How to Become a Real Estate Developer
Real estate development starts with acquiring or controlling raw land that either has the potential to be subdivided (made into smaller parcels that can be sold as lots to build homes) or used for a commercial project.
There are many important considerations when searching for a property that is suitable for development, which include:
A. Initial Investment
The money needed for the first phase depends on these items:
1. The purchase price of the property;
2. Controlling the property with as little money down as possible, and;
3. Being able to cover the “carrying costs” of the property, which includes making all loan payments and paying insurance and taxes, while the development process is underway.
B. Building Permits
It is a critical factor for a development project to be able to get approval from the local authorities. There may be many restrictions, such as zoning issues, off-street parking requirements, type of construction allowed, height limits, requirements for environmental impact statements, and more. There are approvals needed from many different local governmental departments.
Some sites run into problems with the local community members for certain kinds of development. Protests and legal actions to stop a development are possible.
C. Pre-Construction Expenses
A developer needs to be able to finance the pre-construction expenses to get the site ready for development. This includes paying surveyors, architects, designers, engineers, and others that work on the site plans. It also includes paying the fees for permits, inspections, and environmental impact reports.
These expenses are sometimes called, “money in the ground.” The reason for this is the need for extensive investment to prepare a site for construction that includes underground work, site leveling, connections to sewer systems, utilities, and having plans to control water run-off and dust made during construction.
Building sites that are “ready to build” and have permits/approvals in place for construction are much more valuable than raw land. Some developers specialize in buying (or controlling) raw land, getting the site ready for building, and then selling the property for a profit. Other developers go all the way to build the project on the land. Once the building site is ready to build, a construction loan covers the cost of construction.
D. Marketing
For housing tracts, developers begin the marketing process to sells lots and pre-sell custom built homes by first building a single home or homes, furnished as a model home(s). A model home is used as a sales office to show an example of the finished custom home design(s) in a housing tract development
In the case of a commercial property offered on a “build to suit” basis, developers seek a long-term tenant that commits to lease the property in advance of construction. Other commercial projects are built out on a “spec” basis. Spec projects assume there is a market demand to rent properties of the kind under construction.
If the developer continues to own the property after completion, there is a take-out loan at the end of the construction phase that is used for the long-term financing.
Summary
Being a real estate developer is exciting and potentially very profitable. However, real estate development is a business effort full of frustrations as well. Developers need to be detailed oriented or have staff that is, and be able to multi-task various efforts running along in parallel.
The permitting/approval process is fraught with danger. Many, otherwise decent development projects, fail to move forward through this phase for a variety of reasons. Because the carrying costs are usually very high, if there is an economic downturn that slows progress, a development project can run out of money.
For someone desiring to become a developer, they would be well advised to work with other successful developers first, in order to get first-hand knowledge of the pitfalls as well as learn how to succeed as a real estate developer.