The Beginners Guide to Understanding Feasibility Studies
Successful property development requires a great deal of careful planning. There are many different elements to think about, from obtaining the necessary capital to bring your product to life, to finding the right professionals to deliver the final project.
Perhaps the most important thing to think about though, before you start making any serious investments, is whether your project is "feasible" or not. It’s crucial that property developers know that they're project is viable before they commit to the development.
The following guide will help enthusiastic property developers to understand more about the importance of effective feasibility studies, and why they serve to support the sustainability and value of your construction initiative.
Why Are Feasibility Studies So Important?
Just as an effective business requires a strong business plan, a new property development requires plenty of strategic thinking before construction begins. Crunching the numbers and analysing market conditions can ensure that you have a more accurate vision of how valuable your new development will be, making it easier for you to avoid any serious mistakes.
A comprehensive feasibility study not only provides the confidence you need to begin your construction work with accuracy and focus, these documents also help to determine whether your development will be a success or failure. This means that you can reduce your risk of investing in properties unable to deliver a return on investment.
With the right, detailed study in your pocket, you'll be able to highlight any possible risks of failures that you might face on the road to success, and whether there could be any issues that would lead to catastrophic problems somewhere down the road. For instance, your study might prompt you to reconsider things like planning approval, budget problems, and objections from neighbours.
If you don't have the right numbers in front of you before you start making investments, then you can't possibly know for sure whether you're making a good decision.
The Benefits of a Feasibility Study: What's in It for You?
We've already established that a detailed feasibility study gives you the peace of mind that comes with knowing that you're making the right decision. The only problem is that studies often take a great deal of time and concentration, which is why many property developers can end up cutting corners.
Though it might be tempting to assume that you can simply address problems as and when they arise, many experts suggest that building without a feasibility study could be equal to setting yourself up for failure.
In preparing the right feasibility study, you'll gain access to the following benefits:
- Understanding of your opportunity: Ultimately, a study allows you to determine whether your investment is going to stack up at the end of the day. This will help you to figure out whether you stand to make a profit, and it could save you from wasting time and money in the long-term.
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Concept testing: Problems with budgetary restrictions and cost overruns can seriously damage a project. A property feasibility study will allow you to figure out how you will respond to these issues on paper so that you're prepared if unexpected fees or costs arise.
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Confidence: Thorough and accurate studies can increase the confidence you have in your ability to continue your development, if you know the numbers will stack up at the end of the project.
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Finance: Your feasibility study will also allow you to determine how much financial investment you're going to need to tap into to bring your project to life. Remember, cash flow problems can be one of the biggest reasons why projects fail. An analysis will help you to convey your ideas to potential investors with an insight into exactly what kind of financial circumstances you'll be facing.
There's no doubt that feasibility studies are crucial to success. The question is, how do you go about sourcing a study that's right for your property development.
Creating Your Feasibility Study
Assessing the viability of your development project means conducting a range of studies into feasibility. Each of these evaluations will focus on different areas of your development, from the materials you plan on using, to the location in which you'd prefer to build. For instance, the first study most property developers will face involves checking your development site for zoning issues and addressing the value of the area.
A real study requires a lot more than just a few figures written down on a piece of paper. You'll need to check out all the different aspects of both your site and your project to determine how likely you are to be successful. Don't make the mistake of assuming that you'll be able to simply rush through your feasibility study.
Ideally, the goal of your study will be to make sure that you can get the highest possible use or the best potential out of your development. In other words, you want to make sure that you have all the tools and resources in place that you need to get the maximum value or profit out of your development site.
As a property developer, you have expectations on how much money you want to make from any given investment. A feasibility study is your best opportunity to make sure that you're going to access the returns that you need to continue growing your company and expanding your portfolio.
Your study will consider things like cash flow, and equity, generally on a per unit, or per lot basis. This means that the expenses and profits in your system will be evaluated according to each individual property in your plan. For example, if you were deciding to purchase a block to build a development of ten townhouses for four million dollars, you'd need to make sure that you could get a return on your cash back of more than $400,000 for each property for the plan to be feasible.
Let's consider just some of the property development costs that will need to be accounted for during your feasibility study.
Land Purchasing and Acquisition Costs
The acquisition costs for your project will include an overall estimation of the resources and funds you'll invest into the location you've chosen for your build. This may include the costs of acquiring the development site, along with legal costs, stamp duty, land valuation, and conveyancing fees.
Financing Costs
In some cases, when you decide to begin your building project, you may decide to settle the costs for the development first, and develop the site later. In this case, you need a loan to settle the costs of buying the land. Importantly, this initial loan may not cover the costs of things like labour, and materials. Instead, once you're prepared to begin your development at a later stage, you may apply for a separate construction loan.
Remember that the costs associated with acquiring a loan can go beyond the initial capital. For many property developers, there will also be issues like brokerage, legal costs, and application fees to consider. Additionally, you will need to calculate the cost of the interest on your loan repayments over the course of your borrowing term.
