There is no denying that the current environment presents challenges for developers aiming to turn a profit. Rising interest rates, high construction and labour costs, and increased red tape make it difficult. However, from a finance perspective, we have observed some great operators who have managed to navigate this environment and still made a profit.
Here are Four Project Profitability Strategies:
1. Researching Your Target Market
Property development, like any other business, requires meeting product/market fit. Numerous research tools are available that can provide data on specific areas, ensuring that there is a market for what you are building and that there is no oversupply.
2. Pool Funds With Other Investors
In general, development funding carries a price for risk, and equity is safer than debt. Therefore, having a higher amount of equity in a project increases your chances of securing more attractive funding. Equity also serves as a safer way of financing compared to debt. You can strengthen your position by pooling funds and increasing the amount of equity in a project.
3. Joint Venture (JV) With Landowners
A common strategy among successful developers is to identify landowners who own unencumbered sites that are perfect for development but require assistance in realizing their value. In such cases, you can reach an agreement to develop on their property in exchange for either a higher end price for the land, payable at the project's completion, or a share of the profit at the end. However, it is important to be cautious and carefully structure these agreements. Nevertheless, this is a relatively common strategy that has been used effectively.
4. Conduct Value Management With The Builder
Builders often provide quotes without fully understanding what aspects truly add value and what does not. Successful developers typically engage in a value management process with their builders, seeking to eliminate unnecessary expenses or non-essential items, exploring alternative materials, and finding ways to reduce costs or project delays.
By utilizing these four strategies, you may find viable options for successfully undertaking a project in the current market.