Real estate development is quite different from traditional real estate investing. The appeal of real estate development lies in the potential for higher operating profits while holding and greater capital gains on sale. Much like investing, real estate development typically specializes in residential or commercial properties. Most residential development projects additionally specialize in apartment buildings or plots of land for single-family homes.
Only the smallest development projects are undertaken by individuals. This could involve building a small group of duplexes or triplexes where the return on investment will come from rental income. This can be a profitable step up the investment ladder in today’s real estate market due to lack of inventory, competition, high real estate values, or other factors.
Besides long-term rental income, when selling duplexes or triplexes with full occupancy, you can expect a return on investment in the range of 16% to 20%. This may sound like a high rate of return, but keep in mind that there is no positive cash flow until properties are occupied by tenants. Of course, there are many variables. In a major metropolitan market like Southern California, completing the project can take a few million dollars. After a year of development, selling a small $ 2 million development could earn $ 360,000 at 18%. A duplex or similar triplex project in the Midwest would likely cost over $ 350,000 with an 18% ROI of $ 63,000.
Large-scale projects include apartment buildings and tracts of raw land converted into single-family homes. These are almost always picked up by a group of investors which can be organized in a number of ways. From the perspective of the pure developer, it could be an individual operating a business entity such as an LLC who is taking the greatest risk. Unless the promoter is already rich, he will have to call on outside investors to finance the project. However, bringing in outside investors usually requires a substantial investment on the part of the developer to first put a piece of land under contract (often with an option to buy).
Most investors still won’t put any money into the deal until zoning laws align with the project and permits are available. This requires the developer to perform due diligence which includes market analysis and pro forma financial reports to attract early investors. These will be partners with a substantial share of the final profits. As a developer you will need to have some skin in the game as a capital partner which will likely be 3-5% of the cost of the project. Your equity will be a primary source of your profits at the end of the project. The developer usually also receives a developer fee as the project progresses, which ranges from 5-10%. Many developers continue as property managers until all homes are sold. All of this requires an individual developer to hire a team of specialists to complete the project (architect, civil engineer, general contractor, real estate agent, etc.). According to the National Association of Home Builders (NAHB), developers average around $ 3 million in gross profit out of $ 16.23 million in revenue. That’s a profit of 18.9%.
With approval or on the basis of modifications, the developer buys the land and subdivides it into smaller lots to develop and sell the lots individually. Land development costs include fixed costs such as clearing and leveling the land and setting up utilities and roads. There are also ancillary fees for legal fees, financing fees, and design / engineering fees. Some developers will build houses on the improved lots while others will simply sell the lots.
In 2021, the average salary for a land development project manager in the United States is $ 99,100 according to the Economic Research Institute. Over the next five years, salaries are expected to increase 13% to $ 112,100. Most development project managers have a bachelor’s or master’s degree in related studies (civil engineering, urban planning, finance, business management or a degree in real estate). The main responsibilities include:
- Coordinate activities.
- Supervise staff.
- Prepare and / or collect specific reports, including appraisals, available properties, feasibility studies, quality of water resources, mineral deposits, electrical power and labor.
- Discuss terms and conditions.
- Write agreements.
As your career as a development manager progresses, you want to forge professional and personal connections. This will improve your value as a manager or point you towards starting your own development company. In any case, the more people you know and have good relationships with, the more effective you become. You want to develop relationships with a wide range of professionals, including brokers to find deals, title agents to help you with transactions, lawyers for legal issues related to development, real estate investors and anyone else who can help to make your process more efficient and effective. .
Please share your knowledge and experience in the development world by leaving a comment.
Additionally, our weekly Ask Brian column welcomes questions from readers of all levels of experience with residential real estate. Please send your questions, inquiries, or story ideas to [email protected]ws.com.
Author Biography: Brian Kline has been investing in real estate for over 35 years and has been writing about real estate investing for 12 years. He also draws on more than 30 years of business experience, including 12 years as a director at Boeing Aircraft Company. Brian currently lives in Lake Cushman, Washington. A vacation destination, close to a national and the Pacific Ocean.