This post originally appeared on tBL member SCGWest’s blog and is republished with permission. Find out how to syndicate your content with theBrokerList.
So, you’ve found a property that seems like a hidden gem, and the idea of redeveloping it is very appealing. Especially if it’s in an up and coming area, you may think it’s a steal. And maybe it is! But you really need to evaluate the property and its potential for redevelopment before you jump right into something just because it seems like a great deal. Lots of people think that you can’t go wrong with real estate investing, but that’s just not the case.
Read on to learn about how to evaluate a potential real estate development to figure out if it’s a good opportunity for you.
Run the numbers (then run them again)
You can’t assume that just because an area doesn’t have a lot of retail that a retail development will automatically be successful. We can’t stress enough how important it is to evaluate the potential profitability of the project and how it aligns with your goals.
Consider these questions: What will your projected NOI look like? How much of a return on investment are you expecting? What will the upfront costs be? Will you hold the property long-term, or sell it once the redevelopment is complete?
Here are some things to look at:
- Rents and vacancy rates in the area
- Economic trends and projections in the area
- For existing properties, review the income and expenses, maintenance records, and all leases.
- Whether there are other projects in progress in the area (including public improvements like streets, parks, etc.) and how those might affect your project. For example, will another project directly compete with yours, or will it give your tenants a built-in customer base?
- What types of tenants are you hoping to attract, and how will you structure their leases?
- The total development costs, including acquisition, design fees, construction, contractor fees, insurance, etc.
Investigate all the potential roadblocks
Let’s say you find a property, and you think to yourself, “This is a no-brainer. This would be a perfect spot for a convenience store. Why hasn’t anyone else thought of it?!”
Well…it could be that the property can’t legally be redeveloped into a convenience store! Before you make any decisions, you need to know what you can and can’t do with the property. There are several things that can restrict your project, and you need to research all of this thoroughly:
We’ve written recently about zoning and how it can restrict the redevelopment of a property. You need to fully understand what is and is not permitted on the property. It is possible that the property’s zoning can be changed, but that’s something you need to know about well in advance so that you can factor it into your schedule and budget.
Potential environmental problems
Sites with potential contamination or other environmental problems can put a hard stop to your redevelopment plans, due to the costs involved in cleaning them up. Chemicals, underground tanks, heavy metals – all of these could spell disaster for a real estate development.
Some of the most common culprits are former gas stations, industrial & manufacturing facilities, and businesses that use a lot of chemicals, like dry cleaners. An environmental assessment must be part of your investigation, and is recommended as part of your feasibility study.
Keep in mind that a lot of contamination issues can be below ground, so they aren’t visible. It’s important to examine the history of the site and hire a professional to conduct your environmental assessment to help protect yourself.
Have a plan for how you’ll handle cost overruns
You could hire the best development and construction team in the world, and most likely, there will still be unexpected issues that arise – and unexpected costs as a result. Real estate development almost always delivers a few surprises, and hard as you try, you probably won’t be able to anticipate every little thing.
What kinds of things might take you and your team by surprise? Oftentimes, when redeveloping an existing building, you may find problems with the building that were not visible and only become discoverable once demolition or construction has started.
But since you know that you should expect the unexpected, you’ll be better prepared to handle issues quickly and with minimal impact to the overall development.
When you’re developing your budget and figuring out your financing, it’s best to set aside a percentage of the budget as a contingency fund. The amount will vary dramatically depending on what the scope of your project is, but it’ll allow you to plan ahead for those expenses that nobody saw coming, and that weren’t anyone’s fault.
Know the market inside and out
We talk about this a lot, for good reason. It’s crucial to learn as much as you can about the market that you’re locating in. Demographics, growth trends, competition, site visibility and traffic patterns – all of this is important to help you evaluate the success of your development.
You can’t just go with your gut feeling about what would be a good fit for the site – it needs to be backed up with data and analysis. A good real estate developer can be invaluable in helping you with this research.
Real estate development can be a great investment, but you should never just jump blindly into a project. When you come across a property that seems like a great deal, it can be tempting to do just that. But there is a lot of analysis, investigation, and research needed to determine whether a potential project is a good investment or not.
If you’re considering a redevelopment project, it’s a good idea to surround yourself with a professional team that really knows the market and can help you figure out how to proceed. And don’t skimp on the evaluation and due diligence phase – it can save you money and time, and help make sure you get the most out of your investment.