Why a Real Estate Feasibility Study is Vital to Your Development Project
Every new land development project has different goals. What’s more, not all land will be suitable for the project you’re developing. The last thing you’ll want to do when investing in a real estate development project is to purchase land that’s not compatible with your project or invest money in a project that won’t see adequate returns due to various unforeseen factors. To avoid such a disaster, first, perform an in-depth real estate feasibility study. Doing so can help ensure that your investment is sound and help improve the chances of a successful return in the future.
What is a Feasibility Study and What Does It Consist Of?
A feasibility study should evaluate several different things for your development project, including initial and ongoing costs, potential success, and much more. A thorough analysis is required to determine both short-term and long-term feasibility, not only to ensure that your project is worth investing in but that the land you’re buying is suitable for the project. Keeping that in mind, the following are the different parts of a real estate feasibility study:
A Site Analysis
The size of the land you need isn’t the only factor contributing to your project’s compatibility. A detailed evaluation of the land itself is required to determine how viable it is for construction. For instance, an analysis of the site’s soil composition, potential contamination, improvement requirements, presence of utilities, topographic features, drainage and flooding risks, and elevation and slope are all necessary. Any issues revealed during the site analysis will cost money to address. If the site is sloped, it will require grading. If the land is filled with trees, it will require tree removal. A site analysis is needed to determine how ready the land is to build on and how much it will cost to prepare the land for development.
A Zoning Analysis
Every city has its own zoning regulations. Before investing in land, identify the zoning laws governing the land. Zoning regulations will limit what you can do on the property you purchase; if they are not compatible with the project’s requirements, the land is not suitable. For example, if the project in question is a five-story apartment building and the land you want to develop is zoned in an area that limits new construction to three stories, your project is not feasible for that land. You must perform a detailed zoning analysis to ensure that your project will be viable for the site you want to develop before investing in that land.
A Competitive Analysis
In addition to evaluating the land itself and any zoning laws governing it, performing competitive research will give you a better understanding of the project’s potential within the neighborhood for which you’re planning the development. Identify competitors within the neighborhood and research their successes (and failures)Consider the future potential of the neighborhood. For instance, a more rural area may not appear to be of interest at present, but if you determine that there are plans to build nearby highways or office buildings, that land could prove incredibly valuable in the future.
A Cost Analysis
A thorough site analysis, zoning analysis, and competitive analysis can provide you with a lot of financial information, as to some of the costs associated with developing the land and some of the potential returns you could reap; however, a detailed cost analysis will tell you whether you’ll be able to afford to fund the project to completion. A real estate development cost analysis should include the following:
Land Acquisition Costs
Land acquisition costs may seem self-explanatory, but it includes more than just the actual cost of the land. Not only will you have to invest in the land itself, but there are many costs added to the purchase as well, such as conveyance fees, water transfer, taxes, land valuation fees, title fees, closing, holding fees, and legal expenses.
Unless you have the funds to cover the entire development project from start to finish, odds are you’ll be using financing. Many developers will buy the land first and then pay for the site’s development later. Such developers will finance the initial purchase separately and then obtain additional loans to cover the construction (including labor and materials) later. Whatever the case may be, there are many costs associated with financing that you will have to pay as well, including application fees and legal costs, not to mention the interest charged on the loans you take out.
Certification Fee Costs
There are various certifications required based on local regulatory bodies and councils. These certifications include the development approval application and building permits, both of which require fees. There are other certification fees you may have to pay as well, depending on the project. For instance, you may have to pay a strata title fee, a development contribution fee, or a re-zoning fee.
The cost of construction will vary based on the development project. Keep in mind that some construction contractors evaluate construction costs based on each residence they are building. Others may determine the construction costs based on the entire project. If you’re working with multiple contractors, it can be challenging to calculate the construction costs accurately.
Utility Connection Costs
You will have to connect newly constructed buildings to utilities, such as gas, electricity, water, sewer and telecommunication. Utility installation and connection costs vary depending on where the site is located. Rural sites without access to existing utilities, for instance, might need entirely new utility infrastructure built, which you will be required to cover.
Selling And Marketing Costs
Once your project is complete, you will need to sell your properties to make a profit — and you won’t have much luck selling if you don’t market your property. Marketing and selling property is incredibly time-consuming, which is why it’s a good idea to work with a real estate agency, which will charge a flat commission on the sale. Typically included in this service is all of the marketing required to make the sale.
