A survey commissioned by Morgan Stanley showed that 77 percent of US millionaire investors own real estate while 35 percent hold a Real Estate Investment Trust (REIT). Real estate is by far the asset with the highest amount of investment compared with other assets.
Real estate investors often buy turnkey properties but they develop properties more often than not. The benefit of development of real estate is the opportunity for higher operating income during ownership and bigger capital gains on sale.
This is dangerous but always rewarding when it succeeds. Many of these investors work toward achieving their planned ROI with real estate development companies.
You need to understand the processes involved in getting into real estate development. You’ll go through three general stages: predevelopment, construction, and post-development. It is a good idea to refresh your understanding of what real estate development really is and how you do it before looking a little closer at these stages.
What is Real Estate Development?
Real estate development is the process of value creation by making measurable improvements to real estate, according to Ben Bulloch & John Sullivan. When you are developing real estate, you are either erecting new structures, changing existing ones, or simply enhancing any piece of real estate to increase their value. Real estate involves land, and temporary or permanent land-occupying structures.
What Qualifications You Need to Be a Developer?
The process of becoming a developer varies from one state to another but the essential requirements remain the same.
You’re going to wear a lot of hats as a real estate developer, so a wide base of knowledge and experience is important. In most states, in order to become a developer, you do not need to gain a particular degree or technical qualification, but getting a degree in similar fields can aid in your journey tremendously. These include civic engineering, urban planning, accounting, business administration, or a degree in business real estate. For example, some colleges, such as The University of Southern California, offer masters in real estate development, which can also help you get started.
This is as significant, if not more so, because your formal education is your experience on the field. A history of a career in real estate, as an agent, broker, analyst, and so on, will prepare you for becoming a developer – but other professional fields do have importance. Careers in finance, construction, sales, and many other related fields can all be important to developer success.
Most of my students have begun to work as commercial real estate brokers where they learn about both buyer and seller side dynamics. They move to assist investors in either collecting debt or equity for transactions. This can be one of the best ways to get educated in development of real estate because to do it well, you need to understand contracts and proformas like the back of your hand – and, together, these two form the DNA of any development career.
Your social capital, including your technical and personal relationships, would also have an enormous effect on your developer prowess. Simply put, the more people you meet, and have a strong relationships with in the market, the more successful you are. This includes people like brokers, who can help you find deals, title agents to help you through transactions, lawyers to help with legal issues related to development, and everyone else who can help make your process more productive and successful.
How to Get into Real Estate Development?
To get started with real estate development there is a relatively straightforward process:
Aquire Some Basic Knowledge
You don’t want to enter any form of investment without knowing market fundamentals. Know as best you can the ins and outs of real estate before attempting to invest in it. No degree required, though it doesn’t take long to get a real estate license to cover the subject thoroughly. If you’ve worked at some capacity in real estate, you’ve probably already got clear understanding of this.
Create Your Team
If you don’t want to do it all yourself, consider team members who can make it happen with you. Other developers, legal personnel, architects, engineers, finishers, day employees and more are part of a trusted team.
You can build some teams as you go, or work with an existing developer to get started.
Find a Property or Project
Find a project that fulfills the investment requirements and makes sense for the capacities of your team. To get started, you can enter, for more experience, in an existing project or search for your own property.
You need money to buy the property you will be developing, even if you don’t have to pay for it on your own. Working with investors gives you more options for commercial property, even though you would probably need an established partner to win trust of investors.
Congratulations. You have gotten into the development of real estate! Unfortunately – the easy part is to get in. This is where the pressure comes -making a worthwhile investment. Read all about moving into the development of real estate here.
Real Estate Growth Phases
The method of developing immovable property involves three main phases. Before these phases, there is work to be done including vetting opportunities and buying a property. Finding and vetting a real estate deal is a topic that requires its own space. Talking about the 3 stages of the development of the land, we are looking at how to proceed after making a purchase.
Every stage of the development of immovable property is significant. You can’t miss moves, or attempt to do them out of order. If you don’t follow the logical order, then you will make mistakes. Faults contribute to defeat. You’re more likely to end up with a net benefit than a net loss by eliminating errors and only dealing with well-thought-out, rational decisions.
After you have completed the purchase of the property, you will start pre-development before moving on to construction and post-development.
Jumping straight into construction without going through the development and review process is a catastrophe waiting to happen, just as you can’t go through the planning phase and expect that good results will come in post-development if you’re doing shoddy construction work.
Each step is there for a reason. If you want to maximize the chances of a successful outcome, go through this process the right way.
Start predevelopment with a detailed property review. Until the purchase you may have been able to review, but now you need to examine with a critical eye to decide how you can really add value to the land. Hopefully, you’ll have some suggestions based on your requirements of purchase.
Pre-development is likely to be one of the longest stages of the cycle of real estate development, because you want to plan all your steps. Every problem you can – pose and tackle it, so you can handle it before you start constructing.
Understanding Your Market
Like a farmer planting a seed, you want to make sure that you select fertile land to grow your “crop”. Different markets would work for different investment strategies – for example, for more stable but less attractive returns, you would want to invest in more expensive low-cap rates markets, for more risk and more returns, you might look at less expensive secondary or even tertiary areas with higher cap rates.
