GETTING STARTED IN REAL ESTATE DEVELOPMENT
Real estate is not rocket science, and the only barrier to entry is capital. Quite frankly, the majority of real estate developers are terribly unsophisticated and a generation behind in terms of technology and human resources. But, they know how to source deals and where to find capital.
Thought I would share with you these nuggets of wisdom and experience having been in this business for over a decade now.
- Keep it simple, yet viable. I assume you are venturing on your own project, in which you will need to not only show numbers, but location, type, who will sell, who will buy, financial projects both 12 month and 5 year, and your exit strategy. Even if you are financing this yourself, always have a business plan and always keep your real estate ventures separate from yourself. Some people prefer LLC’s for each property, other’s a C or S Corp. Talk with an attorney if you are unsure.
- A complex spreadsheet is not necessary. You need a simple business plan showing the fundamentals of the planned development. While simplicity is ok, please make sure to be truthful with your projections. It is always good to under-promise and over-deliver. If your investors are happy with your first project, not only they will remain with you to do other projects, but they also will refer other investors to you.
- You need to know the demographics of your market. You need to know price trends. Area income variables are equally important. Local zoning requirements and infrastructure costs need to be calculated and entered into the equation. In some markets they can easily add 1/3rd or more to costs.
- Development is turning raw materials (land, building materials, infrastructure) into what amounts to a new business (an apartment complex or an office building or a retail center are all businesses in the form of a building). So you need to explain to the bank how the inputs to the process can be “paid for” by the business you create. That’s a pro forma. The rest of the package will be explaining why the assumptions in the pro forma are correct. How do you know what the building will cost? How do your rents compare to market competition? How many tenants/sales are committed now? What insurance is needed? How much entitlement work is required and how long will that take? Who will operate this business and what are the costs of their services? What professional consultants are on your team and what is their history? You need to prove to the lenders that you’ve considered this proposition thoroughly and believe in the very high likelihood that this new business will be able to repay the loan. Worry less about the template and form and more about telling an easy to follow story about this new business. Generally more information is better in this case.
- Have a good savvy real estate attorney who has a history of representing Developer’s in the area. You’ll be glad you did. Accountants and real estate sales pros are also needed.
- Some other tips worth considering:
Look for high yielding suburbs:
High yielding suburbs are areas that give a high return on the invested capital. Look for suburbs in your neighborhood that give about 10% and above in rental returns and about 30% in the resale profit on the amount that property was bought.
Buy properties that are 20% or more below the median price in the area:
This is what is called a good deal. Look for property that is below the market price and then rent or sell it at the market prices. It gives you a larger profit margin than any other property in the area.
Target properties bringing multiple incomes:
Properties with more than a single source of income enables you cover the cost of maintenance and a bit of the money invested during the buying of the property.
Renovating and adding value to the property
Renovating the property adds some value to the piece of property. A valued added property is able to fetch some extra rent due to better features and quality service. You can increase rents for the existing tenants after renovating the property.
Personally, I find real estate development fun and exciting, but make sure you research beyond just numbers and reports to keep legally compliant.
Now go and make a killing…
