The principals of feasibility are the same irrespective the type and size of your investment. If your prospective investment/development is a land subdivision, construction of industrial units, a row of townhouses or a duplex you need to get some of the principals of investment clear in your mind before commencing.
First, think of how you determine what is a good investment for you (not what you think other investors/developers think or say, this is your project, stay true to your methods.
What you want to find know, straight up,
1. Is tying up your money for extended periods going to be a problem for you and
2. is the return really worth the risk?
At this point, I would like to introduce Internal Rate of Return (IRR), you may have heard of it and if you have you may not know what it is or how it can help you in the initial stages of determining whether a project is for you.
Let’s say, a bank will pay the term rate of 4.5% fixed for 2 years. A friend tells you about a managed investment that has been returning 6% over the last 4 years or so. Which is better? Well that depends entirely on your personal circumstances and how you consider the degree of risk. On the surface 6% sounds good as a comparison but we aren’t comparing apples with apples in this case, are we, if we look at the managed fund, the PDS will advise on all sorts of conditions to the fund which may include minimum investment amounts, regular payments into the fund, strategy options, insurance requirement and more. It starts to become a little less glossy than the straight forward term deposit. What you are contemplating, rightly so, is the risk worth the return? It’s an individual question, it will be for some and not to others. If you turn your attention back to Term Deposits, you might possibly say, the return is just too low to be bothered with. These internal self-arguments are good, healthy and totally necessary. I’m sure you have heard over and over the higher the return, the higher the risk and if it sounds too good to be true it probably is. Static investment are generally considered low risk and take a long time to return significant amounts.
More significant and profitable investments usually come with some form of development or added value of an existing investment such land subdivision or an older unit block that you strata subdivide for instance or any other huge array of other concepts both large and small.
Let’s get back to IRR! This can be a very confusing concept and there all sorts of experts on the internet discussing this topic but we’re here to consider some principals only at this point and also provide some idea of how helpful this way of looking at investments can be. Overall, the benefit of IRR, from our point of view, is simply a way of saying, if I invest $1, can I get $1.10 or $1.20 back or can I get the investment to show 10% return.
We can show how the project could be affected by real life variations along the way due to selling price variations, variation in costs, time delays and other important considerations that can help you determine the levels of risk and prepare for unseen eventualities in an uncertain environment. Other essential features that can be shown are projected cash flows, when you will incur the max debt and when income begins to have a positive effect on your project. This all sounds complicated and reserved for the high end of town, well, believe me, no, this is essential for most developments and investments. It is definitely cost effective and easily updated to reflect any changes in the real / anticipated information. We are currently in early 2019 and the real estate market has come off the boil, lenders have tightened much of their lending, so more than ever, you need this style of analysis BEFORE embarking or committing to the investment, but keep in mind will all types of markets there are always opportunities for the astute investor.
What was not mentioned earlier, we can also determine from the projections and anticipated costs of the investment, what the maximum amount you should pay for the land before diminishing profitably raises its head. This is the true viability of the project. Very powerful and most important to say the least. This is called Residual Land Value (RLV).
Certainly, all this information could, on the surface, look overly complicated and too risky, this isn’t our intension, but you need a plan so you project can succeed, we have the ways and means to forecast, as far as possible, any hurdles that could eventuate so you can avoid or at least expect potential obstacles along the way.