settingsIs it physically possible?
So your block size dictates you can build six townhouses, but is there a flood overlay that will scupper your plans? Is there a suitable location for garbage collection? Does the soil type preclude multi-storey development?
A site’s physical constraints can rule out certain development options, which will effectively simplify your build choices.
Is it financially feasible?
At the end of the day, we’re getting into Property Development to make money so if the proposed build doesn’t turn a reasonable profit, it’s back to the drawing board to find another site.
You may have heard me say this before: 90% of the sites out there that are developable are not profitable. Your job is to identify all the issues and challenges, cost out all the problems that you need to solve and figure out what the finished product will actually sell for.
For my money, I target a 15% annualised return. Under 15% and the deal doesn’t get across the line. 15% or higher and I’m ready to get serious.
Understand the time value of money
Of course some projects will take nine months to complete, while others might stretch out to 24 months. How do you decide which is more profitable? You’ll need to annualise your profit forecast so that you can compare projects of different sizes and durations.
If a project is going to take nine months and generate a 9% return, that equates to an annualised return of 12%. Compare that with a longer-term project that takes 24 months and generates a 34% return.
In this instance, your money's working harder, generating 17% per annum. So it's a much better deal from a how-hard-is-your-money-actually-working perspective.
Maximise profitability
Finally, we want to supercharge our returns by nailing the wishlist of our potential buyers.
Start looking at the sales data for your area. Are there many townhouse or apartment developments? What are they selling for and how long does it take for them to sell? This will give you a snapshot of demand and supply.
Is there a gap in the market – an undersupply of a particular property type? Maybe townhouses get snapped up as soon as they hit the market, with noticeable increases in value every time.
What is the typical price point in the area and is there room to push that price point?
What appetite is there for higher quality homes?
If you look at the median income for your chosen suburb it’ll give you an indication of the level of debt homeowners can sustain.