on cost . The developers equity contribution is going to be $1.124,811 So for something that is going to be a total development cost of $2.7 million your ballpark figure for developers equity contribution is going to be $1,124.811 on TDC.
We will continue our discussion on How to Use Target Development Margin When Using the One Minute Feso next.
How To Use Target Development Margin?
Target Development Margin In Lead Developer Suite > One Minute Feaso
The next thing that we need to figure out is your Target Development Margin. This is the number 1 reason we were doing this One Minute Feaso in order to determine the Residual Value of Land. That is the maximum price you should be paying for this site based on it's on its Development Potential. So whatever the highest best possible use is that is 4 townhouses in this example, I should be paying X amount for the land if I want to make 20 percent the total cost of this development.
So let's look at this.
We've got a Target Development Margin. On a smaller site, up to four to six units. I'm happy with making 15% because the smaller the site the more competition that you are going to face in order to acquire the site.
From Our Example above where our land value we put in as 1050000, if I put 15% as my Target DM% this is telling me that my residual value of land is about $1414051.7.That means I can still afford to pay 1.4 million for this site.
Now if we go and change the land value to $1400,000. You'll see that my development margin is about 15.3%. What this is telling me is that on the total cost that I that I've got, if I make 15%, I can afford to pay 1.4million for the block of land.
In case say Im paying only 1,200,000, for example, you know, I'm making 24 % development margin on this site.
On the basis of the above 2 scenarios in the feasibility, based on all the cost and other details that you allowed for in this feasibility you can go back to the agent or to to the seller and tell them, that you know you can easily put 4 townhouses on it. And that's the maximum that I want to pay for this, because I've got all these costs that I have to incur and I simply to make my minimum return on this project in order to go ahead with it.
This is why we do this feasibility in the first place in order to figure out what is the maximum price that we can pay for land -Which is your Residual Value of Land $1,411,842 and $372,373 is basically just breaking that into for each unit.
We will summarise our Preliminary Development Feasibility Assessment with One Minute Feaso next.
Property Development Feasibility Summary Section In One Minute Feaso
Summary In Lead Developer Suite > One Minute Feaso
Now we are getting into the summary section of the One Minute Feaso and what each one of these means and how you should read this to your advantage.
Development Margin on Costs will tell you the ballpark Development Margin that you're making on this site. It is based on cost. And so you're making about 24% in costs in the above example.
Development Margin on Revenue and 19% on revenue.
Total Profit per unit based on the number of units that you're developing. As per our previous example the number of units was 4. Based now on this example, you've got $162,615 profit on each unit.
As for Total Profit. You're making $650,462 as a total profit.
You get your Residual Value of Land $1,397,331
You've got your Developers Equity Contribution, which is $1,124,811 which is based on the amount of money that you can borrow.
Then you've got Land Vs GRV(total sales), which is the value of the land vs. the gross realisation value, which is about 45%
Construction Vs. TDC. That means your construction is about 37%. Here you want to make sure that your Construction Costs vs. your Total Development Costs is always less than 40%. Once it starts going more than that, you'll see they'll start putting pressure on the value of the land as well.
Construction Vs GRV, which is total sales of construction value based on the total sale value or the gross realisation value that you've got there.
Return on Equity (TDC) if you borrow money based on the Total Development Costs or total costs and Return on Equity (GRV) based on if you if you are able to borrow money based on your total sales value. So you'll see that your return falls down if you are able to borrow less money. So if you borrow more money, that means there's more funding available for you for the development. You'll make a better Return on your Equity.
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How To Calculate Return For Your Investors Using One Minute Feaso?
Return For Investors In Lead Developer Suite > One Minute Feaso
Here you need to figure out what is the amount of money that you are going to raise? Now, that is a tricky concept. It requires a fair bit of knowledge, but it actually kicks in based on the amount of money that you are required to come up with.
Now, if you are able to raise that money from your investor, that means you're basically doing a No Money Down deal. So the way I have structured The One Minute Feaso is that everything is already being thought through and done for you.
What we are trying to do here is raise the total amount of money that we need to come up with in order to do the development because the rest can be borrowed from a lender. We are raising The Developers Equity Contribution.
Let's look at the total rounded costs. So you've got your total cost, which is in the example is $2,750,000. we round them up over here under Capital Raising section. You want to be able to justify to your investors that the total money and thats why the One Minute Feso has a TDC(rounded) option.If you're not happy with the automatic roundup, you can come up with your own roundup. So you can say, look, I'm going to go with 2.7 million at this stage or simply type whatever that number is that you want.
That tells me that my value per share in the example that figure $27,500 based on total shares per units being 100. You might be able to issue a 1000 units or 5000 units or whatever. In that scenario, the moment total shares/unit goes over 100, I think of this 100 as a %. What this is telling me is that based on the 100% the money that I need to raise the value of each year for that unit, for the total cost that I've got is going to be $2,750,000.
Now, I could override this and say, look, I'm going to go with the $30000 value. You can override it and put $30000 in there. No one's stopping you from doing that, but you shouldn't, because you will have to present to the investors and build the case with your investors in order to do that. So I'm just going to go $27500 at this stage.
