There are many benefits developing property will bring, but what should you focus on when assessing a development opportunity?
I get lots of calls and love speaking to people about property development. It’s interesting to see what kind of questions are raised. There is one question that is asked often and that is; “what kind of Return on Investment (ROI) do we get from our development projects?”
Even though our ROI is pretty good, it varies from project to project - this can be a dangerous way to assess the success or otherwise of a property development.
“ROI is usually expressed as a percentage and is typically used for personal financial decisions, to compare a company's profitability or to compare the efficiency of different investments. The return on investment formula is: ROI = (Net Profit / Cost of Investment) x 100.” Source: investinganswers.com
It can be a bit misleading to compare ROI on different opportunities as you need to be sure that you are comparing apples with apples. In Property Bloom cost calculations, we include every single cost, fee and charge, including our project management fee. But there is one thing that is hard to put a cost on. Time.
Having a development professionally managed saves our clients valuable time. If you didn’t use a project manager and made a higher ROI but your development took you twice as long to complete, then you need to consider the ROI over say two years instead of one.
But focussing on ROI can also mean that you are missing the other valuable advantages that property development can bring. These include:
- Yield – higher yield is created through adding value, this leads to passive income
- Strategy Flexibility – hold them, sell them, hold a few or sell a few
- Equity creation – whilst waiting for capital growth, access the equity that has been created through the development process by refinancing/selling
- Depreciation – create tax credits
- Fast growth of portfolio – increase your collection of properties quickly
- Experience – with each development, your experience widens
- Fun & exciting – beats watching TV :)
So, there are many other ways apart from the ROI, to assess what you’ll get out of a development project and it’s worth considering the bigger picture.