Eventual Goods and Services Tax
Once you begin to sell your property, you will need to pay a goods and services tax. Not only will you have to pay this tax, but odds are you’ll pay an accountant to do so on your behalf. A professional accountant will make sure that the right amount is calculated and paid on time, so you don’t face any tax penalties.
You will want to cover your project with various insurance policies to ensure you are protected against fires, floods, storm damage, vandalism, damage and that you are covered for your own liability as an owner. You will also want to be sure to insure the project itself. Some of the policies you should consider are a real estate development professional liability insurance policy, an environmental insurance policy, an owner-controlled insurance policy, and a first-party builder’s risk policy.
Being able to afford all of the costs that you’ve broken down in your cost analysis doesn’t automatically mean that the project is worth the investment. You must also break down the potential ROI (return on investment). If the possible ROI doesn’t exceed the estimated costs of developing the project, then it’s not worth the cost — not to mention the time and effort — to develop. The following are the two essential facets of conducting an accurate ROI analysis of your real estate development project:
Potential Profit and Income
Profit and income refer to how much you expect to make selling or renting properties over a certain period. Understanding your potential profit and income requires knowing how much you plan to sell or rent your property for and whether the market can bear these amounts.
Gross Realization Value
Whereas profit and income refer to the amount you believe you can make selling or renting your property, gross realization value is the amount you’ll make if you sell or rent out all of your properties once you’ve accounted for what you’ve had to spend. It’s the absolute profit you can make at the end of your project and is the value that most lenders use to determine whether to approve financing for your project.
Scheduling Feasibility Analysis
Time is money, which is why a scheduling feasibility analysis is a must. Such an analysis helps break down how reasonable your project’s timeline is. You will need to analyze and compare your development project to similar existing projects. If your development schedule isn’t feasible, the project can end up costing more than projected. Determining when the best time of the year to build is also important. For instance, construction costs might be cheaper in the winter, but there may be more risk of delays due to poor weather. Finding a balance between costs and timing is an essential component of determining your project’s scheduling feasibility.
The Benefits of Conducting a Feasibility Study
Now that you have a strong understanding of what a feasibility study entails, you might be wondering whether such a thorough review is necessary since such a comprehensive study requires a lot of time and resources to perform correctly. However, we believe that every real estate development project, no matter how big or small, should be preempted with a feasibility study for these reasons:
Determine if The Project is Even Possible
A successful feasibility study can help you determine if the land you’re considering for the project is appropriate for your development — and if it’s even possible under current zoning laws. The last thing you want to do is invest in land that you can’t use in the way you had planned due to rules and regulations for land use. Nor do you want to get stuck with land that requires a prohibitive amount of work and money to prepare for construction. A feasibility study can inform you as to whether your project is realistic or not.
Predict The Ultimate Sales Potential and Success of The Project
It can be financially damaging if you invest a significant amount of money into developing your project, only to find that profits fall short of what you expected. A successful feasibility study should also help you accurately calculate the sales potential to more effectively determine the project’s potential success.
Identify the Budget Required for the Project
A thorough feasibility study will help you calculate the costs of developing the project, from purchasing the site to your project’s construction. Understanding the total costs of the project is essential to determining the budget that’s required. Going over-budget early on in development due to inaccurate cost calculation can be detrimental and cause severe delays if you need to attempt to obtain more financing, which can cost you more money.
Determine If The Project Is Worth The Investment Over The Long Run
There are so many different factors that contribute to a real estate project’s success or failure that it can be difficult to predict what will happen. A real estate feasibility study will provide you with an overall picture of a project’s costs, the potential roadblocks, the effort required, and the potential success. As a result, you can compare and analyze the costs and obstacles to the potential of the project’s success to determine whether or not the investment will be worth it in the long run.
A Real Estate Feasibility Study Is Critical To Any Development Project In Denver
Like any business, you must understand up front whether your investment is worth the potential return. Performing a feasibility study will inform whether the project you envision is even possible. A detailed feasibility study can help outline the costs and potential obstacles and help you predict your project’s sales potential. Without a feasibility study, you’re taking an enormous risk with your real estate development project.