And that gives you a subscription value. What is the subscription value? Is the same amount of money that you need to come up with just rounded off or Developers Equity Contribution rounded off .
So I'm saying that I need to come up with $1,125,000 rounded off .But you could say, look, you know, I'm going to put in $1,25,000of my own money or you might have already put that money into the project to get to a certain level. So if you say, look, I'm just gonna raise a $1000000 from the investors and what does it look like? So that's what it will look like.
% of Shares Available for Investors based on the amount of money that you need to raise by is 36 %.
Investors Return on Equity -ROE.What that means is If you wouldn't raise a $1,000,000 from investors and they own 36 % of the project, they're going to be making about 23.65% return on equity. This is different from the projects return on equity because that is for the entire project based on the money that needs to come up. whereas what you're trying to do is raise this money from the investors and the rest of it comes from the lender so that you can do it and no money down deal. So you've got Investors -Return on Equity, 23.65%.
You've got Investors -Profit Share, which is $236,532 . That is telling you, based on the amount of money that you have raised in the amount money and about the percentage of the project that the investors will end up owning. That's what that is.
Then the One Minute Feso will also give you the total number investors that you require based on the minimum share block. So you might say that, look, I just want each investor to come up with $50000. You can put $50000 there's no problem whatsoever. Again, agencies like the Securities Commission comes in ,ASIC comes in, your requirement for Australian financial security license kicks in and it might be a different body in the country that you work in and you're trying to raise money. In Australia, if you are a sophisticated investors, you are a you are allowed to put in money into this program so long as you can prove that you are a sophisticated investors.
I usually keep Min Share Block $100,000. anything below that means you are doubling the number of investors that you would need. Which in turn would mean that you're doubling the amount of people that you will need to deal with.The less that number is, the better it is for the development especially for small and medium sized development, where you've got 4 townhouses, you don't want 50 people in the project, so to speak.
When we put in $100,000 as Min Share Block, Total Investors Required is calculated as 10 you know, you only need 10 people. If this was $50,000 as you will see, this will change total investors Required to 20 now you know, you need to go over twice as much money (see example 2 and 3 ).
If you can find $250,000 and you know that you got 4 investors come together and they can do $250,000 Min Share Block , you know, that's what they will need to come up with(see example 1 above). Our Total Project Profit, is $650,462 .Value of Each Share is going to be $1.
Under Investor -Shares you are issuing a 1,000,000 for $1 each . Whereas Under Capital Raising its telling you Value/Share based on the percentage of the project. So when you are raising money, that means each share on the this side is going to be $27500 if they are only 100 shares as this is the percentage side. where as the Investor -Share side is number of shares .
The Investors will end up owning about 9.1 % of the project and the total Return/share is going to be $6505 and Return/Investment Block is going to be $59,133. That means that if somebody puts in $250,000, they will go home with about 60 grand in profit and their Return on Equity is going to be 23.65%.
Because see, when people advertise that you don't come and invest in this project. And I'll give you 20 percent return on this money. They are talking about Investors ROE.
So, yeah, this isn't a sophisticated way of doing it. The sophisticated way of ding it is doing as a cash flow waterfall where you you have a minimum return that you achieve and that is not part of this course that will be covered under a different feasibility suite that I'm working on currently. And that is also not part of the lead developer suite. That is part of the lead developer plus system that is going to be released maybe later on down the track sometime.
But at this stage, on a ballpark figure, you want to figure out the money that you want to raise, what that money is going to be. And if all that money is going to be raised from investors so that you can do a no money down deal. And this is how you can work it out.
And I wish you all the very best. Don't forget to check out the other feasibility apps that are included in here. You got One Minute Feaso or you've got Smart Feasibility Calculator that you can work with, that you've got a Smart Real Estate Investment Analysis. And you've also got a Lead Developer, which is a detailed feasibility application and does everything that you need to do from cash flow to financing options and so on.
How To Do Sensitivity Analysis Using One Minute Feasibility For Your Preliminary Development Feasibility Assessment?
Sensitivity Analysis In Lead Developer Suite > One Minute Feaso
One last thing this One Minute Feasibility includes is a Sensitivity Analysis and it is super easy to do using the One Minute Feaso. It gives you a glance into what might happen if things were to go wrong or things were to improve.
1)The Sales Value that you're planning by time your project is finished, it might go up .
2)The Cost that you had accounted for could have blown out for whatever reason or
3)The worst could happen where the costs would go up and the sale value would come down.
Have you ever wondered what would that do to your project?
So any time you're doing a project, you always, always must 100 percent do a sensitivity analysis.
And what that does is, in a glance it tells you what will happen if things were to go wrong or improve.
Under the Sensitivity Analysis we can see how the following get affected in case Sales or Cost Value change.
2)Development Margin on Cost
3)Return On Equity/TDC
4)Return On Equity/GRV
Now, this is super easy to do. All you have to do is change the increments or the decrements for the scale for Sales and Cost. So say, for example, you want to see what the scenario would look like if the sale value would move in a 5% fashion. And we do the same thing for the cost, but we do it at 3%( see example 2 below).
