Real Estate Development Feasibility Study

By: Colm Dillon

A specialist article for those interested in real estate.

From the desk of Colm Dillon ...

Author of 

"Residential Development Made Easy"

Hello Colm Dillon here ...

In the minds of many people, the work of preparing a feasibility study is seen as the central focus of attention.

In fact a feasibility study is just another cog in the wheel of the property development process.

(By the way most people don't realize that there is a Process To Follow & lose a great deal of development TIME & MONEY due to this ignorance & that's why I wrote the only ebook in the world that teaches the process - excuse the 'commercial'.)

 In fact to be more accurate we should refer to the feasibility study we do as a Development Financial Analysis.

There are a number of ways to prepare this type of analysis.

For small developments the Study is sometimes referred to as an Accountants Return on Investment. (ROI)

This format is just the collection of all the 'cost' figures and all the 'sales'
'income' figures.
 
If we subtract the 'costs' from the 'income' figures and the result give us the level of profit we want, (say 25%) then the project is regarded as being financially feasible. 

A bit further along the process we spread all these cost and income figures
out on a cash flow chart. That is our best estimate of when we are actually going to spend the money.

The expenditure on the land is always the easy part ... we know the amount
and the date we settle.

It's the other costs where the estimating comes in.  

For developments that take a long time to complete, the Interest will be calculated on the basis of draw down from the lender.

Naturally the longer the development time period, the more significant is
the interest component is, of your total costs.

The development's cash flow requirements are spread out across the chart
on a monthly basis and then each monthly column is totalled.

These monthly total figures are the basis of the the claim from the lender
and once paid out by the lender, interest is calculated.

Naturally at the early stages of a development you need to be conservative with the interest rate and time for the development.

Rates and terms can change from the date of your first calculation, to the
date of your negotiation, with the lender. And rates can change again during
the development time period. So don't pear the figure down to 'tight' or you'll pay for it later.

Another style of analysis is referred to as Discounted Cash Flow. (DCF)

Take the explanation I gave you in the previous few paragraphs and remember I said that you had to use an interest rate, in order to calculate your interest component of total costs.

Well, with DCF, it's the same thing, ONLY in reverse.

When I was learning this stuff, I wish the teacher told me that 'first.'

OK, the official definition of DCF is: (SHORTENED BY ME)

Discounted Cash Flow

is the:
 
"Present Day Cost" of Future Cash Flows

Settle Down ... this is what it means.

When do you do a DCF Analysis?

Answer ... Today!

Why?

'cause I understand what todays costs are ... like I'm here now ...
NOT IN THE FUTURE!

But how do you get todays costs, when all my development costs
are spread over the next twelve ... fifteen ... +++ months, and by the TIME my development is completed I'll have paid interest.

Well, to arrive at the "Today's Costs" from "Tommorow's Expenditure"
you need to discount those future costs by the interest rate you will have
to pay during the Life Of The Development.
 
So you can see that Feasibility Studies can vary in sophistication considerably.

From the one you do sitting in your car outside the site you've just
inspected for the first time ...

To the one you include in your Finance Application to the Lender.

Financial Analysis Work is completed all the way through the development as "assumption figures" are "firmed up" as actual - for both costs & sales.

In Residential Development Made Easy I set out a template for you and then explain and define every item that comprises a full study. I also include a Cash Flow Schedule.

Colm Dillon author of "Residential Development Made Easy" the only
'How To' Become a Developer eBook, selling in 38 Countries,
has developed $1.2 Billion worth of real estate - read more
on his web site: http://realestatedevelopmentcoach.com/realestatedevelopment.html

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