The single most important number in property investment is the maximum you should pay for a site. Here is how to calculate it.
What is residual land value?
Residual land value (RLV) is the maximum price you should pay for a development site, given the costs involved and the profit you need to make the scheme viable.
RLV = Gross Development Value minus Total Development Costs minus Developer Profit
If the answer is positive, the site has value. If it is negative — or lower than the asking price — the scheme does not work at that price.
The calculation
For a residential scheme of 6 flats in East London (GDV £2,200,000):
| Item | Amount |
|---|---|
| GDV | £2,200,000 |
| Less build cost (400m² at £2,500/m²) | minus £1,000,000 |
| Less professional fees (12%) | minus £120,000 |
| Less planning/CIL/S106 | minus £80,000 |
| Less finance costs | minus £75,000 |
| Less sales & marketing | minus £60,000 |
| Less contingency (6%) | minus £60,000 |
| Less developer profit (18% GDV) | minus £396,000 |
| **Residual Land Value** | **£409,000** |