Property Development Profit: Key Metrics to Measure Success

Property Development Profit – 6 Key Metrics to Measure Success

Not everyone has what it takes to become a property developer, but there is a lucrative market for infinite opportunities for those who do. 

If you understand how the property world works, or you are willing to put in the time and energy needed to see results then there are no limits on the returns you could see.

One of our successful property developers embarked on a Surrey barn conversion and broke records with a gross development value of an astounding £2,400,000.

Call us on 01825 749721 to see how you can get started today.

Read on to find out how to maximise your chances of earning profits like this…

6 Standard Industry Metrics:

1. Profit on GDV
2. Profit on cost
3. Cost VS budget
4. Project progress relative to milestones
5. IRR

Profit on Gross Development Value GDV (construction + fees + land)

When it comes to succeeding in property development, although a lot of it comes down to your knowledge of the industry, property market, local areas and intuitive awareness about what makes a property sell, the most important thing is to keep your budget in check and utilise the available metrics to ensure you don’t end up in a deficit.

The most commonly used metric, also known as GDV, is Gross Development Value.

The GDV is a calculation of all the profit you expect to make on any given project, before additional costs.

Profit on GDV is expressed as a %. To find the profit on GDV, you take your project’s profit and divide it by your project’s GDV.

For example, if you develop 2 homes which go on to sell for £1,000,000 each your GDV is £2,000,000.

If your costs are £600,000 and you make £400,000 then your profit on GDV is £400,000. £400,000 out of £2,00,000 means 20% profit.

Generally, the industry target for property development is 25% profit on GDV. 

However, this can be adjusted depending on your project and you will know yourself what a reasonable, feasible profit to aim for is.

Profit on cost

This metric is similar to Profit on GDV but instead, profitability is assessed against the development costs.

Again, this is expressed as a % figure.

You can find your profit on the cost by dividing your gross profit by the total cost of development, so using the same calculation as used for profit on GDV but swap GDV with development costs.

Generally, profit on cost can give a more useful figure because it allows developers to estimate their target returns.

However, both calculations have their benefits. See how much you can borrow here.

Cost VS budget

It is important to be aware of the differences between estimating your costs and determining your budget.

Although similar, estimated costs usually consider the specific amount for each separate activity or purchase, the budget refers to a more general umbrella price incorporating several costs.

This can be organised based on the time frame, or activity.

For example, a budget for remodelling a kitchen based on time may look like:

• Demolition: £3,000 Week 1
• Tile floor: £3,500 Week 2
• Installing fixtures: £1,500 Week 3
• Painting: £800 Week 4
• So the total budget would be: £8,800 split weekly:
• Week 1: £3,000
• Week 2: £3,500
• Week 3: £1,500
• Week 4: £800

Obviously, this becomes more complicated and more useful when you have multiple costs to account for each week.

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Project progress relative to milestones

Using project milestones to track progress helps monitor that you’re sticking to your estimated timeline.

Dependent on your project, milestones may include the completion of any significant tasks e.g. acquiring planning permission, demolition task, selling the property etc.

From a strategic standpoint, milestones are used as “management metrics,” allowing a qualitative way to track and measure progress.

Milestones may be altered and adjusted throughout the project lifecycle if unforeseen issues arise.

However, generally, milestones will be laid out prior to the project and developers will use these points to manage where they want to be and at what point on their development timeline they should get thereby.

Internal Rate of Return (IRR)

The final metric used to calculate the success of a project we will consider is IRR.

The IRR refers to the value your project generates during the time period when it is in your name.

In other words, the IRR is again expressed as a % and refers to the amount of interest you make on each pound you invest in the development project over the holding period.

This is a useful measurement method because it takes into consideration the amount of time needed to complete the project.

So, if you only consider GDV as a means to measure the success of a project, two projects that took different amounts of time to complete would be deemed equally successful.

It is important and highly beneficial to include time in your analysis of profit.

Are you ready to succeed through property development?

Find out how Hunter Finance can help you.

Call us today to discuss any of your specific questions and queries on 01825 749721.

Or email us: info@hunterfinance.co.uk