Last week, I told you that I’ve been out shopping for commercial real-estate and ended up with not one, but two, high rise condo/office development lots …
[AJC: for those of you who have been keeping up with this blog, you will know that I feel that development is really a MM201 activity, whereas I was really out shopping for MM301 buy/hold commercial real-estate ‘with a twist’ – i.e. something I can rehab or otherwise add value to before letting it out – instead, I kind of just ‘backed into’ these deals by accident … and, my entrepreneurial instinct grabbed hold and took over 😉 ]
… and, this week I want to share ‘the numbers’ with you i.e. what do I think of the deal that just one of these properties offers?
It’s best if you start by downloading my ‘project feasibility spreadsheet’ – the actual one that I used to discuss with my project manager (who will be an equity partner) and accountant (who will earn some hefty fees) – from the new Real Estate Group/forum at ShareYourNumber.com by clicking on this link:
If you are having trouble, then try clinking on this image to go straight to the Real Estate Forum, and click on the actual link (that I’ve highlighted in blue for you in this image):
I’ve tested the link and it works for me … but, if you are STILL having trouble, e-mail me [ajc @ 7million7years.com] 🙂
Got the spreadsheet open, now?
Great, let’s get started with the first tab, labeled “Assumptions”:
– I bought the piece of land for $1.5 million (plus closing costs)
– There will be some ancillary costs (that we will go into later) to get permits to demolish and rebuild etc.
– But, this tab of the spreadsheet is more focused on getting down some of the key estimates that we will need in order to do a ‘back of the envelope’ analysis that should be enough to make the ‘go / no go’ decision on the land purchase, since this is exactly what I did with this exact same spreadsheet:
1. Any good multi-level builder worth his salt will be able to give you a ‘rule of thumb’ that says something like “a basement (for parking etc.) will cost you $1,000,000 for the first level, and $500,000 for each level thereafter” OR they may quote a ‘per square foot’ rate, like $100 psf to build it. If you can’t find a builder who will give you this for your kind of project, you may need to pay a GOOD quantity surveyor to do it for you. This is worth while for any reasonable size development project (e.g. quadraplex and upwards).
[AJC: you will need to know that this is an Australian project so you will need to multiply all the Australian dollar figures by 87 cents (i.e. multiply by 0.87) if you really want to convert this example spreadsheet to USA dollars – but, I don’t think that’s really necessary … what I DO think you should do is convert the ‘psm’ figures i.e. the areas given in ‘per square meter’ to ‘per square foot’ by multiplying or dividing by 10.75, as necessary … don’t worry, I’ll give you an example or two, as we go along]
2. To help me work out how large the basement needs to be, I need to find out from the municipal council how may car parking spaces that I need to allow for e.g. office space might be “one space for every 3 workers” whilst apartments and condos may be “one for every 2 bedroom apartment” or “one for every 20 square meters [215 square feet]”.
3. It’s critical that the builder or quantity surveyor is able to provide building costs, such as “it will cost roughly $1,500 dollars psm [$139.50 psf] to build out your office space and $2,500 psm to build the residential areas, depending on the quality of fittings that you want … this will be down to the last tap and door knob in the apartments/condos and the suspended ceilings and commercial-grade carpet in the office areas”.
3. You also need to know how large you want to make your apartments e.g. “do you want large, luxury 2 bedroom condos of about 70 square meters (including 4 to 8 square meters of balcony space) OR do you want smaller, urban-style condos of 35 square meters plus 4 square meter of balcony for your 1 bedroom apartments and 55 square meter, plus balcony, for your 2 bedroom apartments?”
[Hint: usually smaller apartments sell just as well as larger ones “off the plan”, but larger ones command a better price once completed; and smaller 2 bedroom apartments provide the greatest ‘return per square meter’ because you are still only fitting out one kitchen and bathroom; a 50/50 mix of 1 and 2 bedroom apartments usually works well … but, this can vary by location, so get EXCELLENT advice before you buy your land!]
4. Now, if you can’t be the expert on buying and building, these rules of thumb will be extremely critical – if you can find them and feel confident about them – but, you can and MUST become an expert in selling your condos … i.e research, research, research the areas you are interested in, how the condos are built/fitted out/marketed and how much YOU think they will sell for … get a good Realtor’s advice, too, and double-check it with one or two other Realtors.
5. As a ‘double-check’, you can try and run a spreadsheet (and/or ask your Realtor/s) how much condos are selling for ‘per square meter’ [or, per square foot], but this is a less critical figure.
6. If you have run the analysis that I showed you in this post, you should already know for yourself how much your office space (if you are building this as well as condos, as we are on the first two levels of this project) is renting for per square meter, and you can again double-check with a good Realtor or two who specializes in office rentals and sales (while you’re at it, ask him for the current capitalization rates for office rentals v sales …. we’ll get back to this in the next post in this series).
[AJC: you should have also already done this really simple analysis for the parcel of undeveloped land before you even think about buying it!]
Once you have these few figures (and, really, it’s not as hard as it might seem to get this stuff), you’ll be ready to move on to the exciting part:
How much money will this project make me?!
… which, I will answer in the next post in this series 😉
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I have ran the numbers looking forward to following this series. In today’s market as commercial space is now under pressure and banks holding them in their portfolios are starting to fail, developing any real property is a moving target to say the least. And financing such a project is almost impossible. That being said under standing the numbers behind a project is a must have in the tool box of the real estate investor.
@ Chino Hills – In the US, this is true. This development project is in Australia, although funding WILL be the greatest issue here, too.
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