Continued from page 1
The extra $100,000 acts as a safety buffer as you are only pricing off non-detailed preliminary design plans.
Now. let's say it’s your intention to sell all these town homes at a profit, so you have allowed some marketing costs to cover sales commissions, brochure printing etc. in your feasibility study.
At this stage biggest figure is sales commission and so you have been out talking to agents and so you have a good idea that your figures are OK.
At this stage we have wrapped up all of "major" costs except finance costs or interest on you borrowed development finance.
By now, hopefully you will have bought my e-book, and know how to go about seeking development finance correct way and not dumb way.
So you will not only know best interest rate, but more importantly, have correct type of loan and on correct “terms” – you know small print stuff.
At this stage everyone I teach wants to buy a software program so that they can get all calculations done “easy like.”
Well I have a problem with that – I know, and believe, that for you to get to know your development intimately, you have to go to trouble of doing feasibility study figures manually - it is only adding, subtracting and multiplying some figures.
It is not difficult and benefit is that you get to “know” importance and interplay of each figure on end result, being profitability.
So a simple spread sheet broken up into months on an XL is all you need.
In month one you buy land for $286,500 and associated costs of say, $21,700 so you enter a figure of $310 ($308,200 rounded up to $310,000 – you have added a bit of safety in this one item)
Note: never use full figure allways round up and take off last three zeros - so $310,000 becomes $310l; $3,500 becomed $3.5 and $800 becomes $8. This makes it easier to read and creates less mistakes.
You then spread design costs across page to reflect negotiated deal you did with designers.
Then construction costs – marketing costs and so on. You can divide these individual costs up into a many smaller items as you wish.
But real thing you are doing is setting out your best estimate of flow of cash that is required from Lender and also from your own equity funds - Cost Cash Flow.
Once you have these figures spread across page you add then vertically for a total monthly figure – and also horizontally for each item total.
Hopefully big development cost total in bottom right hand box is equal to vertical and horizontal totals.
It is – great; go to top of class.
Earlier I mentioned that you will have concluded terms of your development loan.
Well, let’s say that Lender has agreed to lend you 80% of your costs. This means you have to provide 20% from your own capital resources.
Having got monthly totals you can now calculate 80% of each figure, because this is amount on which you will pay interest.
It is these figures that you now calculate interest on each monthly cash flow and arrive at a total cost of finance for your development.
You now add total interest figure to Cost Total and arrive at what we call Total Capital Cost of your development.
There are a total of about 44 item headings that make up Cost Side of a Feasibility Study.
Next time I concentrate on Income Side.
Author & $1.2 Billion Real Estate Developer, Colm Dillon, Has Written The Best Selling & Only 'How To' E-book, "Residential Development Made Easy," With Readers in All States in the USA, Canada, Australia, New Zealand, UK, Ireland and 79 other Countries. His independent web site is http://www.realestatedevelopmentcoach.com