Do you want to maximise your return on investment (ROI) from property?
There’s a secret to it, and it’s one that 99% of property experts don’t actually know.
This secret is the foundation of all property appraisal and valuation. It’s a secret that is well understood and employed by some of the most professional and successful property investors.
Want to know what it is? Read on to discover this mysterious secret.
Highest and Best Use
The secret to maximising your ROI is Highest and Best Use.
This concept is extremely important when it comes to maximising the value of a property development.
Simply put, every potential development site has a maximum value that can be extracted from the development in terms of profit. Many investors fail to maximise the value of their investment, and it’s because they fail to calculate the Highest and Best Use.
How To Calculate Highest and Best Use
There are four essential questions that need to be answered when calculating Highest and Best Use:
#1: Is the proposed development physically possible?
There can often be serious impediments to different proposed developments, and in many cases, these are not obvious.
Ground conditions are a great example for this.
Can the ground physically support the proposal? Is there soil contamination? What is the level of the water table and will this impact the construction of foundations or basement for car parking?
This is just the start! What are the impediments from flood, or environmental protection? Are there highways, or noises that impact the site? Which way does the site orient with regard to views, sunlight and cooling breeze?
The list is endless, and these are just for the first question!
#2: Is the proposed development legally permissible?
It goes without saying – any property development you undertake should be legal.
To that end, you need to fully understand the local planning scheme and how it works. Wrap your head around concepts like zoning and neighbourhood overlays. A sound knowledge of the technicalities of property development will help you to answer Question #3.
#3: Is the proposed development financially feasible?
Over and over again, property investors get this wrong.
A variety of factors impact the financial feasibility of a development. It is for this reason that the feasibility for the development must be based on sound fundamentals and strong market insight. If the proposal is not financially feasible, your development is unlikely to proceed.
#4: Is the proposed development maximally productive?
This is where Highest and Best Use comes in. Without conducting multiple feasibilities, there is no way of knowing.
Just imagine you have a site on which you are physically, legally and financially able to build a seven-level apartment complex. A development of this size would require two levels of underground car parking.
Alternatively, if you were to decide to only build a single level of car parking, your development would be limited to just three levels of apartments.
Sounds simple, right?
Wrong! Although developing seven levels provides far more revenue than just three levels, it’s incredibly deceptive. The cost of digging the second basement for car parking is very expensive and often doesn’t justify the cost.
So which development fits the criteria for Highest & Best Use?
Only by conducting several feasibility studies, which take construction, projected sales revenue, market acceptance and town planning objections into account, will you actually know.
And there are many other questions too. Should you develop an upmarket complex with higher prices? Or should you aim at a budget market? Once again, the answer is provided by going through the feasibility process to determine the alternatives with the greatest return and lowest financial exposure.
The most profitable method to maximise the value and profit of the land will present itself once you have established the Highest and Best Use.
Only then should you be confident that the maximum value can be achieved from the redevelopment or improvement of your property development site.
If you want to learn more about achieving strong returns through property, don’t hesitate. Reach out to the Adpen team today!