At some point in every real estate investor’s career, she finds herself looking to move to the next level.For some, that next level is the acquisition of more rental homes, or a change in strategy from buy-and-holds to flips, while for others that next level is developing raw land into something of their dreams.If you’ve been flirting with the idea of becoming a real estate developer, there are some key things you should know before you ever break ground.
Some would-be developers might surmise the first place to begin would be with locating the perfect parcel of land, but nothing could be further from the truth.While location matters of course, it should not be the first item on the list.
So where does one begin?
Take Personal Inventory.The very first step for a potential developer is to ask the question, “Do I have what it takes?”Common attributes among developers include a solid real estate knowledge base; experience in property management or real estate investing; excellent time management skills; a flexible schedule; enough capital to complete the project or access to enough capital to bring the project to completion; and last but certainly not least, determination.Even if you don’t have all of these traits, bringing in a partner or partners who do will make all the difference in the success or failure of the project.
Think Like a Developer.Developers begin a project by focusing on the economic feasibility of it.What should I build that will bring the most profit in the least amount of time?How much will it cost?How much land will I need to accomplish my goal and where should this land be purchased?How large do I want to make this project?Do I build residential or commercial?What areas will accommodate what I want to build?
Developers begin with the end in mind and they visualize the finished project as well as the profit made from it.Having the end in mind also includes having an exit strategy.
Experts warn that first-timers may want to start with a small development project before trying their hand at larger projects.Taking on small projects as an investor often allows for on-the-job training, whereas there’s no room for mistakes on larger development projects which can cost millions, depending on the project.Investors taking on larger projects will need to be fully prepared to do so.
Another word to the wise is to begin with residential properties as commercial properties tend to be more complex and more difficult to obtain financing.
Assemble a Dynamite Team.Your team is critical to the success of your project.The team should include an architect, engineer, appraiser, realtor and trustworthy, reliable contractors.Work with professionals with whom you are already familiar or with contractors who have been referred to you by someone you trust.The wrong team could cost you more than anticipated and even ruin your project altogether.
Survey the Land.Developers want to locate a property and actually walk the land.Sometimes what is on paper can be very different from reality.When investing in another state or country, plan a trip or have someone you trust walk the land to determine whether the lay of the land is right for your project (that said, new developers should not be investing in unfamiliar markets).It is also important to have the experts on hand during this process as well.Engineers and surveyors can determine if your plans will work on the property once they’ve been able to actually see it in real time.Viewing the land also provides the opportunity to discover any defaults or obstacles as well as an opportunity to explore neighboring businesses and any competition in close proximity.
This is also the time to establish a relationship with your city council or city planning department as they will be instrumental in the near future when you’re trying to obtain various permits and approvals for your project. Speak with the local permit office extensively, both to start building a relationship with them and to fully comprehend exactly what permits will be required and what the process of obtaining them will entail.
Doing as much due diligence as possible up front can make the difference between a failed project and an incredibly successful one.
Secure Financing Early.Visiting with a lender early on is a good idea to determine the likelihood that a bank or other lending institution will consider you and your project loan worthy.Experienced developers say this is where an expert should be utilized to help determine how much capital is needed to fully fund the project to completion. Developers should also have a contingency for additional funds, in the event that they go over-budget; many viable projects have failed because they were undercapitalized.
Investors should be prepared with a comprehensive business plan and feasibility study in hand when the time does come to actually apply for the loan.Also, they will need to be mindful of the various stages during the process where payments will be required. Loan officers who specialize in development loans are often a good resource for “free” advice on what they often see go wrong during projects – you’re paying for their service anyway, so get as much information and expertise out of them as you can.
Of course, most lenders will require that developers be prepared to bring at least 20 percent of the total cost of the project to the table, and sometimes as much as 50 percent.
Developing raw land into something the masses can enjoy, such as a shopping mall, small townhouse community or apartment complex is a huge undertaking that shouldn’t be taken lightly.Being prepared is key, although there are bound to be surprises along the way.For a reader-friendly, step-by-step beginner’s guide to real estate development, visit https://propertyupdate.com.au/how-to-get-started-in-property-development-article/.
Have you considered becoming or are you currently a developer?If so, what types of projects are you interested in or have developed?