8 Tips for Becoming a Successful Real Estate Developer
If the process of buying, selling and making real estate deals excites you, but being a Realtor does not, you might be a good candidate for becoming a Real Estate Developer.
What is a Real Estate Developer?
Real estate developers are entrepreneurs who find and buy land, and finance real estate deals that develop the land and any resulting projects (commercial malls, housing developments, etc.) on that land. They create and control real estate developments from start to finish, taking the greatest risks, but reaping the greatest rewards. They also buy real estate and make improvements to existing buildings. You can make highly lucrative profits, or suffer crushing losses. It’s not a career choice for the weak at heart.
Build a Personal Foundation First
Okay, so you bought and sold or flipped a house, or a piece of commercial property and made some money the first time out of the gate. Chances are you got lucky. The first step to consistent success in real estate development is to get the proper education. A degree in law, finance, construction management or urban development is a good place to start if you can. If school isn’t your thing, work for someone in the real estate business or get your realtor’s license while you build your credit score and base knowledge of the industry.
When the time comes to finance your first developmental venture, you’re ready and able to get the loans to make it happen, and you’ll have the basic knowledge to go about buying and developing your property. Work in commercial real estate if possible. Residential real estate may be easier to break into as a developer, but the rewards and the ROI and less governmental regulation in commercial real estate is where most developers make their money.
It Takes a Village to Build a Village
It’s practically impossible to be a solo real estate developer. You need a “village” or a team of players to help you see your vision through from start to finish.
“Choose a good team with applicable skills for the job,” said Robert Pellegrini, a Boston attorney. Pellegrini is president of PK Boston, a real estate law firm based in Massachusetts. He says he has quickly grown his development projects by keeping costs low and using his 20 years of zoning and permitting experience across dozens of communities. His team includes himself, a builder and an engineer. Each helps the other with their part of the project and takes a fee on the back end.
Don’t Recreate the Wheel
Real estate investment is a very risky business, but the payoff is equally great if your development is a success. That doesn’t mean you take outrageous risks, however. Take calculated ones and work smart, not hard.
“Find a good location for what you’re planning to develop, in an area that is easy to zone and obtain permits. You can find out your best options by using an experienced real estate attorney who knows the legal landscape of the community in which you plan to develop. Renovating or razing one property, but sticking with the same or similar use on the same “building footprint” eliminates permitting, saves time, and limits your costs and expenses,” he said. “Make time to do a good feasibility study too.”
A feasibility study is comprised of an analysis of the market, the location of the property, your use, the underlying zoning, demographics, the competition and the amount of risk involved in the project along with a projected return on your investment (ROI). That information is what you and your team will use to decide whether to move forward or not.
Research, Research, Research
“Before committing time and money to a project, find out if it’s a project worth pursuing and don’t be afraid to say no. Decisions based on your enthusiasm of the project can often shield you from good common sense,” he said. Intuition is sometimes helpful but successful real estate development takes research. Your preliminary research should include potential legal, economic, financial and technological challenges.
“Protect yourself during the buying process by making yourself conscious of all the things you’ll need to have in place to develop the property,” Pellegrini said. “For instance, if you want a piece of property, make your offer contingent on obtaining all zoning and land use permits that will be required. You don’t want to waste time and money on a piece of property you can’t develop to your specifications.”
Patience Is a Virtue
Real estate development takes time. Don’t put yourself in a position where you’ll feel rushed no matter how great the opportunity might appear to be. “Be mindful of the process and the timeframe you’re looking at. Plan for an extra six months to account for unseen challenges and delays at the local level. If things move faster than that, that’s a plus, but prepare and plan for the long haul. Remember, you have to buy the property, go through the zoning process, plan, build and sell – or rent. Due to the fast-paced economy, it can take longer than you think just to finalize your development plans, and even longer to get all of your permits.”
Put It in Writing
“You’ll be doing this over and over again if you’re successful. So, have solid agreements in place with your partners, so everyone understands the arrangement and so it’s easy and smooth to repeat the process,” Pellegrini said. “Having everyone on your team familiar with their process and yours, and knowing what to expect is vital.”
Know Your Market
“If you’re not a market expert, find a good real estate agent who is. Learn to be aware of the market and don’t bite off more than you can chew. One of the biggest lessons you’ll learn in real estate development is that interest on loans can eat into profits quickly. Consider smaller purchases first and you can always expand later on,” he said.
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