All Forum Posts by: Tyson Taylor

Hello BP,

This is my first time asking a question, so apologies if I screw it up. 

My question is how you folks incorporate property value increases into project metrics. I've seen the models that put a normal 2-3% property value appreciation into ROI, which makes sense. What I'm looking at though is in a development/rehab scenario where at the end of the project you'll have added a significant amount of value, more like 25-50%.

For example, I buy a property for 100k, and put 150k into it. Assume it was the right place/right time and now the property is worth $500k. I guess I should also ask, does anyone else use a CAP rate calc to determine value? I assume I can sell a 7 or 8% CAP, so if I have an NOI of $36k annually, I estimate value at around $500k.

So if I were wanting to display the project economics to someone, say a hard-money lender or bank, how would the increase in property value be shown? If I calculate the IRR without property appreciation, it's not that great (around 9%). If I add back the increase in property value into the first year of revenue then the IRR goes up to a respectable 27%.

To add another layer of confusion...what if the bulk of the initial investment is borrowed money? Say I put in $50k of my own cash, the rest was borrowed and at the end of development/beginning of revenue I have a note for $200k that's costing me $15k a year. This is a NNN lease so my annual opex is almost nil. Obviously now my IRR is obscenely high and I don't want to put numbers in front of people that look absurd.

Any advice is greatly appreciated!

First off, for everyone asking, by "option" he means a contract to buy the property in the future. I pay you $500 today for the option of buying the property at X date in the future for X amount.  It also establishes the relationship between the optionor and optionee, the guy who gives you the option still owns the property, they'll have to give consent to rezone/replat/etc in some form or another. 

You're adding value by rezoning, not by using the existing (or even proposed) zoning. If you're looking at an acre, currently zoned for single-family residential and the future zoning plan shows zoning for duplexes then the owner is going to sell it assuming you can build duplexes.  You don't make any money there...

You make money by buying an option on land that is zoned Agriculture and getting P&Z to approve your retail corner/hotel plan (that wasn't already on the plans). So you take your cheap option from farmer Joe, give him a % of the sales to the developers and you pocket the rest after you've paid engineers and landscape architects who put your plans together for the rezone.  Land in that case can go from being worth $3,000/ac to $100,000/ac. but you have to know what you're doing.  

Your next step is finding some land to option and finding an attorney to draft the contract for you- the "out" clauses in those are important...

Redfin.com has a stats section by zipcode, click the "stats and trends" tab on the map screen. 

I don't see anything on months of inventory though.