Council Costs and Regulations
Local regulatory bodies and councils will charge different amounts for different certifications. For instance, there are two primary application fees to think about when you're planning a residential property development. These include the development approval application, and the planning or building permit fees.
Depending on the project you have in mind, there's a chance that you might need to pay extra fees for other things too, like re-zoning, strata titles, and land subdivision. Councils may also charge contribution fees known as "development contribution".
Construction Costs
Construction is crucial to the success of your property development and having a building partner who can provide a fixed price contract offers a massive advantage. Property developers
Project leaders often assess construction costs as they apply to each residence they're building, rather than looking at the entire development as a whole. Depending on the details of your building strategy, you may prefer to calculate construction costs of the entire project.
It is important to make sure that you have a genuine idea of these figures in mind when you're putting your property feasibility study together, as it can kill deals if you have the wrong fees written down, or your calculations are off for any reason.
Keeping that in mind, if you have a building partner who can provide a fixed price contract, that can be a massive advantage. That way, you're not liaising with multiple contractors to get all of the quotes together in addition to scheduling trades - both of which can leave a lot of room for unforeseen cost blowouts. Having the fixed price contract and an experienced building partner to run the project can save both time and money and is well worth your consideration.
Utility Connection Fees
Though often overlooked in the property development world, it's important to remember that there is a fee involved when you want to connect new utilities to a development site. You're going to need to make sure that the buildings you're developing have gas, electricity, stormwater options, drainage, and telecommunication opportunities available. After all, utilities are a crucial aspect of what transforms a home into a liveable space, and something that you can market to individuals and families alike.
Selling or Marketing Costs
How are you going to advertise the properties that you build so that you can convince people to start buying them? If you hire a real estate agent to list your properties for you, then you'll need to take the fees involved with that into account. Usually, a commission for a real-estate agent can range anywhere between 1% and 2.75% of the property purchasing price. You'll need to know the commission amount, and remember that they can be negotiable, so don't be afraid to haggle with the agent you choose.
Goods and Service Tax
When you deal with the accounting side of a project for property development, you'll be required to file something called a "BAS" statement each month. The Business Activity Statement allows you to claim your tax credits each month so that your cash flow can continue to be as healthy as possible. However, you will need to pay the GST on the sales for the developed property when the project is finished.
Insurance
Insurance isn't always a concern that property developers like to think about, but it is a necessary expense. It's important to make sure that everyone in your project has the right coverage.
Remember, as a property developer, you'll be liable for the insurance required when the buildings are handed over, and this includes coverage for insurance against storms and fires, and public liability insurance too.
Contingency
Just like insurance, contingency is a kind of safety blanket for your property development project. Contingency is a percentage of construction costs that a developer will allow for which is usually somewhere between 5 and 10% of the overall expense. This ensures that property developers are prepared to support themselves, and their project if they're hit by unexpected costs.
Profit and Income
After your project is complete and you've got your investment properties up and ready for rent or sale, your profit or income will depend on your overall strategy for selling or holding the properties you've designed. There are no hard and fast rules on how you should manage profit and income. However, if you decide to rent your developed properties out, then you'd need to make sure that you have an idea of how much rent you're going to ask for per week. This will help you to calculate your profits more accurately over time.
Gross Realisation Value, or Gross Sales
Gross realisation value is the complete sum of cash that you get when you've finished selling all the properties that you've developed. This can make up a major component of your income because it outlines what you're left with at the end of your project. Banks will also use this value to determine the percentage they can safely lend when you're looking for investment for your project. Although it's difficult to predict this number with absolute accuracy, an estimation can be very useful at the beginning of your project.
Deciding Whether the Numbers Stack Up
Ultimately, a property development feasibility study allows you to determine whether you're going to benefit from your new project, based on the information you already have about your investment. Ideally, you should combine your study with plenty of in-depth market research. This will help you to determine whether you're building in the right area for your chosen demographic, whether you have the right facilities to appeal to a specific customer, and whether you've chosen the most competitive renting price.
One of the most important numbers you'll need to choose as a property developer is how much you expect buyers to pay for your property - either in terms of rent, or sale. There are countless factors that can go into this decision, including whether there are any amenities or services nearby that would attract people to the location. Sometimes, it's useful to get the insight of a local real estate agent, who may be able to provide you with estimates for your intended project value.
Feasibility Studies Take Time, But They're Worth It
While it's fair to say that a study takes time, it's also important to acknowledge that this research is the easiest and most effective way to ensure that you have the numbers you need to plan a successful property development.
Collecting all the numbers mentioned above can be difficult during the first stages of property planning, but keep in mind that feasibility studies are often an "ongoing" process. They're something that you'll carry with you and adapt as the plan for your new property continues to evolve and come together. Though your initial study might not mirror the results of your development exactly, they will give you a powerful set of resources to work from when making crucial decisions for your project.
The key to success is making sure that you update your feasibility study every time a variable in your project changes. That way, you can consistently learn from what the numbers in your plan are saying.
Remember, accuracy is key. When it comes down to it, a study is an essential and valuable part of any development project. Not only does it ensure that you have the potential for profit, it can also open the door for attention from potential investors and stakeholders.