Real Estate Development

[TwoCitiesCapital]

Good afternoon all,

 

I've been interested in getting into real estate investments for awhile. I'm getting to the point where my capital allows me to play in that sandbox, so I wanted to spend the next year spending my time intensively learning the industry and the opportunities there. 

 

There's been a ton of great threads about real estate investments that I already have saved to go through again. I also have a family member who has extensive experience in residential real estate that I can tap. What I am lacking is resources focused on development related activities. This is an area that captures my interest, but that I have zero knowledge of. Anything from developing the raw land to buying commercial buildings to re-zone into residential units is of interest for this thread.

 

I was hoping to hear from those with development experience in the following:

 

1) Resources to use to learn about the process and everything involved

2) How you think about the developments/investments you make (commercial and/or residential)

3) Generalized timelines from start to cash-flow and the returns you have experienced in the business

4) Tips, anecdotes, and general wisdom from your years in the business

 

Ultimately, I'll be leaving NYC sometime in the next two years and this was one of the few opportunities that currently excites me about the potential of working for myself back in St. Louis. Just trying to cultivate that interest and learn the industry along the way.

 

Thanks!

[atbed]

Good afternoon all,

 

I've been interested in getting into real estate investments for awhile. I'm getting to the point where my capital allows me to play in that sandbox, so I wanted to spend the next year spending my time intensively learning the industry and the opportunities there. 

 

There's been a ton of great threads about real estate investments that I already have saved to go through again. I also have a family member who has extensive experience in residential real estate that I can tap. What I am lacking is resources focused on development related activities. This is an area that captures my interest, but that I have zero knowledge of. Anything from developing the raw land to buying commercial buildings to re-zone into residential units is of interest for this thread.

 

I was hoping to hear from those with development experience in the following:

 

1) Resources to use to learn about the process and everything involved

2) How you think about the developments/investments you make (commercial and/or residential)

3) Generalized timelines from start to cash-flow and the returns you have experienced in the business

4) Tips, anecdotes, and general wisdom from your years in the business

 

Ultimately, I'll be leaving NYC sometime in the next two years and this was one of the few opportunities that currently excites me about the potential of working for myself back in St. Louis. Just trying to cultivate that interest and learn the industry along the way.

 

Thanks!

 

If you haven't read the books below already, I think they provide a good primer into the industry:

 

https://www.amazon.com/Real-Estate-Game-Intelligent-Decisionmaking/dp/068485550X

 

https://www.amazon.com/Timing-Real-Estate-Market-Sell/dp/0071421955

 

If you are interested, I can recommend a good textbook as well. I've heard you want to start small, because projects take longer and everything costs more than expected.

 

GL

[merkhet]

I would second the Real Estate Game recommendation.

[Parsad]

There is a ton that goes into real estate development.  So much so, that we actually partnered with a team with tremendous experience in the area. 

 

Buying a property and selling it are the two easiest parts of real estate...all of the work that goes into licensing, regulations, etc, combined with being incredibly efficient in contracting, building and managing the service providers is essential in deciding what is a decent profit or a loss.  Add in normal delays by municipal bureaucracy and contractors, and you end up reducing your projected returns on what is almost always a leveraged investment.

 

But if you get it right, and you can survive the downcycles, it is the fastest way to creating substantial wealth.  Cheers!

[apparat]

TwoCitiesCapital -- I was wondering what you have found useful so far as you're spending time studying this space?

 

atbed -- I really enjoyed Real Estate Game and wanted to learn more/get further into the details. What would be the next few books to read?

 

Thanks!

[DTEJD1997]

TwoCitiesCapital:

 

I've been working on/off with commercial real estate ever since I was in graduate school.

 

Every project I've worked on, I've made money in the end....BUT that doesn't always make it a worthwhile investment.

 

The 1st project I worked on was a complete gutting and re-purposing of a building in a downtown location.  It took SUBSTANTIALLY more time & capital that what was initially budgeted/planned.  My partner and I also spent many more hours doing personal labor at the project. 