Most of the time you want to target markets with strong population growth, a diverse work base and a well-educated population. It is also a big advantage to be near to urban centers or economic centres.
Locating a Land
It’s time to find a property once you’ve decided on a market. Just as in residential property markets, digital listings are increasingly popular, with sites such as Loopnet, Costar, the major commercial real estate platforms providing retail, shopping, office, industrial, self-storage, and other types of property for sale.
That said, given the growing presence of digital media, much of the real estate industry is still face-to-face, and brokers can be great sources of off-market dealing. Your third choice is to reach out to commercial property owners and see if they are willing to sell within your specified area. That strategy requires a little more time, but due to the opportunity to pick up a property before other buyers have a chance to bid on it can be quite rewarding.
Vetting Real Estate
At this point, watch out for things like:
- Property zoning
- Local government policies
- Construction design
- Tenant negotiations
- Cost analysis & redesigns
- Market analysis
- Community public input, when required
Take your time and do this process well. Even if you want to get through everything quickly to prevent high holding costs, you don’t want to miss anything that would eventually erode your profit margins.
You should be sure that all is ready to go before you send the construction team the order to continue. If you don’t feel comfortable about your plans, continue to prepare or get a second opinion from a trusted source.
After you send the construction team the go-ahead, it’s your responsibility to track them closely. You may not be the expert in construction, but you may hire an expert to help ensure things move smoothly along. This is the most costly stage of the cycle and seldom is there a way to fix a mistake without charging for it.
If you haven’t completed your pre-development research properly, you’ll probably run into more problems during construction. If you addressed the possible issues well, then construction will move forward in a fairly predictable manner. Even if you’ve prepared well, there’s always a possibility something will go wrong.
As part of your investigation you should ask questions such as:
- Are all regulations being followed?
- Is everything up to code?
- Is the team sticking to the budget?
- Are things happening on schedule or not?
Payment to construction workers is made during the project, based on milestones. Every time a milestone is achieved, it releases more capital before it is completed. When you have checked and approved the entire project, the final payment occurs.
Whether you are building a new construction from the ground up or renovating/modifying an existing complex or building, you need to keep a close eye on what’s going on. If you are not adequately informed to know when something is wrong, hire someone to keep track of what is happening on the spot. This is vital to ensuring that the building process goes smoothly, and that the team does everything right.
Substandard work is easier to see when it’s completed than when items have been finished and perfected for opening the house. If you cut corners, something will fail before its lifespan is over, which will cost you a lot down the road.
After building is complete you have two key options. You can either open the building for business to lease and maintain it during the post-development period, or you can sell it. You will also be able to use this as collateral for a larger project loan after you complete the development project.
If you are leasing and managing the property, you should have some clients already lined up. Large CRE spaces should have business tenants lined up before the building is complete, particularly if the property needs an anchor store or if a single business tenant has a larger full space.
Projects for real estate development that take on outside investors may plan to lease and manage the building until investors have had a chance to return most or all of their initial investment. This is a common practice for multi-family homes, as tenants are usually easier to locate and keep. If the property only needs repairs or improvements, existing tenants can stay as long as possible during the buying and construction process.
Asset management begins when construction is complete. You are responsible for maintaining the house, carrying out the appropriate repairs and for general maintenance so that the asset remains in good condition. At this level, whether the property makes money or not, you are responsible for all taxes, loan payments and other fees.
If you want to sell rather than lease the house, you can be able to make a fast profit and start your next project sooner. With this path, you are more likely to owe higher taxes on capital gains, but the opportunity to move to a new project makes it perfect for those uninterested in handling long-term leases.
Tips to Keep in Mind
Here are a few things to think about when you’re in the middle of the process of development.
Many of our problems can be chalked up to miscommunication or lack of communication. As a developer, one of the leading positions is to be a facilitator and communicator, collaborating with other developers, investors, brokers, financial people and others. Availability is imperative particularly during normal working hours. People want to know that they can meet you and count on you.
It’s also important to meet your professional partners, wherever they are. This means getting in contact with people across various channels, including email, text messages, phone calls, and everything else you need to do to keep in touch.
Don’t make choices which are reckless.
In the real estate markets emotional decisions can be a killer. The same applies to reckless, unplanned decisions which some make without thinking about the possible consequences. Be careful and fastidious in how you handle every aspect of growth, from the purchase of properties to the search for funding, to the completion of the contract.
Putting your emotions to the side can be difficult, particularly in some of the highly competitive, highly stressful circumstances that come with being a real estate developer — but talk softly and hold a big stick, and you’re going to go far.
Maintain an honor code.
This one goes without saying. Your legitimate ability to do business is dependent on behaving in all of your dealings with honesty and honour. Now, that doesn’t mean you need to take every call or meeting or pay a dime more than you would have to pay for a property. This means you’re expected to obey the golden rule and treat everyone the way you’d like treated.
The real estate world is small, and even though people do not face legal penalties for conduct that is immoral or unethical, potential investors, real estate professionals, and buyers and sellers will hear about it one way or another.
Start at the Beginning
If you’re new to developing real estate, the first move is awareness. Read more about every stage of the process, from pre-development analysis to your choices for post-development. There’s no downside in getting to learn more about your potential investment area when planning for a possible project.