There are certain circumstances under which you should call for a feasibility study.
As the term suggests, a feasibility study is a review or assessment as to whether a proposed investment or development is feasible based on the criteria of:
Such a review would likely involve various professionals to ensure the accuracy of the data gathered, likely selling and advertising costs, likely construction costs, likely professional fees, estimates of investment and selling periods, technical and professional advice whether engineers or planners and financiers.
Once relevant information is gathered it is analysed using either the relatively simple residual format, or discounted cash flow (DCF) analysis. The latter, is increasingly used by property professionals as it offers the more sophisticated approach. However, the residual approach is simpler, more quickly developed and quite appropriate for reasonably modest investments or small-scale developments.
Let us take revisit the example we used in Module 2 of a suburban site valued at $435,000 with the potential to build five town houses each with a projected value of $475,000 on completion.
The feasibility study for that prospect is as follows:
- The total development period is 18 months. However, because of the three month settlement period, full equity would be needed for 15 months.
- Interest rate of 8 per cent on $435 000 (land purchase price) for 15 months is $40 000.
- Purchase costs include: stamp duty, legal fees, rates and taxes are $34 000.
- Professional fees include: architect, engineer and surveyor total $150 000.
- Interest on the construction cost of $1 200 000 is $70 000.
- Selling expenses are $60 000.
- Projected Profit Return (ROI) is calculated as Projected Profit ($386,000) / Total Cost ($1,989,000). Each investor will have a different target ROI. The feasibility template above enables the calculation of the profit result in dollar and percentage terms so that the investor can assess whether it is an acceptable return.
In this case it would seem that the feasibility study has indicated that the project is viable.