Tips When Calculating your Costs before Starting a Development Project

June 22nd, 2020

Before applying for a commercial mortgage to fund your development project In Melbourne, make sure you conduct a ‘needs-assessment’ or a thorough analysis of your financing needs first.

Step 1. Calculate the costs associated with the stages of development of a project.

  1. Pre-development stage (or the planning phase): It may include the appropriate filing fees, regulatory fees, legal fees and other expenses incurred in the formation of your organization or startup. Pay particular attention to acquisition options, marketing costs and the costs of securing loans for your project.
  2. Development stage: It is the longest and the hardest stage when accounting for management and cost control is very important. Prepare a comprehensive budget with estimated amounts for each of the cost category with your team. The finance, construction, and management team must work together during this phase for you to come up with a reasonable budget.
  3. Post-development stage: When the project is noticeably complete, you still need money to prepare it for its intended use. Before the buyers or lessees can move in, you may have to pay for real estate taxes, broker’s fee and attorney’s fee. You may also have to pay for certain improvements to make it habitable, such as utilities, cleaning and security.

Step 2: Study various loan options. Compare offers from banks, online lenders and other financing companies to find the loan with the lowest interest rate. You can choose between fixed or variable interest rate, depending on your capacity to pay and financing needs. Ask about repayment options, pre-payment penalty and the existence of any borrower protections.

Step 3: Make sure that the cost of the loan is reasonable enough

Developers should make a profit from project not only because the property market is good, but because they don’t have to spend a huge amount of money in repaying the loan used for the project.

Let’s say, you took out a property development loan amounting to $500,000, minus $50,000 interest, to purchase a property for $200,000. If you spent $300,000 developing it, and sold it for $1, 000,000 with a significant rise in property prices; your efforts made you $450,000.

In the example above, it is obvious that the profit margin is substantial. But, if you will spend too much on the overall interests of the loan, you may end up with a thin profit margin.

Are you planning to start a property development project in Melbourne? Windsor Capital can guide you all throughout the stages of your property development project.