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How do I become a real estate developer?
January 27, 2013 9:37 PM   Subscribe

I'm well positioned (I think), to become a real estate investor. I'd like advice on how to take it to the next step.

Here's my situation:

- I have access to ready and willing investors via my connections made in previous startups
- I've flipped one property and currently own an income-property (each in two different states)
- I take my RE license exam in a month (so does my wife)

In my other life, I'm a software engineer with a strong marketing/business/analytics background. I've been very involved in RE for about five years now. I know much of the great things about the business, as well as the bad.

Having just moved back to the Los Angeles / Hollywood / Beverly Hills area, I see a big opportunity for development of properties > 4 units.

So here's what I'm looking for:

My objective is to acquire a property, build a new development (or reno), and hold for cash flow. If this makes me a developer (which - I'd love to hear other people's view of what a developer does) - then what are the next steps? Finding the property, doing the analysis, figure out financing, and then going forward?

Are there any resources on the development process from A to Z. Something that goes into more detail about the process: acquire land, hire architect, get permits, city approval, hire construction company, etc?

Also, if anyone has anyone they can put me in touch with or would like to talk to me more about development or RE investing in West L.A., please do not hesitate to reach out!
posted by mistermc to Work & Money (19 answers total) 9 users marked this as a favorite
 
You're a real estate developer when you invest in property and start to change it so you can make money from it. It doesn't matter the size of the property, who your investors are, what your business structure is and what process/strategy you use.

It sounds like you're going to lose your shirt if you've five years experience and have been studying and still can't begin to guess at how this might work. You really must talk to at least one person who has done this in your area; in fifteen minutes they will give you quite an education. I suggest taking on at least one investor that has done larger-scale properties before, and reading as much of the local/regional codes as you can so you have primary knowledge of them. I know too many people who have been burned by this; please be careful.
posted by michaelh at 10:09 PM on January 27, 2013 [4 favorites]


Keep in mind that a fundamental problem with such objectives is not necessarily lack of smarts or knowledge but lack of diversification (too many eggs in one basket, which means high potential return but also high potential loss).
posted by Dansaman at 10:35 PM on January 27, 2013


Avoid West Hollywood. You may buy there, but chances of demo and re-building are fraught with politics, and the public has squashed more than one building plan there.

What are your goals?

You'll do better (as you probably know) in the City of LA proper, rather than Beverly Hills, WeHo, or Santa Monica. Less push-back from the local neighborhood once plans are announced.

There are so many tiny steps involved in your plan - I hardly know where to begin.

Perhaps I am jaded, but it seems having the "right" emissaries to deal with the City Council and Planning Department is key. Do you have these people in place?

You could, say, buy a residential building.... Upgrade the exterior, landscaping, and the plumbing, then move to renovate and rehab individual units as they come vacant. This is less intensive than demolishing a property (and you won't have to pay existing tenants to vacate - what's that called again??) but is it IS a longer term investment.

I know folks who have seriously rehabilitated the exteriors and common areas extensively and flipped buildings quickly, but they were lucky, as the plumbing was still shite. If I remember correctly, you want to make back the renovation of any individual unit within 2 years of initial investment on that unit.

West LA is prime for what you are aiming at.

I really really recommend slow improvement of an existing property, rather than demo and rebuilding. Unless you have the kind of cash that makes losing your initial investment a non-issue.

My experience is in WeHo and West LA. Memail if you have more questions.

----

If I was you, with money and time, I would buy properties in slowly gentrifying areas (what's the neighborhood south of Pico, west of La Cienaga called?) Make those buildings nice (the architecture there is lovely to begin with!) and wait for the market to catch up. Like, 10 years wait.

I've been through the approval process for new builds. It can be easy, or a war of attrition you might lose in the end.

Cheers.
posted by jbenben at 10:39 PM on January 27, 2013 [3 favorites]


Paying existing tenants to move is under the Ellis Act.

Once you Ellis Act tenants on a property you buy and plan to demolish, you must either demo the site, and then you have to offer former tenants the option to move back under certain rent restrictions, or keep the building entirely vacant for 5 years. It's a "do or die" kinda thing, for the owner.

I know of buildings that were Ellis'd where the owner ran out of time, money, or good will from the Planning Commission to demo and re-build. The rent controlled tenants who chose to stay are still in residence, the rest of the building has been empty since the Ellis Act was optioned - over 5 years now. The owners I'm thinking of failed to come up with a building plan the neighborhood approved, and their demo and re-build stalled.

Your ask is very optimistic. Unless you buy vacant land in LA (and therefore a build there is likely issues) I implore you to be a bit more grounded.