Sensitivity Analysis -Development Profit/Unit
So what this is telling me is that if my sales were as it is, if everything that you assumed here, everything that you bought here was exactly the same, you know, your development profit per unit would be $162000. But if the sales were to fall by 5 %, your value, your profit per unit would go to $120,116.
Sensitivity Analysis -Development Profit
Now, if you look at the above example where Costs is 0% and Sales is 0% nothing is going up or nothing is going down. Everything is exactly the same. Only if the sales went down by 5 %. But the costs are zero, your profit per unit from $162,616 would fall by 20 %. And the same thing will happen as you keep moving left. If you keep if you keep going right, it is telling you that costs are exactly the same, but you will manage to get extra 5 % for the same value by the time you finish. That improved your profit and pushed it to $205,116.
The same thing happens here (see example 3 above) with your Development Profit. Now above is profit per unit. This is telling you what's happening for the entire development. So let's say your sales were to go down by 5 % and that your costs also went up by 3 percent see column 3 (-5.0%) row 5 (3.0%) .from $650,462 profit, you're now doing $397,976 profit.
Sensitivity Analysis -Development Margin on Cost
And if you look into your Development Margin, it'll tell you that, okay, it shows 24 percent right now (see example 4 below). But if things were to go bad, it would it can fall down to 14 percent or in a worst worst case scenario is 10 percent and 6 percent.
Sensitivity Analysis -Return On Equity / TDC
The fourth table here shows you if you were to borrow money based on the total cost. So your LVR or your Loan to Value Ratio was based on the money that you were able to borrow on TDC.
Your Return on Equity would have this sort of effect. So if all these things were to happen, sales were to move in this scenario you can easily see what the Worst-Case scenario could be.
These are the scenarios that I look at most of the time when I'm doing a feasibility, I try and check out this area and I see, okay, if the costs were to go up by another 6 % and my sales were to go down by another 7 %. What would it do to my bottom line?
Sensitivity Analysis -Return on Equity /GRV
And the last table here is the same thing. But in this scenario, it assumes that more equity was available to you because you borrowed money based on an LVR against your total sales value.
It is telling you the effect of the return on equity on your project in the last two tables.
So what you want to do is have a realistic scenario. First of all, you've got to have realistic figures in here. Now, I know when you're starting out, it's very difficult. But you start off with averages and then you see, "OK, I might be 10 % off. Might be 7 % off". "What does that do to my projects If my costs were to go up by 7 %?". I was more confident with my sales and I said, look, sales can move around 5 percent or so. So I'll put those scenarios in there and see what it is doing to my bottom line.
Look at this scenario I have $850000 allowed ,can my sales go down to about $765000. Can they ?Are they can they not?. If you think that sort of massive drop off the top can not happen. I've been in this area. I look at these houses, I look at these apartments. They are going right here for there for those sales. Is it $850000 ,might be a $810000 or so . So you come in and tweak your percentage here and put in 3 %, for example. And that way you will know how this whole thing is moving. Now your Worst-Case scenario is 6 percent now. So you're still breaking even.
So that's your Worst-Case scenario. You still get your money back in this scenario. So this sensitivity section, I have not seen this anywhere. And now I actually incorporate this into all my visibilities because I want to keep an eye on the Worst-Case scenario. Anytime I'm doing a development.
One Minute Feasibility Checklist
All The Information You Need To Complete A Property Development Feasibility In Under One Minute
- Property Address
- GST Rate
- Currency Symbol
B) Acquisition Costs
- Land Value
- GST %
- Stamp Duty %
- Legals Acquisition Costs
This will calculate your Total Acquisition Costs.
C) Construction Estimate
- Land Value Units
- Average built Area/Unit(m2 or sq. ft)
- Select Construction Costs/m2 (sq. ft) or Construction Cost per unit
- Amount of Construction Costs/m2 (sq. ft) or Construction Cost per unit
This will give calculate your Total Construction Costs/Unit.
D) Allocate Costs
- GRV (Sale Value/unit)
- Construction Allowance %
- Consultants Allowance %
- Council Contributions %
- GST Yes/No
- Marketing / Agents Commission Allowance %
- Miscellaneous + Legals +Marketing + Building Permit + Valuation per unit
- Finance Cost -TDC/GRV
This is how you can allocate your different development costs your Total Development Costs will get calculated.
E) Project Timeline
Finance - Land
- Land Loan - Finance %
- Interest %
- Total Periods(months)
- Finance - Construction
- Loan Draw - Utilisation %
- Construction Time
- Debt - LVR / LTV -%
This is when your Development Margin Cost will get calculated.
F) Target Development Margin
- Target Development Margin%
G) Return For Investors
- TDC(Rounded) Override
- Value/Share Override
- Subscription Value Override
- Min Share Block
*Helps Work out ball park
H) Sensitivity Analysis
It gives you a glance into what might happen if things were to go wrong or things were to improve.