Breaking Ground: A Beginner’s Guide to Real Estate Development
Real estate development is an essential subject and could be a great career that allows for creativity, strategy, and business acumen. It could be as simple as converting vacant lots into neighborhoods or old, depressed buildings into new residential apartments. In essence, real estate developers are responsible for much of what comprises the physical landscape of our lives. For those new to real estate development, it can seem confusing and inaccessible. Development involves understanding legal processes, acquiring financing, understanding market trends, and coordinating professional services of many types. Whether you are thinking about creating your first residential development or commercial properties, it is essential to give yourself a solid foundation.
Understanding the Basics of Real Estate Development
Before you take on your first development project, it is crucial to understand what real estate development is. Real estate development is improving land and/or existing buildings to use them for a desired purpose, whether residential, commercial, industrial, or mixed-use. The development process typically involves the following: identifying an appropriate site, feasibility studies, securing funding, obtaining final approvals, overseeing construction, and finally selling or leasing the improved property.
Developers are usually the visionaries behind the project and coordinate the work of other professionals, including the architects, engineers, contractors, and real estate agents. Being a successful developer involves an amalgamation of skills that incorporates creativity, financial literacy, risk management, and interpersonal skills. Even if you’re planning to outsource most of the work, knowing each step of the process will help you make better decisions. New developers should start with small projects, such as a single-family home or a duplex, so they can learn the process.
Finding and Evaluating Development Opportunities
Discovering the right property is one of the biggest parts of being a real estate developer. Successful developers have an ideal talent for locating sites that are undervalued pieces of land or properties that would yield the highest value. It requires understanding activities in the area with local zoning laws, land use planning policies, potential growth in neighborhood areas, and demand in the market as a whole.
It is vital to look at a location not only in terms of what it is today but also what it could become tomorrow. Areas that are undergoing infrastructure improvements or economic revitalization will often yield a high return on your investment. Working with a real estate attorney and an appraiser will help you assess whether it is worth pursuing, but remember that not every opportunity is a good opportunity.
Securing Financing and Building a Budget
The financing aspect is usually the largest barrier for novice developers, but when you know what your financing options are, you can start to move forward. A bank loan may have lower rates but may require a consistent credit history and collateral. Private investors may be less rigid when it comes to qualification, but they will want to share the profits. Either way, you will have to create a solid business plan, and a solid business budget will be in place to secure financing for your project.
Your budget should include land acquisition, construction costs, professional fees (architects, lawyers, engineers), permits, contingencies, and marketing. When putting together your budget, take the time to slightly overestimate your costs, as it is always better to overestimate knowing there may be delays or material cost increases. This way, you will have a cushion for any unexpected issues. Keeping track of your budget is even more vital after the project kick-off.
Navigating Permits, Zoning, and Legal Requirements
Navigating the maze of legal and regulatory requirements can be one of the most difficult—and sometimes aggravating—parts of doing a real estate development project. Before any construction can take place, you will need to demonstrate that the project is following local zoning and building codes and observe any land use regulations. You will likely be working with city planners, the public, and other agencies during the public hearing process and submitting your plans for review and approval.
It is good insurance to hire a knowledgeable land use attorney or consultant, as they will help you understand if variances or rezoning needs to happen, the timeframe of the process, and what documents you need to prepare, if any. Relationships with local officials also go a long way. Remember, the development is not just about the development; you also need to follow the rules. Getting the regulatory and legal sides correct upfront can save you time, money, and lots of headaches.
Overseeing Construction and Bringing the Project to Market
After the plans are approved and financing is in place, construction can begin. The construction phase is where all your ideas take form and where vigilance is required to help control your time and budget. This is the time to secure a general contractor, and consistent communication will make this easier than it may seem. Once the project starts, the contractor will work with a series of trades. The general contractor is responsible for coordinating the trades, developing construction schedules, and managing safety, quality, and cost. Constantly going to the site, communicating, and sending you regular reports will help you keep the project rolling and solve problems along the way.
Once the project construction is done, your attention to marketing the sale and/or lease of the property begins. The way you use your marketing strategy is now in play. Use professional staging, online and social media outlets, and a local realtor. You have invested the time and money, and you want a return on your investment. The end player’s honest performance is measured in the market. The ability to get off to a great start and show potential built value can help you recoup the initial work.
Getting into real estate development can feel like an enormous task, but with the appropriate perspective, preparation, and a team, it can be a wonderful learning experience for you and the community you create. Every step is an opportunity to learn. Start small and educate yourself, then find an experienced teammate who will help mentor you through the process. In time, we will gain experience, and with experience will come the confidence to take on larger and more complicated developments. Continue to be educated on local markets, stay flexible in your planning and thinking, and above all, continue to pursue socially responsible development. Whether you are planning your first duplex or a commercial development, every project begins with a first step—now you have that step in place! The possibilities are ripe in real estate, and if you’re ready to break ground, there is a world of possibilities waiting to be explored!
