How to Get Into Real Estate Development
By Adam Gower Ph.D.
The real estate market has been booming since 2010. Condos, apartment complexes, mixed-use developments, and shopping centers are being built all across the country. Developers are building the types of real estate assets that people are demanding, and they are making a lot of money in the process.
In other words, now is a great time to get into the real estate development business. According to the Emerging Trends in Real Estate 2019, which interviewed over 1,600 real estate and development experts, the current cycle has “peaked” but opportunities still exist in niche markets. You have to be careful, but you can still make a lot of money.
“The keyword for real estate’s future performance is transformation—in technology, in generational choices, in a reconfiguration of preferences by geography and by property type, and in the potential for new investors in the asset class,” according to the report.
How Do I Get Into Real Estate Development?
You could be asking yourself — how do I get into real estate development? You might be a realtor or perhaps you are a seasoned construction veteran. Maybe you are a veteran businessperson who sees an opportunity for development in your community.
In general, the question is complicated and varies. People in the real estate development industry come from diverse backgrounds. Some are trained through formal education in construction management, and others are professional financiers. At the same time, some people in real estate have an entrepreneurial background and come to real estate with little or no experience.
No formula exists for being a successful real estate developer. A lot depends on determination and perseverance. Every development project has obstacles to overcome, and a developer’s job is to keep a project moving forward despite the headwinds. The goal is to defeat the obstacles and complete the project.
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What Does a Real Estate Developer Do?
A developer could be compared to the conductor of a large orchestra. The person does not necessarily play any of the instruments but directs the musicians on how and when to play the music. From hiring a contractor to working with government planning staff, a real estate developer wears many hats and brings the entire project together.
To start, the developer has a vision. An idea for a successful development might come from seeing a vacant piece of land or watching trends in the marketplace. A developer sees an opportunity and the potential to fill a need in the community. Once the vision has been established, it is a developer’s job to spread and inspire others about the project.
Often, the developer assumes much of the risk for a project’s success or failure. Development is a high-risk, high-reward business, and a successful developer often takes on the burden of that risk. That often means negotiations. A developer negotiates multiple aspects of a project. From a contract with an architecture firm to negotiating the price of land acquisitions, a developer must have good people skills to conduct the negotiations but also be a savvy businessperson. The ability to keep a project within budget can mean the success or failure of development.
Besides working behind the scenes, the developer is often the public face of the development. If the media expresses an interest in a project, the developer will often discuss the project with members of the press and lay out the overall vision for the development. A developer might also need to go before government bodies and discuss the project. Elected officials might ask difficult questions about a project, and the developer needs to be able to answer those questions. Sometimes, there is public opposition and a developer must address the concerns.
In the end, the most important aspects of a developer’s job are securing and managing finances. A project will not get built unless funding is secured. A developer has to assemble a budget for the project and work with banks or other sources of financing to build the project. Once the financing is secured, a developer must make sure a project stays on budget and the money is allocated correctly.
You Need to Start Small in Real Estate Development
Small is often the best way to start in real estate development. You most likely are not going to build a 1,000-unit apartment complex or a 25-story office tower for your first project. A single-family home or a duplex can be a successful project and can lead to larger projects down the road. Financial institutions want to see a history of success, and they are more likely to loan money if you have borrowed money for small projects and successfully repaid back the money.
For small projects, you are often looking to fulfill a certain niche that large development companies cannot fill. Your community might need more affordable housing or perhaps it has a demand for co-working spaces in the new gig economy. These are small, manageable projects that can launch your career in development.
With a small project, you can manage a project through from start to finish. Your risk is lower with a smaller project, and thus your margin for error can be a little bit larger. A smaller project will require a small team and you will be able to wrap your head around the various pieces.
Related: How to Recognize a Housing Bubble
How Much Money Do You Need for Real Estate Development?
The cost of real estate development is a difficult question. A lot depends on your particular market and the type of project. A development in New York City will cost a lot more than a project in Wichita, Kansas. Labor, land, and materials can vary greatly depending on the location of the project.
Understanding the cost of a project is all about market research. You need to know your market. Projects can range from a couple hundred thousand dollars for a single residential home to millions of dollars for a large-scale project.
You need to start by asking questions and determine the cost of land per square foot and the cost of construction per square foot. The key to being a successful real estate developer is getting an accurate estimate of the cost to build the development from vision to final sale or lease. There have been many developers who went into a project without the proper funding and ran out of working capital halfway through a project.
