Developers - How do you calculate how much to pay for land to develop a rental property?
I am familiar with the residual land value technique and have been reading up on it however I'd like users to chime in on a real life example of how to get a good valuation on the price to pay for dirt or a development site.
Assuming you know the unit count and what can be built as well as the market rental rates and construction costs, what would be a more in depth way of calculating the land value?
Any initial tricks/back of the envelope math for an initial review to see if the deal would pencil out?
Any excel models or articles would be appreciated. Thanks!
Multi guy here. Its a Return on Cost Equation for me. Try to pencil it to 125-150 bps above prevailing cap rates. Stabilized NOI / All in Basis (Land + Hard & Soft Costs).
Yield = NOI / (Land + Soft Costs + Hard Costs + Contingency)
Your firm will give you the target yield. My firm's is 200 bps over cap. Most are 150. Some are 100. Let's say cap rates are at 5 and your firm is building to 150 bps over that cap rate. That means you're trying to get to a 6.5%.
So,
6.5% = NOI / (Land + Hard Costs + Soft Costs + Contingency)
or generally,
6.5% = NOI / (Land + Costs)
or
6.5% = Z / (X + Y)
So if you know your Costs (Y), and you can model your trended NOI (Z), it's really just solving for Land (X).
Again, that doesn't mean that's what the seller thinks the land is worth. That doesn't mean that's what the land will be listed for. That doesn't mean that's what the land will trade for. That means that's the most you should pay for it, assuming you're not flexible on the yield.
If it doesn't work, it doesn't work.