 

It was a 1st project for both of us...so our inexperience was a major problem.  Of course, everybody has to have a 1st time.  I made money...but in retrospect, I probably would have made more on an hourly basis in a "regular" job!

 

2nd project was a similar but even MORE ambitious project.  The building was in even WORSE shape and was substantially larger.  This project actually turned out to be pretty good.  The reason it worked well was that personal time was almost all intellectual work and very little physical labor.  We were also working under VERY strict time constraints.  These time constraints forced us to move along.  We wound up selling out quickly (less than a year), and actually made pretty decent money when you factor in labor, capital and time.

 

The group that wound up actually completing the second project was MUCH more experienced, much better capitalized...and wound up making out like bandits.  They made the REALLY good money.

 

The 3rd project had a decent amount of personal labor in it...and a much longer time frame...but it housed a business that I was running.  So when you factor that in, it was OK.

 

My 4th project I am currently working on.  It is a better project I think then any of the 1st 3 that I've done.  I am the owner, no partners or investors, so I get to keep all the upside.  Of course, I've got to do all the work!  I was very fortunate to get this project.  Real estate in my corner of the world has gone up, and my timing was very fortunate.  I also have a business that I run based in the building.

 

So I would say that:

 

A). Everything takes more time/labor than you initially budget for...almost always.  As time goes by and you get more experience, you will get better at estimating this, but it is ALWAYS difficult.

 

B). You really need to be well capitalized.  I simply can't emphasize this enough!  Thinking that you will be able to work with banks/mortgage companies when the time calls for it, is a very dangerous assumption!  Try to have ALL your financing lined up BEFORE you take the project on.

 

C). Working with contractors is VERY difficult and a real skill.  You can get good contractors who know EXACTLY what they are doing and do a good job...but you will pay TOP dollar to do so.  So if your capital is tight...you go further down the chain of contractors and that is where the problems start.  Contractors don't always show on time...their work takes longer than they tell you...they run into unforeseen problems and on and on. 

 

D). I highly recommend working with a more experienced partner, especially at first.  It is better to own a small part of something good, than all or most of something that is a turkey.

 

E). The more complex and lengthy projects will frequently be the largest gainers...but have more risk.  I might suggest working with the simple stuff first, and then going into more complex projects as you gain experience.  I did this the wrong way :(

 

In the end, you have to work with what is available to you, and you've got get started somewhere.

 

If you can, make sure you've got plenty of capital, time and energy.  Work with good people.

 

Good luck to you.  Let us know how things work out.

[gfp]

D). I highly recommend working with a more experienced partner, especially at first.  It is better to own a small part of something good, than all or most of something that is a turkey.

 

A lot of good points above but this one is especially wise.  The question is usually why they would want to work with you - and the answer with real estate developers is usually either, 1 - you found the deal and have it under contract (and its a good deal they want) or 2 - they need you for financing (they are tapped out with their banks temporarily - real estate developers always seem to be constrained by their access to financing - explaining the active hard money business).

 

My wife is a developer and had the good fortune to get started with a local real estate developer that turned her loose with his capital to run projects while he was out of town for months at a time (doesn't spend summers in New Orleans - wise..)  She gained experience and an introduction to a huge and valuable network of subs, service providers, lenders, and on and on.  Importantly for the work she does now, she learned the ins and outs of the State and Federal Historic Rehabilitation Tax Credit system, which has been very lucrative for her over the years as she only deals in historic structures.  Done properly, tax credits can be a huge factor in a project.

 

The other most important advice from above is the part about not being undercapitalized.  You need to pad the early parts of the renovation budget like framing so you get more capital towards the beginning of the project, otherwise you are floating an awful lot between bank draws.  Site prep, demolition, framing - add as much as possible to that section of the budget you submit to the banker.

 

It is wise and extremely helpful to have another line of credit of decent size somewhere that you have available for unforeseen timing mismatches between bank draws and payments that need to be made.  Not paying subs promptly won't build you a great reputation and it will be no surprise when they are too busy for your project on the next job..

 

Get to know the commercial bankers that are eager to lend in your area - they will compete on terms and such for your business once you get a bit bigger.  Keep 'em happy!