Cost/Benefit in Real Estate Development Business Products
by David L
My name is David L, 23 years old, and first of all thanks very much for your quick responses on the previous inquiries I have sent to you.
It really tells all the visitors how eager you are to answer these questions, and with your answers that help a lot.
I have got some more questions for you.
From what I have seen, I have noticed there are different time frames of a real estate development products, from 1 single home, a subdivision, to a residential tower.
In what I could observe from different people I have talked to and personal experience I have noticed the following:
1. If you buy lets say a serviced lot from a land subdivision developer, and build a home, all the process can take around 6 to 8 months.
2. If you talk of a major project development for example 250 homes, which is the interesting thing to get into, there are more permits and arquitectural designs to be done like streets inclinations, water treatment plants, environmnental impact studies, the connection of water from main pipes of the water utility office, soil studies, dirt movement to accomodate topography, and other things before you start your 1st unit. I have seen this can take 2 years for you to start building your first home.
3. If we talk of a residential tower, lets say a 20 story building, 2.5 years or a bit more to see it standing and sold, and with your occupation permits signed to get the cash from the mortgage of customers.
Now, with these timeframes, not necesarily in your country, how do you estimate your profit margin if we grab the 25% estimated margin, and divide that profit margin by the amount of years it takes to complete a project.
If a project, not a phased one like a tower, takes 2 years, and your margin is 25%, then in real profit without counting inflation would give you a yearly profit of capital of just 12%? Or how do you estimate the margin versus time?
Its curious for me since in business you make money rotating inventory fast even if your margin is low, or having absolutely very high profit margins.
Real estate development, is tons of money in game, but how would you classify the business with my previous questions. I'm starting in developing and tons of questions just pop to mind everytime im working.
Also, I'm very interested in purchasing your commercial real esate development, since I suppose its way different from residential.
Can you please extend some facts about this ebook? Is hotel developemnt and management included there?
Thanks again Colm for your answers, your wisdom, and patience you dedicate to your visitors and customers.
I'm really happy my answers help you and others get on with the business of creating wealth.
I'm going to ask you to go back and read my residential course again on the point about 25% profit on cost as you have missed the instruction.
First of all the 25% applies to a residential feasibility study - and is NOT - NOT your projects profit margin - please get that clear!!
Read my material again and you will see that 25% is used only as a 'hurdle' minimum profit margin when you are 'first' assessing the purchase of the land. That is work you do before you buy the land.
Remember I said that land is only worth in money terms 'what you can do with it?'
Well in the early stages of your investigation you may find many blocks of land that will fit your development needs today; which one do you pick?
If you can buy one for $100k and put two units on it, the land cost per unit is $50K. If you can buy one for $120k and put three units on it the land cost is $40k each.
That is one calculation and is only of use to you provided you can create a financially viable development on either or both pieces of land; OK?
So you do a feasibility study which I explain in my course, that includes the best cost estimates and sales prices available to you.
Now if the result of the study gives you a 'profit on cost' including Interest of 25% then you deduce that you are paying the correct price for the land. Got that?
If it is less, say 21% you don't proceed with buying the land. So that is what the 25% is for. It also happens to be the absolute minimum that lenders will accept in order to finance you.
As the project proceeds and you numbers become more 'firm' that 25% will increase. So that is one part of the story.
The next part is to do with equity and borrowings from a bank and I will not go into this in detail.
By the time your development is finished and the return is say 31% - that means a money profit of 31% on 100% of the money required to complete the project.
Unless you are very cash rich you will only put in say 10% of the money required and borrow the 90%.
Well the bank gets interest on the 90% loan and you get 31% (al the profit) on your 10% equity and I'll let you calculate that, but I assure you it is much larger that 31%.
That why developers do what they do!
Regarding the commercial course. It covers all the same topic the residential course does but with the differences as they apply to commercial developments.
It is the differences that count.
BUT - BUT BUT - AS I SAY IN SO MANY WAYS AND TIMES - My courses are not a "quick read" they are a study and you will get greater benefit by studying the material.
Hope this helps,
Colm Dillon www.realestatedevelopmentcoach.com