Again. I'm not an expert, but memail me if I've touched upon anything that might help.
posted by jbenben at 10:55 PM on January 27, 2013 [2 favorites]


Bigger Pockets is a real estate investing site. I have found their forum very educational and I know they have people from LA on there.
posted by Melsky at 11:04 PM on January 27, 2013


I'm a small-time landlord, and I'm pretty scared at this step you're about to take. You don't seem to know the business, really. jbenben has great advice for someone at your level. What you should be doing if you want to be in the "developer" world is making contacts there and, eventually, finding a way to be a junior partner on a project in which you don't hold all the risk (but in which everything you pony up is in fact at risk, a fact you should always keep in mind). The year-ish that you spend on this project, doing as much hands-on as you possibly can, will be an education far more valuable -- like 10x or 100x -- than that cert you're getting.

Only after that would I consider taking on a project of my own. Only after taking on a project of my own and succeeding would I dare suggest to any friends, relatives, or acquaintances that they invest with me. Because when you lose someone's shirt for them, they really don't forget it.

Another route to take is REITs. This would be another way to mitigate your risk by spreading it out against a variety of properties in a variety of locations and circumstances. It's quite the opposite of hands-on, though.

Finally, moving back into an area isn't knowledge enough to be sure of the fundamentals. That you get from the hands-on stuff like monitoring vacancies and cash flow.
posted by dhartung at 12:25 AM on January 28, 2013 [1 favorite]


Construction costs can explode if not planned and monitored properly. Do you have any knowledge in this area?
posted by jazh at 12:31 AM on January 28, 2013


You're an individual starting out and you want to do real estate development in one of the most expensive cities in the country, some of whose neighborhoods have very restrictive development policies/regulations?

Not to be too harsh here: but I do not understand your plan or why I would want to invest with you.
posted by dfriedman at 4:55 AM on January 28, 2013


Your ambitions are admirable, but you've been competing in amateur weekend bike races, and now you want to join the Tour de France and go up against Lance Armstrong and the steroid-infused members of the USPS racing team.

Don't feel bad about this. You can do this eventually! But you need a few stepping stones to get there.

Since you've both flipped a property and currently own income property, you've covered two of the bases for development, ie, construction work (assuming you spruced up the flipped property) and management. Your next task should be expanding your real estate portfolio with a more ambitious fixer-upper, a spec house, or a new income purchase.

My preference would be an income property like a fourplex or sixplex that would deliver you a positive cash flow, some of which you can use for capital improvements. Unless there's a dearth of good properties nearby, try to buy your purchases in your home state, or a neighboring state if it's close. There's no "cachet" in owning separate properties in multiple states! Everyone I know who has done this has experienced numerous management hassles. All of your real estate should be a maximum of a five or six hour drive away. You're not Ted Turner with ranches everywhere. Don't fuck with remote, out of state properties.

Also, if you're a serious, committed investor, don't fuck with REITs. REITs are great for retirement portfolios, but their returns are terrible in comparison with buying properties with your own money for your own LLC. You can't take direct advantage of the tremendous benefits of direct ownership, such as depreciation and leverage via OPM.

As time goes along, you'll network with bankers and owners in real estate, and eventually be able to staff an office, find multiple principals for deals, and get into the development game. But your first priority now is building experience, capital reserves and contacts.
posted by Gordion Knott at 5:31 AM on January 28, 2013 [1 favorite]


Are there any resources on the development process from A to Z. Something that goes into more detail about the process: acquire land, hire architect, get permits, city approval, hire construction company, etc?

If you are serious about this and have as much RE experience as you claim, then you would already know the answers to these questions and such people would already be part of your network.

You have lots of money, right? Enough to keep you from losing your shirt when construction projects drag on due to unexpected delays? Heck, you might experience SERIOUS delays during the design or tender process. It happens. I work in construction and the developers we do business with have enough cash flow to become involved in these projects for the long haul. Because it is a long haul, especially in terms of seeing a return on your investment.
posted by futureisunwritten at 6:50 AM on January 28, 2013


The general attitude of people when I try and ask them for advice is negative. Certainly, someone is developing properties and is doing well at it. Certainly they had to start somewhere. Or perhaps as dhartung mentioned, development is best done as part of a development team as it is not feasible for an individual to accomplish the task.

I know it's hard. I know the risks are high. Anything worth having is going to take a lot of hard work. Real estate is a business and I'm very aware of the risks and involved. I know this. I know this. I know this. I'm not naive.

Just because you're scared, doesn't mean I am. I don't have any false pretenses about making a quick buck or not losing money (which I plan to avoid), or any other possibile outcomes.

