Storage Condo Development Costs
DEVELOPMENT COSTS AND PROFITS
I have managed to breakdown the project costs into the following components.
- Site improvements
- Project management
- Soft costs
The biggest variable in them all is site improvements. The better you are at estimating the site improvements cost, the better handle you will have on the profit of the project.
I was talking to a realtor the other day who listed a property which I previously had an accepted offer on. After the survey, it revealed 1 less acre than represented so I cancelled the contract. Another guy came in and bought it. The realtor is now selling the land for $10/sf, which is at least $4/sf more the highest in the area. They said the owner has to sell for that price because the site improvement costs were more than expected.
This is backwards - the market is what it is! It doesn’t care if you messed up on the development costs. The point I want to make is, watch very carefully the site improvement costs so that you don’t get stuck into the same situation.
The key is to set the sales price first, then subtract the expected profit/building, the building cost, project management, engineering and soft costs, and see what is left. That is what you can pay for the land and the site improvements.
It is not wise to work it the other way and see what you would have to sell them for.
Know what they will sell for by figuring out what the rental rates are in the area, keeping it at a price point where there isn’t any choices, and if another development popped up in the area, you know for sure they can’t beat your price. Finally, add a little local knowledge, common sense and a “gut feel”.
On my first project, I wasn’t sure what the sales price could be - I mostly went on my gut feel. After figuring all the costs I then determined what was left and that was going to be my profit. I was ok with that number and said if they sell for more that would be great. I was more willing to leave money on the table then to over price the units because I needed more profit or the site improvement costs were more than expected.
I was “under priced” because we sold units to people who turned and sold them 6 months later for $20k more than they paid. I’m ok with that because I learned I could increase the price and therefore increase the profit/unit. goal. The formula is simple. As I explained above, the only real variables are the land and the site improvements. Here is the formula again.This shows that there is $531,800 left to pay for land and improvements.
Sales price of the units
$78,000 (11 bldgs)
$20,000 (22 units)$140k
Soft costs (5%)
$80,000 - $120,000
This analysis assumed a 2 acre parcel with the projected 5.5 buildings/acre.
We can break this down into the approximate cost of the land and improvements. Knowing the price range for industrial land in this sub area is around $3/sf, the land portion is about (2acres x 43560sf/acre x $3/sf) $261,360. This leaves the remaining amount for site improvement or ($531,800 – 261,360) $270,440.
Again, you don’t change the price to achieve the profit; you make sure your costs are right. If you are wrong, you change the profit, not the price. Just get good at knowing what all your development costs are!
It is important to note that there is flexibility with this rule but, be careful not to let it get away from you. Understand that the market doesn’t care what you paid for land improvements etc. In fact, they don’t really care how much you profit. They care that the property is good value to them.
The above analysis is used when you are going through the
process. All the development costs should be verified with actual estimates – the end result would be a
final development costs
which shows all the costs and the projected profit.
How to determine price of the units
Figuring out the price of the units is actually easy because there isn’t any competition and really nothing in the general price range – at least right now. If you follow the StorageShopUSA™ development prototype you may be the only choice in your area – at least that is what happened in my area.
Sooner or later somebody will try to compete and then the pricing becomes more crucial. For now, I look at the following;
- Rental rates for comparable office warehouse space
- Make sure you found the lowest price property for the sub area
- Use a building design that is the most economical choice (lowest price while avoiding the “cheap” look and feel)
- Local knowledge of the real estate market
- “Gut feel”
- Price point
The rental rates help determine the price because people do look at a rent vs. own analysis although it is not crucial for the typical storage condo buyer. You will pick up small business owners that are renting and would like to own. The more important reason is that it is an insurance policy so if they don’t sell, I can rent them to cover my debt service.
Making sure the land cost is the lowest in the area. If you want the best economical choice then you have to start with the best economical choice of land. It doesn’t insure value but it is the best place to start.
This holds true for the building design also. If you do this, then how could anybody put a product out there that competes with it? The only possible way is that they were more thorough than you on the design and development costs or, they are simply willing to take less profit. You want to feel comfortable that the price you set can’t be beat – you become the only deal in town!
Local knowledge of the real estate market always helps. If you have that, it is harder to get that “gut feel” or the “price you really don’t want to exceed.” The “gut feel” price is not a “hard” number, it is simply used to “gut check” the price you already determine from the other factors. I wouldn’t necessarily set the price with it but you can use it to determine the top and bottom range. The bottom range should tell you “I could live with that profit” and the upper range should tell you what you might be able to increase the price of the units as they sell.
Finally, the price point is a number you don’t want to exceed. Anything above that number and people won’t respond and say “that’s just more than I am willing to spend.”
Remember, the majority of buyers have “means” and don’t use the rent vs. own analysis. Their decision is more emotional and a lifestyle choice. Those people can afford the higher price but there is a point at which they say, “not right now” or, the price is over what I am willing to spend even if the value is there.
Price points differ a little bit from person to person depending on the purchase. The majority of storage condo buyers have the “means” to purchase and that leads to roughly the same price threshold.
In our area, the threshold is under $100,000. There is another good way to check the price point. Make sure there is nothing even close to that number. Like I said before, you can’t even buy the land for $100,000.
I suspect that as the land prices continue to rise, you won’t be able to buy land for $125,000 therefore the price point will increase naturally.
The one thing nice about this project is that if you set the wrong price, there is still a fair amount of profit.
Review the building cost breakdown.
A copy of the engineering cost estimate for a typical project.
The profit has been ranging from $20,000 to $25,000 per unit. I think this is an acceptable profit margin – especially for a new concept. A homebuilder makes 10% profit in a proven industry – why wouldn’t 20% be ok for a non-proven industry.
As you can see, the profit allows for some error - if you are off $100,000 on a 2 acre site, you still make good money. The better you are at finding land and controlling the development costs, the more profit – just do the work!
As I said before, if you mess up, it comes out of the profit. The only chance you have to recoup some lost profit is to raise the price of the units as they sell. The price increase is then warranted.
Refer to a
case study for complete development costs
which is part of the Development Manual
Project management fees usually run about 8 percent of the construction costs. I have always managed my own projects and use the budget to pay myself a monthly fee. If you have no experience in construction, then I recommend hiring a project management company or get some
from StorageShopUSA™ . I am in the process of setting up a complete turn-key package for developing and constructing new sites - geared for investors who want to venture into this new market.
If you have experience, then I recommend you pay yourself first.
Soft costs are shown on the
total project costs
spread sheet They are usually about 3% of construction costs.
The cost overruns should be minimal. If you have them they will be in the following areas.
- Sub surface soil conditions are not what were determined by the soil borings or sub surface investigation.
- Change in material costs during the project
- Construction surveying
- Construction mistakes
Every project has overruns – just stay on top of them.
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