Nathan Battishall, our founder and Director, shares his tips on calculating the margin on development for small property development.
Introduction
Duplex property development can be an attractive venture for real estate investors seeking to maximize returns. However, understanding the financial aspects, particularly calculating the Margin on Development Costs (MDC), is crucial for ensuring profitability and mitigating risks. In this blog, we’ll delve into the intricacies of calculating MDC for duplex property development, providing a step-by-step approach and essential considerations.
My name is Nathan Battishall from Duplex Building Design and we are specialists when it comes to development and investment design and duplexes or dual occupancies are one of our most popular services we offer to clients.
“If you don’t own a block of land, get in touch and we can find you a site off market, please book in for one of the consultations we have available for you”
- Understanding Margin on Development Costs (MDC):
- Margin on Development Costs (MDC) is a key metric used in real estate development to gauge the profitability of a project.
- It represents the percentage of profit relative to the total development costs incurred.
- Components of Development Costs:
- Land Acquisition Costs: The cost of purchasing the land where the duplex will be built.
- Construction Costs: Expenses associated with building the duplex, including materials, labour, approvals, subdivision and contributions
- Soft Costs: These include design fees, legal fees, permit fees, and other administrative expenses.
- Contingency Reserve: An allocated fund to cover unexpected costs or contingencies that may arise during the development process. Many of our clients allow for a 5% contingency
- Steps to Calculate Margin on Development Costs (MDC): Step 1: Determine Total Development Costs (TDC):
- TDC = Land Acquisition Costs + Construction Costs + Soft Costs + Contingency Reserve
Step 2: Forecast Sales Revenue: - Estimate the selling price for each side of the duplex. Make sure you work off conservative numbers
- Multiply the selling price by the number of units to get the total sales revenue.
Step 3: Calculate Gross Profit: - Gross Profit = Total Sales Revenue – Total Development Costs
Step 4: Compute Margin on Development Costs (MDC): - MDC = (Gross Profit / Total Development Costs) * 100
- TDC = Land Acquisition Costs + Construction Costs + Soft Costs + Contingency Reserve
- Example Calculation: Let’s consider a hypothetical scenario:
- Land Acquisition Costs: $900,000
- Construction Costs: $1 200,000
- Soft Costs: $50,000
- Contingency Reserve: $60,000
- Total Development Costs (TDC) = $900,000 + $1 200,000 + $50,000 + $60,000 = $2 210,000
- Forecasted Sales Revenue: $2 800,000
- Gross Profit = $2 800,000 – $2 210,000 = $590,000
- MDC = ($590,000 / $2 210,000) * 100 = 26.7%
- Key Considerations:
- Market Analysis: Conduct thorough market research to determine the demand for duplex properties in the target area and estimate achievable selling prices.
- Cost Management: Keep a close eye on development costs and implement strategies to minimize expenses without compromising quality.
- Risk Management: Allocate an appropriate contingency reserve to mitigate unforeseen challenges or cost overruns.
- Financing Costs: Consider the impact of financing expenses, such as interest payments, on the overall profitability of the project.
Conclusion:
Calculating Margin on Development Costs (MDC) is essential for evaluating the financial viability of duplex property development projects. By understanding the components of development costs, following a structured approach to calculation, and considering key factors such as market dynamics and risk management, investors can make informed decisions and maximize their returns in this lucrative sector of real estate.
Duplex property development offers lucrative opportunities for investors, but it’s crucial to approach it with a thorough understanding of financial metrics like Margin on Development Costs (MDC). By following the steps outlined in this guide and considering key factors, investors can assess the profitability of their projects effectively and make informed decisions for success in the real estate market.
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