The key is keeping the project on time and on schedule. The longer a project takes to complete, the more money it costs. A developer does everything possible to stick to the timeline and stay within the desired budget. Otherwise, the project will barely break even or could even lose money.
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What Kind of Experience Do You Need for Real Estate Development?
Real estate development requires no experience, but you are more likely to be successful if you have a background in construction, finance, or real estate. You need to have an understanding of the development process and how a project goes from idea to completion. A person with a background in the industry will understand many of the nuances that come from building a project.
No matter your background, however, you need to educate yourself. The development has many moving parts and operates in a heavily regulated environment. Zoning laws, labor laws, finance, project management, and workplace safety all play an important role in a successful project. You have to begin by educating yourself about the development process and the development needs in your community. Knowledge is power!
How to Get Started?
Step 1: Research
A successful development project starts with data and research. You need the correct information in order to make informed decisions to move your project forward. You can gather information in a variety of places. Online you can look at sites like realtor.com or the U.S. Census Bureau. These resources can provide you with current demographic and market trends.
Industry reports are also an excellent source of information. Organizations like McKinsey and Co. and Nareit have conducted research on current trends and have numerous publications. You can learn a lot about the larger trends in development and real estate.
Talking to people is also a great way to gather information. Realtors in your area will be happy to talk about potential opportunities and trends in real estate development. They work in the business and know what types of projects that clients are looking to purchase.
The goal is to gather enough information so you can identify opportunities that exist in the marketplace. You do not want to build luxury condominiums if there is already a glut in the luxury condominium market.
Related: What is a REIT and is it For Me?
Step 2: Build a Team
When developing a project, you will need to hire professionals in a variety of areas. To begin, you must understand your area of expertise and find team members who can fill the gaps in your abilities. You will need to find experts in real estate law, finance, construction, environmental regulations, and architecture.
When assembling a team, the whole has to be greater than the individual parts. You want people who work together well and bring cohesion and unity. A development team will spend months or even sometimes years together on a project, and you need to surround yourself with people who can grow and prosper together.
Often for your first project, you are working with outside consultants or firms and not hiring individual employees. These are usually specialty firms that will play a specific role within the project team.
Step 3: Develop a Plan
The foundation for any development project is a development plan. The plan is an overview of the project and summarizes its finances. It gives a brief vision for the project and how the project will be executed. The plan states the current real estate market and the niche that the project will fill. It must be backed by solid data and discuss the market segment for the project.
Often, you will want to conduct a SWOT analysis (strengths, weaknesses, opportunities, and threats). You need to examine the positives and negatives of the project and explain why your project will be successful given the competition in the marketplace. You need to discuss the demographics for the target audience for the project, including age, income, education, marital status, and family status. If it is a commercial enterprise, you need to talk about the particular types of businesses it will target.
Finally, the project plan needs to summarize the development team. The combined team must show that the project has expertise in every aspect of the development process. You need to have well-respected individuals on the team who will bring confidence to not only the financiers but also potential buyers. You want to demonstrate that you can successfully execute the project.
Step 4: Secure Financing
Once you have the team and the plan together, you need the money to build the project. When it comes to financing you have a variety of options. A construction loan through a bank is one option. That will mean working with a commercial loan officer and applying for the loan. The bank will look at your team and credit history. A bank will want to minimize its risk and will often set specific terms before the money will be allocated.
Outside investors are also an option. These are people who are interested in real estate investment and will supply the necessary funds. You can bring in outside investors as either silent partners or people who are actively involved in the project. A lot will depend on your project and the amount of funding that you need.
Step 5 Get the Necessary Approvals
A real estate project must get the approval of a county or city government, depending on where it’s located. For a simple project, that might just mean applying for a building permit. More complex projects can require zoning changes and the approval of planning commissions and elected officials.
To get through the approval process, you will need your team to work together in order to understand the necessary regulatory requirements. Codes and laws are different and vary greatly depending on where you are located.
Now is the perfect time to start your career as a real estate developer. Opportunities exist in niche markets, allowing you to gain valuable experience. The recipe for success is identifying a funding model that fits well with your project. A lot of new methods have been developed to raise funds. You do not have to necessarily follow the traditional route of banker-backed financing. It can be easier and often more profitable to find innovative ways of putting a project together.
You just have to use your imagination and follow the dream. Then, one day you will be putting shovels in the ground and holding a groundbreaking ceremony at your first development.
Related: The Real Estate Development Process
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