Development investments are one of the most promising ways to increase one's wealth. However, in order to achieve success in the real estate development industry, a business plan for a real estate development investment plays a key role.
A business plan for a real estate development project is a detailed documentation that outlines the planned real estate investment, as well as indicates what financial benefits may result. Not only does it help investors set goals and strategies, but it also helps minimize the risks associated with the investment.
A business plan for a real estate development project can be used not only for its own purposes, but also for obtaining a loan from a bank or other type of financing. This is a key document when applying for money. Most often, such a business plan is used precisely as an effective tool for obtaining a bank loan.
Read this article to learn more about business plans for real estate development projects. Entrepreneurs who implement this type of projects are the largest group of our clients. We have carried out more than 100 development business plans for both small investments like two semi-detached or terraced houses to large housing estates or hotel developments.
Here is a sample sample business plan structure for a real estate development project:
A brief summary of the investment, its purpose and potential returns. Allows you to get an idea of what the project is about in a short period of time, contains basic - the most important information.
Information about the development company, its history, experience and resources. Often the team is also described, its experience. Also included is a detailed description of the project. Usually with architectural projections, a profile of the clients, a description of the location.
Real estate market research, including trends, demand, supply and competition. It focuses on the local market, but it is also useful to show nationwide trends and the strengths and weaknesses of competitors.
Marketing and promotional strategy for a development project. It is worth highlighting the developer's distinctive elements in this field.
Forecast of investment costs, revenues, profits and profitability ratios. Performed by a professional financial analyst. Important: most "ordinary accountants" will not be able to handle this job. It requires financial modeling for the future, not just historical accounting.
Detailed schedule of activities, project management, construction stages, etc. For development projects, the material and financial schedule is particularly important.
Identification and evaluation of potential risks associated with the investment and strategies to minimize them. Most often in the form of a SWOT analysis.
Description of the management structure of the project and the responsibilities of individual team members. Can be part of the project / company description.
Details of financing sources, such as loans, investors, equity. As part of the financial projections, you should show a detailed loan repayment forecast. This is, of course, on the assumption that the business plan is created for the purpose of obtaining a loan. It is a good idea to establish the loan terms before the business plan is prepared, so that it includes the established repayment terms.
Determine the expected rate of return on investment and the timing of returns. Presented through indicators like IRR or NPV.
A strategy for the continued operation, sale or management of a property after construction. Does not apply to special purpose vehicles established solely for the purpose of selling the property and its dissolution.
Summary of the business plan and recommendations for undertaking a development investment. Conclusions follow from the other chapters of the document and the individual sub-proposals.
Remember that the above formula is a general guide and should be tailored to the specific needs and requirements of your development project.
Most of the elements of a typical construction investment business plan overlap with business plans for other industries. In it you will find sections such as a financial plan, market analysis, sales forecast. In addition, there is usually also a competitive analysis, SWOT analysis or basic business assumptions.
In addition to the above components, other elements should be kept in mind to comprehensively present the entire investment. This is especially important if the development project is to be financed by a development loan. In particular, the document includes information such as: the adopted sales schedule, advantages in relation to local competition, description of the investor (including experience), description of the stages of implementation of the investment, justification of the location, profile of future customers, financial model taking into account possible external financing. When creating financial projections, don't forget about the income statement, balance sheet or cash flow. A detailed statement of capital expenditures may also prove useful.
While you are applying for a bank loan, the execution of a business plan is important, because it means presenting a key document to the bank. It is on its basis, as well as on the basis of your financial situation (collateral) and your own contribution that the credit committee will decide whether to grant financing. The business plan allows you to make your venture credible in the eyes of the experts evaluating the project. The business plan for a real estate development project should be developed by people who have relevant experience. It is best to entrust its implementation to a specialized company. A developer usually does not have adequate internal resources in this regard.
A bank is just one of the potential financiers. Sometimes it is private investors (investment funds, business angels) or private lenders who are eager to finance the construction and development industry. Such an investor often secures a mortgage (such as land ownership). If you are looking for investor contacts or need a professional study for a bank - get back to us.
A business plan prepared with due diligence will also come in handy for your own purposes. When you register a special-purpose company, it is useful to know the exact financial plan, the schedule of activities to make it easier to stick to the set deadlines and milestones.
Of course, the business plan can also be prepared independently. You already know what such a document consists of. You can find more articles with free instructions on our blog. Just remember that it will probably take you several weeks to make such a document if you have no experience in it. In addition, preparing professional financial projections (balance sheet, income statement, cashflow, NPV, IRR) requires financial knowledge.
Why should you entrust the preparation of a business plan for a development project to an external company? The following arguments answer this.
A development business plan is a document that describes and analyzes a planned real estate investment. It contains detailed information on the strategy, financing, schedule of activities and projected profitability of the project.
A business plan is important because it provides a comprehensive assessment and analysis of a development project. It helps investors and decision makers understand potential risks, returns, timelines, and effectively communicate their vision and strategy for the investment.
The bank usually does not impose the rigor of a specific number of pages. What matters is the quality of the content of the document and the presence of all mandatory elements (described in detail above). Practice shows that the minimum volume of such a business plan is twenty pages. It happens, however, that bank business plans are more than 100 pages. To this, there are often separate attachments such as an appraisal report.
A business plan for a development project can serve as a tool for obtaining financing from investors or financial institutions, for convincing potential business partners, and as an internal roadmap to guide the project team.
