Real-estate development is a risky BUSINESS, but it can be very lucrative and – provided the market doesn’t turn on you, hence the risk – you can predetermine HOW MUCH money you are likely to make and WHEN you can expect to have it sitting in the bank. All in all, not a bad MM201 activity … one that scales from small projects to large ones.
Speaking of which, my projects happen to be large ones but the methodology to analyze them is pretty much independent of size … only the number of zeros will change 😉
So, whether you are building a single dwelling, a quadraplex, an office, or a 8 to 12 story apartment complex (or two, as I am doing), you will still need to collect a few key numbers – that I ran through with you in last week’s post – from a reputable Realtor and an equally reputable builder:
– The cost to buy the land
– The estimated cost per square foot to build the size /type/quality of building(s) that you are planning to erect
– The expected sale price for finished residential apartments/condos/houses
– The expected rental rates – and current capitalization rates – for any commercial space (e.g. office, retail, warehouse) that you are planning on building
Of course, you need to have a pretty clear idea of what you are building – and, their sizes – before you can really do this properly.
If you have all that, then it’s time to move to the second tab of the spreadsheet [AJC: I recommend that you spend a few minutes double-clicking on each cell to see which ones require you to insert a number, and which ones are formulas that should feel free to use or adapt for your purposes]:
– Your site may be a certain size, but you will need an architect, designer, draftsman, or town-planning consultant to tell you how many buildings / floors you can put on the site … it’s this buildable area that we are most interested in.
– I have allowed $500k for consultants’ costs (e.g. survey, plans, etc, etc.) for my large project, but it’s much better if you can call the various experts that you need and get an idea of their likely charges up front
– At this stage, I’m not building in interest cost … that will come in the next tab
– Most of this tab of the spreadsheet is self-explanatory [AJC: just drop a comment, below, with any questions!] and, completes itself, IF you have researched those numbers that I asked you to get.
Don’t get overly excited about the $7 million ‘paper profit’, as next week we’ll look at how to build in the interest component [AJC: don’t worry, the profits will still remain in ‘nose bleed’ territory IF everything goes according to plan] …