What is a good developer profit margin or return on cost?

For ground-up development, many developers target a return on cost of 15–25% and an equity IRR of 15–20% or higher, depending on risk, asset type, and market. Lower-risk core projects may underwrite to lower returns, while speculative or entitlement-heavy deals often require higher returns to be attractive.

What is the difference between profit on cost and equity IRR?

Profit on cost (or return on cost) compares total profit to total project cost and ignores timing. Equity IRR measures the annualized return to equity investors based on the timing of cash flows, including when equity is contributed and when it is returned. Two projects can have similar profit on cost but very different IRRs if one takes much longer to complete.

How much contingency should I include in a development budget?

Contingency depends on project type and design stage. Early in design, many developers carry 10–15% contingency on hard costs and 5–10% on soft costs. As drawings and bids firm up, contingency can often be reduced. In volatile markets or complex projects, higher contingencies are prudent.

Real Estate Development Feasibility Calculator & Pro Forma Tool

Q: What is a real estate development feasibility study?

A real estate development feasibility study tests whether a proposed project makes financial sense before you commit capital. It brings together land cost, construction costs, soft costs, financing, timing, and exit assumptions to estimate total profit, return on cost, equity multiple, and IRR. Lenders and equity partners typically require a clear feasibility model before approving funding.

Q: How accurate are early-stage feasibility numbers?

Early-stage feasibility is usually a rough order-of-magnitude estimate. Land price and rents may be fairly solid, but hard and soft costs can move 10–20% or more as design progresses. Use conservative assumptions, include contingencies, and update the model as bids and drawings become more detailed.

How this real estate development feasibility calculator works

This tool is a streamlined pro forma for early-stage real estate development. It is not a replacement for a full Excel model, but it is ideal for quick “back of the envelope” underwriting and comparing multiple sites.

1. Revenue assumptions

The calculator supports two common development types:

For-sale projects (condos, townhomes, lots) – value is based on total sellable area × average sale price per square foot.
For-rent projects (multifamily, office, industrial) – value is based on stabilized net operating income (NOI) capitalized at an exit cap rate.

For-sale revenue

\[ \text{Total Revenue} = \text{Sellable Area} \times \text{Sale Price per sq ft} \]

For-rent revenue (exit value)

\[ \text{Gross Rent} = \text{Rent per sq ft per year} \times \text{Rentable Area} \]

Assuming a default 5% vacancy and 35% operating expense ratio, stabilized NOI is:

\[ \text{NOI} = \text{Gross Rent} \times (1 - 0.05) \times (1 - 0.35) \]

Exit value at stabilization:

\[ \text{Exit Value} = \frac{\text{NOI}}{\text{Exit Cap Rate}} \]

2. Development costs

Costs are broken into four buckets:

Land cost – purchase price plus closing, entitlement, and carry costs you want to include.
Hard costs – construction cost per square foot × sellable/rentable area.
Soft costs – design, permits, legal, marketing, developer fee, etc., modeled as a percentage of land + hard costs.
Contingency – a percentage of hard + soft costs to cover overruns.

Hard costs

\[ \text{Hard Cost} = \text{Area} \times \text{Hard Cost per sq ft} \]

Soft costs

\[ \text{Soft Cost} = (\text{Land} + \text{Hard Cost}) \times \frac{\text{Soft Cost \%}}{100} \]

Contingency

\[ \text{Contingency} = (\text{Hard Cost} + \text{Soft Cost}) \times \frac{\text{Contingency \%}}{100} \]

Total development cost (before financing)

\[ \text{Total Cost} = \text{Land} + \text{Hard Cost} + \text{Soft Cost} + \text{Contingency} + \text{Interest} \]

3. Construction loan and interest

The calculator assumes a single construction loan sized as a percentage of total project cost (loan-to-cost, LTC). Interest is approximated using a simple average outstanding balance over the project duration.

Loan amount

\[ \text{Loan} = \text{Total Cost (pre-interest)} \times \frac{\text{LTC \%}}{100} \]

Approximate interest during project

Assuming the average drawn balance is 50% of the loan over the project duration:

\[ \text{Interest} \approx \text{Loan} \times \text{Interest Rate} \times \frac{\text{Duration (months)}}{12} \times 0.5 \]

4. Profit, returns, and feasibility flag

Once revenue and total cost are known, the calculator computes:

Developer profit = Total Revenue − Total Cost
Profit on cost = Profit ÷ Total Cost
Profit on value = Profit ÷ Total Revenue
Equity required = Total Cost − Loan
Equity multiple = (Profit + Equity) ÷ Equity

To give a quick sense of timing-adjusted returns, the tool also estimates a simple equity IRR assuming equity is invested at the start and returned at the end of the project plus absorption period.

