Return Over Investment is one of the biggest metrics to analyse financial success in projects, I get all the time questions in regard to knowing how to achieve it and if it is something related to any size of business. That’s why today I will talk about it and describes the key elements to make it successful.
Let's start from the stage of the project; it is important that as a Real Estate Developer you define a specific project that you want to dedicate to build it without investment.
The lifecycle of most of the developments are usually 2 or 3 years and this basically defines de ROI that you have achieved considering the investment you have made into it.
So let's say that you have a client who wishes to develop a big commercial property for a supermarket. The client knows you operate in Australia with success building this type of projects and you lease with him to offer him the right location.
You ask your land finder to make a deal with a landowner whose property you know is ideal for the supermarket. The land finder tells you that what price are you willing to pay? Well simply see what he wants if he wishes for a cash-out transaction or if he wishes to have an infinite return. (The infinite return comes as a multi-year contract to receive a % of the rent for the shed made for the supermarket). Then the land finder tells you that he wants to use his property as equity to invest in the development after a fair negotiation you will determine a % and then you will create a Trust on which the land is used as payment to be part of the deal.
The next step is to get all the paperwork in order and you will need to have all the town planner support to get the approvals and required permissions. The next step is to define the equity required to build the development at this point you might not have put any equity yet now you have a development plan and the approval now you might get a financial specialist like the Empire Leads team to bring some options for you. At this point it is relevant to define a good strategy for presale of the development and also you will need some bank leverage which you will be able to obtain with the project and with the contract of the supermarket (most of these types of contracts are for at least 15 years) so it is highly viable to obtain a credit with that contract as a guarantee. (Note: we are considering the project costs as paid after expense)
Let´s recap a little bit where we are at this point, you have the client, you have the land you have the finance and you have not taken money from the project.
Now it is very important to identify if the development will have secondary areas to leas, or sell such as commercial properties or even residential properties (nowadays it is common to build offices and unit on top of a shopping centre). If you do have other real estate properties to sell it is important to get a relevant agents team to sell the properties fast so that you can increase your profit by paying less interest on the debt.
Ideally you will make a successful presale with at least 65% to 70% of the property sold (this kind of presells might take time and seem a bit complicated but with some strategy to be carried out, please get some professional advice before launching your presales campaign, Empire Leads can also help you with this point).
The next thing to do is start building the supermarket, so you will execute the construction according to with the plan and start getting the income for the lease that will pay for the bank loan. Once you have this property stabilized you can approach the bank to get a new appraisal for which you will get a new loan so that you can repay the original loan and start building the rest of the development.
It is important that by this time you have easily spend a good year and now you have some presells which will help you pay for the actual construction of the units, once you have that you will also have the remaining money (after paying for the original loan) to invest and build up the secondary commercial and residential properties, you can make a due diligence at this point and review if you have enough money to conclude the project or if you would like to have additional investors or capital into the project (Empire Leads can help you do this process as well).
If you do require any additional investors you can now rely on the presell numbers and the presale campaign ongoing. To demonstrate the value of the project and actual expected returns of it, if you do this properly you will definitely get the investors for the capital to conclude with the project, up to this point you have not invested your equity and now you are about to conclude the whole development. The next step is to have the proper commercial strategy and the appropriate auditing to make sure the sales team is accountable for their job (empire leads can help you with this as well) so that you can reduce the sales cycle and make the development closure as fast as possible.
In conclusion, now you have finished selling the commercial and residential properties you have made a profit to pay the loan and the investors and you have a remaining. Now if you want to calculate your ROI you just have to write down the amount of money reaming from the development over cero (as you virtually did not invest any equity).
Remaining amount $$$$ = infinite returns ∞
¨We Increase the returns for investors and developers through real estate projects that sell ahead of time¨
*Alain Falcon Empire Leads is a master in the business area and has brought to the real estate industry great expertise and knowledge which sells faster your development.
If you have a Project struggling to get the right ROI don´t hesitate to contact him firstname.lastname@example.org
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