Calculating feasibility

Expert Advice with Sam Saggers 26/11/2015
Feasibility, as defined by is something that’s “capable of being done, effected, or accomplished".  I don’t know about you, but I like that definition.
So, then when we’re searching the marketplace for great deals, how can we know whether a property is “feasible”? That is, how can we know that a profit will deliver good returns for the time, effort and money that we pour into it? That’s the whole point of investing right?
While there are no shortcuts to property investing success, it is possible to speed up your investing decisions by quickly assessing the feasibility of a certain marketplace.  Then, once you’ve narrowed down a general location you can study the market data to drill down to a particular suburb and then choose the right property to fit with your particular strategy.

So then, let’s get started, shall we?
Remember to keep it basic. You should be able to estimate about 70% of the feasibility of a particular deal with some quick maths.
What to consider

  • Return on investment
  • Downside risk(s)
Return on deposit
A key component of successful property investing involves return on deposit.
To determine the feasibility of a particular deal, take a look at how quickly you can recover your deposit in terms of capital growth.
The more quickly you can recover the capital you’ve put into the deal the sooner you can put that money to work elsewhere.
To calculate what’s known as “cash on cash return”, take a look at the following scale.
  • 100% = 12 months
  • 50% = 24 months
  • 200% = 6 months
Let’s say you purchased a property for $250,000 and put in 20% from your own funds. You don’t want to throw $50,000 away, so you find an investment where you believe you can get a return within 12 to 18 months.
If the property, after two years, grows to a value of $350,000, then you’ve succeeded in getting a 50% cash on cash return.
No discussion of investment could ignore the reality of risk. In fact, risk is such an inherent part of growing wealth, it’s important to understand it.
Some risks are foreseeable, others are not.
Market factors can - and often do - change, impacting the financial decisions we’ve made previous to the change.
For example, adjustments to borrowing requirements and stipulations recently initiated at the urging of NRAS may negatively impact some investors’ plans.
Could we have seen this change coming?
Certainly. The longer you invest in real estate the more you’ll see that the market is always shifting and changing, both as a result of consumer choices and industry decisions. This is the type of information PRE freely share at our national events.
Savvy investors, however, can respond to such changes from a position of confidence because they have already put up safeguards in the event of market shifts.
Of course natural disasters and environmental issues are also to be considered when evaluating risk.
Other factors to look at:
Market risk
Understand the property cycle and where the market lies. If the market has been going strong and seems expensive chances are you’re too late for that marketplace; Look elsewhere.

What does the supply look like? Is there a lot of land available for release?

Is the area bush prone or in a flood zone?

Location and neighborhood
Is the area desirable or does the street carry risk. (e.g. next to a main road, waste facility nearby, high crime, etc)

Will there be a major economic impact to the area? For example, properties situated in towns which rely on a single industry (e.g. mining), could lose value very quickly should that employer scale back their workforce or go out of business altogether.
Feasibility studies can include one or more strategies in their calculations, such as discount, renovation or market confidence.
Buyer appeal
How likely would you be able to find a buyer in the event the market began to turn soft? Always include an exit strategy when conducting a detailed feasibility study, setting out the demographic your marketing tactics would focus on in the event you decide to sell.

Does the property ‘fit’ with its surroundings or have the owners turned a lovely Queenslander into a Gothic nightmare, overcapitalising in the process? In a downturn the strategy known as ‘best house in the worst street’ could lose value.
Will the market continue to drop, potentially causing you to lose any money before you even have a gain? In other words, is the property at its rock bottom price?

Risk capacity
Finally, one of the most important risk assessments you need to undertake can be done without a study of the market.
What is your capacity for risk?
Understanding not only your financial ability for taking on risk, but your emotional and mental ability is key to making the most of the opportunities that present themselves on your journey towards financial freedom.

Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!

Read more expert advice articles by Sam
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.

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