Equity IRR (approximate)

Let:

\(E\) = Equity required
\(P\) = Profit to equity
\(T\) = (Project Duration + Absorption Months) ÷ 12 (years)

Then:

\[ \text{Equity IRR} \approx \left(\frac{E + P}{E}\right)^{1/T} - 1 \]

The feasibility flag at the top of the results uses simple thresholds:

Green – “Feasible (on paper)”: Profit on cost ≥ 20% and equity IRR ≥ 15%.
Amber – “Tight, proceed with caution”: Profit on cost between 10–20% or IRR between 10–15%.
Red – “Not attractive”: Profit on cost < 10% or negative profit.

These are generic guidelines; every market and capital partner has different hurdles.

How to use this tool like a real developer

Step 1 – Start with the dirt

Land cost is often the biggest swing factor. Include not just the purchase price but also:

Closing costs and transfer taxes
Entitlement and zoning costs
Pre-development studies and due diligence
Property taxes and carry during entitlement

Step 2 – Sanity-check hard and soft costs

Use recent bids, cost guides, or conversations with contractors to set a realistic hard cost per square foot. For soft costs, many developers use:

15–25% of hard + land for soft costs on typical projects
10–15% contingency early in design, tapering down as drawings and bids firm up

Step 3 – Align financing with lender expectations

Construction lenders often look for:

Reasonable LTC (e.g., 60–70%) and loan-to-value (LTV) at stabilization
Minimum debt yield and DSCR at stabilization (not modeled here, but you can approximate using NOI and loan amount)
Developer equity “skin in the game” and realistic contingencies

Step 4 – Stress-test the deal

Use the calculator interactively to test downside scenarios:

Increase hard costs by 10–20%
Reduce sale price or rent by 5–10%
Extend project duration and absorption period

If the project only works under very optimistic assumptions, it is probably not bankable.

Typical benchmarks for real estate development feasibility

While every market and capital stack is different, many developers and equity partners look for:

Profit on cost: 15–25%+
Equity IRR: 15–20%+ for ground-up development
Equity multiple: 1.5–2.0×+ over the life of the project

Core or lower-risk projects may accept lower returns; highly speculative or entitlement-heavy projects may require higher returns.

Limitations and next steps

This calculator is intentionally simplified. It does not model:

Detailed monthly cash flows and draw schedules
Multiple loan tranches (mezzanine, preferred equity)
Waterfall distributions between GP and LP
Tax impacts or depreciation

Once a site passes this quick feasibility test, most professional developers build a full spreadsheet model with monthly cash flows, sensitivity tables, and lender covenants.

FAQ

What is a real estate development feasibility study?

A feasibility study tests whether a proposed project makes financial sense before you commit capital. It combines land, construction, soft costs, financing, timing, and exit assumptions into a single model that outputs profit, return on cost, equity multiple, and IRR.

What is a good developer profit margin?

For ground-up development, many developers target at least 15–20% profit on cost and a 15–20% equity IRR. In very competitive core markets, returns can be lower; in riskier markets or complex projects, investors may demand higher returns.

How accurate are early-stage numbers?

Early-stage feasibility is usually a rough estimate. Hard and soft costs can move 10–20% or more as design progresses. Use conservative assumptions, include contingencies, and update the model as you get real bids and more detailed drawings.

Should I include developer fee as a cost?

Yes. Professional models usually include a developer fee (often 3–5% of total cost or a percentage of hard costs) as part of soft costs. This tool lets you include it implicitly inside the soft cost percentage.

Can I use this for small infill or single-family projects?

Yes. The logic is the same: land + construction + soft costs + financing versus sale price or stabilized value. For very small projects, you may want to adjust assumptions for shorter durations and different financing structures.

Real Estate Development Feasibility Calculator

Project assumptions

Size & revenue

Costs

Financing & timing

Key results

Project economics

Capital stack & returns

Per-square-foot metrics