In general, much of my own personal success has been become I have a different attitude and outlook than those around me. Rather than letting fear stop me from pursing my dreams, I embrace the unknown, seek out the experience, seek out the answers, and then push the ball farther down the field.

That being said, with all due kindness, stop being so negative. Don't stop just for me, but for yourself. There's no book on how to do this in the real world so I'm using this post as one of many venues to gain some new knowledge.

I'm sure someone will continue their rant about "Oh my gosh - the fact that you're even here means you don't know what you're talking about!" - fine. Carry on if it makes YOU feel good about not pursing my goals. Just know that you're only hurting yourself by looking at the unknown with fear, rather than trying to discover it for yourself.
posted by mistermc at 7:11 AM on January 28, 2013


[seeking people who will] talk to me more about development or RE investing in West L.A

Start here.
posted by carmicha at 7:48 AM on January 28, 2013 [1 favorite]


mistermc, I don't think people here are negative on your investing in real estate per se, just on your immediate transition to development.

Is there any specific reason why you want to short circuit the normal process, and jump directly into development before you've built up a portfolio of income properties and a substantial cash flow?
posted by Gordion Knott at 8:04 AM on January 28, 2013


@Gordion

I'm not trying, not intentionally anyhow, to short circuit the normal process. I'm trying to find out what the process is in the first place. Do you know? Why is having a portfolio of income properties and substantial cash flow a prerequisite to development?

I don't necessarily disagree, but I don't see it as a requirement. It is something I'm already doing in parallel. If the right property comes across my desk and it makes financial sense, then I will act on it.

Many folks here mentioned local politics and zoning as being a potential risk. I concur; however, my experience with development in the past has taught me that if I can find a good/established contractor that serves my area, many of those risks can be mitigated by their experience in dealing with the city. They'll have inherit knowledge based on their experiences that I can draw from. Does it mitigate all risk? No - but it's one of many strategies to alleviate it.
posted by mistermc at 8:14 AM on January 28, 2013


Why is having a portfolio of income properties and substantial cash flow a prerequisite to development?

Some people jump in directly, with no fanfare. But they're unusual. Take Donald Trump. Yes, he got in the development game and began making headlines in his twenties, right out of college. But he was bankrolled by a trust fund, and more importantly, he had the rolodex of his father, who developed middle class housing in Brooklyn, to use for contacts. Lawyers, bankers, contractors, union officials, municipal contacts--these, we can assume, were pulled right out of the rolodex.

Even so, many of Trump's early projects blew up on the launchpad. He walked away, a little poorer, but still with ample cash reserves, and a monthly cashflow in the family business that exceeded his needs.

From what you've written, it sounds like you're more attracted to the challenge of developing than making a big score. This is good. I think your best bet for a starter project might be a spec house, if you can find good land near to you. You might put up a single-family dwelling to test the waters, and learn the difficulties of zoning variances, dealing with contractors and subs, and the like. Then flip it, and think about another spec house or spec apartment building. At first I suggested buying fourplexes or sixplexes, but given your motivation, starting fresh with a new spec house and building up might suit your personality more.

Whatever you do, make sure you have at least 30% extra in cash or financing to cover cost overruns (which are guaranteed).
posted by Gordion Knott at 9:38 AM on January 28, 2013 [1 favorite]


@Gordion

You get me. RE investing is not a get rich scheme. I'm genuinely interested in it from a long-term perspective.

Thanks for the suggestion. I agree with you. Start small, go through the process on a small scale, learn, and then scale up.
posted by mistermc at 10:20 AM on January 28, 2013


I take my RE license exam in a month (so does my wife)

If you haven't already, you need to put some thought into how this would affect what you want to be doing, and how the laws in your state that govern what you can and can't do when you have a license would potentially come into play.

My objective is to acquire a property, build a new development (or reno), and hold for cash flow. If this makes me a developer (which - I'd love to hear other people's view of what a developer does

Unless you've got some other idea of how to "hold for cash flow", you'll be a landlord. You can call yourself a developer if you want to, absent legal reasons that require otherwise.
posted by yohko at 3:32 PM on January 28, 2013


You want to read Gary Keller's The Millionaire Real Estate Developer.

Keller is half of the national real estate Keller-Williams franchise.
posted by Short Attention Sp at 6:40 PM on January 28, 2013


You want to read Gary Keller's The Millionaire Real Estate Developer.

My wife and I have both read it. It's a fantastic book. In fact, we've already made arrangements to join the Keller Williams brokerage in Beverly Hills once we get our licenses next month.
posted by mistermc at 8:09 AM on January 29, 2013


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