Heights Finance - Real Estate Feasibility Study (Cost Side) - .2 Billion Developer Tells You How To Do One
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There are two sides to real estate improvement feasibility study: The Cost Side & The revenue Side.
What I said. It is not outcome that the actual about
Heights Finance. You look at this article for info on a person want to know is
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How is Real Estate Feasibility Study (Cost Side) - .2 Billion Developer Tells You How To Do One
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We had a good read. For the benefit of yourself. Be sure to read to the end. I want you to get good knowledge from
Heights Finance.
I am going to incorporate in this narrative on The Cost Side.
Having told you that a feasibility study is vital when applying for finance, it is however, just someone else cog in the wheel of the asset improvement process.
To help you come to grips with the term, feasibility study, it might help you if I call it a, Financial Analysis, of all the costs and revenue revenue that tell you if your improvement will produce a profit.
Where To Start?
When you are at the very beginning of making ready a feasibility study - I mean when you are just thinking about buying the land on which you propose to manufacture a building, your initial cost figures are liable to be a bit 'rubbery.'
They're normal - they are not exact and can't be exact, because all you know at the beginning is the 'asking price of the land.'
Hopefully the land cost will be less than the request price after you perfect the buying negotiation. Can you see that there is going to be a dissimilarity in just that first item of the feasibility study - land cost?
Ok - if you accept that, you'll also accept that the connected land costs will also vary. Items like conveyance costs, legal charges, stamp duty, adjustment of utility charges and other costs.
That should demonstrate to you that a feasibility study goes through several stages.
The first stage uses figures that are the 'best' figures you have available at the time. The last stage is when all your cost figures are firm and final.
But as you are only at the stage of choosing to buy the land or not, you figures are "general and loaded with safety" - in dollar terms.
Let's be clear about what I mean here. For the land cost you would use the full request price and all the connected costs, at full calculation for your initial entry in the feasibility study. Then if you negotiated a lower price you are safe.
If you first feasibility study shows a satisfactory profit return for the risk of doing the development, you will head somewhere and gain legal control of the land.
Well, to gain control, you must have finished a negotiation on the land sale price - so you have now "firmed up" on one of the cost items. Hopefully it is lower than, or the same as the form you allowed in the feasibility study.
In the first feasibility study you will allowed a form for the fees of the manufacture consultants.
People like the architect, the engineer and so on. Well now you have to engage them to create the initial manufacture for you and again this is a negotiation that will whether be within your feasibility study reduction or not.
The next major item in your feasibility study will be the constructions cost.
If your improvement comprises ten town homes, that are aimed at the luxury end of the owner occupier market, your shop knowledge may tell you that you should allow 0,000 per to town home or .8 million to build all ten.
Your manufacture team will have to manufacture well within those cost parameters and after the initial manufacture is perfect in initial format, you will need to get a few expert builders to give you a price.
If you are well within the .8 million, then you may settle to leave the .8 million form in your feasibility study. This would be smart if the buider's form was say, .7 million.
The extra 0,000 acts as a security buffer as you are only pricing off non-detailed initial manufacture plans.
Now. Let's say it's your intention to sell all these town homes at a profit, so you have allowed some marketing costs to cover sales commissions, brochure printing etc. In your feasibility study.
At this stage the biggest form is the sales commission and so you have been out talking to agents and so you have a good idea that your figures are Ok.
At this stage we have wrapped up all of the "major" costs except the finance costs or interest on you borrowed improvement finance.
By now, hopefully you will have bought my e-book, and know how to go about seeking improvement finance the accurate way and not the dumb way.
So you will not only know the best interest rate, but more importantly, have the accurate type of loan and on the accurate "terms" - you know the small print stuff.
At this stage every person I teach wants to buy a software agenda so that they can get all the calculations done "easy like."
Well I have a qoute with that - I know, and believe, that for you to get to know your improvement intimately, you have to go to the issue of doing the feasibility study figures manually - it is only adding, subtracting and multiplying some figures.
It is not difficult and the benefit is that you get to "know" the point and interplay of each form on the end result, being profitability.
So a uncomplicated spread sheet broken up into months on an Xl is all you need.
In month one you buy the land for 6,500 and connected costs of say, ,700 so you enter a form of 0 (8,200 rounded up to 0,000 - you have added a bit of security in this one item)
Note: never use the full form allways round up and take off the last three zeros - so 0,000 becomes 0l; ,500 becomed .5 and 0 becomes . This makes it easier to read and creates less mistakes.
You then spread the manufacture costs across the page to reflect the negotiated deal you did with the designers.
Then the construction costs - marketing costs and so on. You can divide these personel costs up into a many smaller items as you wish.
But the real thing you are doing is setting out your best assessment of the flow of cash that is required from the Lender and also from your own equity funds - the Cost Cash Flow.
Once you have these figures spread across the page you add then vertically for a total monthly form - and also horizontally for each item total.
Hopefully the big improvement cost total in the lowest right hand box is equal to the vertical and horizontal totals.
It is - great; go to the top of the class.
Earlier I mentioned that you will have finished the terms of your improvement loan.
Well, let's say that the Lender has agreed to lend you 80% of your costs. This means you have to provide 20% from your own capital resources.
Having got the monthly totals you can now guess 80% of each figure, because this is the estimate on which you will pay interest.
It is these figures that you now guess interest on each monthly cash flow and arrive at a total cost of the finance for your development.
You now add the total interest form to the Cost Total and arrive at what we call the Total Capital Cost of your development.
There are a total of about 44 item headings that make up the Cost Side of a Feasibility Study.
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