Real Estate development in a nutshell
October 21, 2009 8:38 PM Subscribe
I think I really, really want to get into developing real estate. Can anyone give me an overview description of what the work / process is is like?
The thing is, I have no educational/professional background in real estate per se.
I want to start small and I know it will be a long while before I see my big hairy audacious goal realized. So what I want to know exactly is:
What books, articles do I read on basic strategies for real estate business development? Where do I get ideas for a business plan? What knowledge is within my reach for me to study? Where do I start looking?
Social housing (which is a big reason for my wanting to go into this), from the little that I know, is usually done by nonprofits and the government. Is providing that a commercially viable option? Can private companies survive while providing low-cost and public housing / has it been done?
What am I expected to reasonably accomplish every five years up to the twenty - year mark?
I know I have to start small, but where exactly does developing real estate start, and how does it grow, exactly? Where does my funding come from apart from loans?
So far, what I can see about the idea is to buy lots, develop houses, and then sell or rent them, use the profit to develop more houses, and so on until I gain momentum and a large portfolio. But it seems to me that it's like living hand-to-mouth, and given the recent financial crisis it doesn't seem like a good idea to just borrow a ton of money from the banks from the get-go.
I hope my questions makes sense. The idea fires me up and I want to start but I hope my lack of experience and knowledge doesn't cause me to stagnate/give up. I'm also really really young, but I'm looking at this as a way to give me a headstart in the business. Eventually, I hope the answers will give me what I need to start pursuing this goal. The answers might not be as in-depth as I'd like but I figure the hive mind can give me various points of view to assess.
Thank you very much.
The thing is, I have no educational/professional background in real estate per se.
I want to start small and I know it will be a long while before I see my big hairy audacious goal realized. So what I want to know exactly is:
What books, articles do I read on basic strategies for real estate business development? Where do I get ideas for a business plan? What knowledge is within my reach for me to study? Where do I start looking?
Social housing (which is a big reason for my wanting to go into this), from the little that I know, is usually done by nonprofits and the government. Is providing that a commercially viable option? Can private companies survive while providing low-cost and public housing / has it been done?
What am I expected to reasonably accomplish every five years up to the twenty - year mark?
I know I have to start small, but where exactly does developing real estate start, and how does it grow, exactly? Where does my funding come from apart from loans?
So far, what I can see about the idea is to buy lots, develop houses, and then sell or rent them, use the profit to develop more houses, and so on until I gain momentum and a large portfolio. But it seems to me that it's like living hand-to-mouth, and given the recent financial crisis it doesn't seem like a good idea to just borrow a ton of money from the banks from the get-go.
I hope my questions makes sense. The idea fires me up and I want to start but I hope my lack of experience and knowledge doesn't cause me to stagnate/give up. I'm also really really young, but I'm looking at this as a way to give me a headstart in the business. Eventually, I hope the answers will give me what I need to start pursuing this goal. The answers might not be as in-depth as I'd like but I figure the hive mind can give me various points of view to assess.
Thank you very much.
yeah I would love to go around creating cool apartment communities since the general rule is that they all suck.
Earlier this decade it was possible for developers to put together deals with very little of their own money, via mezzanine financing that would cover the "down payment" and function similar to a second lien loan. Unfortunately with CRE down 30-50% from the peak nearly all the mezz lenders are on life support if not dead men walking.
If you want to self-educate you could do worse reading all Calculated Risk's CRE-related posts.
AFAICT Real Estate development is highly political and you've got to know the right people in local government to get your plans through, and the occasional bribe or quid-pro-quo is not unheard of.
If you don't have a lot of money it's going to be tough getting started in this area. Real Estate is the purview of the wealthy, since real estate is the source, and the sink, of wealth.
There are a million things that can go wrong with CRE from plans to day-to-day operation. It is not for the faint of heart or the wet-behind-the-ears.
posted by mokuba at 9:07 PM on October 21, 2009
Earlier this decade it was possible for developers to put together deals with very little of their own money, via mezzanine financing that would cover the "down payment" and function similar to a second lien loan. Unfortunately with CRE down 30-50% from the peak nearly all the mezz lenders are on life support if not dead men walking.
If you want to self-educate you could do worse reading all Calculated Risk's CRE-related posts.
AFAICT Real Estate development is highly political and you've got to know the right people in local government to get your plans through, and the occasional bribe or quid-pro-quo is not unheard of.
If you don't have a lot of money it's going to be tough getting started in this area. Real Estate is the purview of the wealthy, since real estate is the source, and the sink, of wealth.
There are a million things that can go wrong with CRE from plans to day-to-day operation. It is not for the faint of heart or the wet-behind-the-ears.
posted by mokuba at 9:07 PM on October 21, 2009
oh, I forgot, but the RE curriculum at city colleges generally has a CRE management class or two.
posted by mokuba at 9:09 PM on October 21, 2009
posted by mokuba at 9:09 PM on October 21, 2009
Wow. Lots of questions. I am a landlord (presently constrained by bankruptcy) so I hope some of my experience can be of help.
And of course this whole market is in the tank right now and may remain so for several years. That gives you time to prepare.
I would advise you to get into the real estate business one way or another. The simplest open door is usually sales. Find a CRE developer you like well enough and work for them for a few years, networking like crazy. You might even develop a relationship where he'll help finance your first project. Learn the legal and financial constraints of building a for-profit apartment complex. Then you'll know how to do it all for less money, somehow.
The other way to educate yourself and build up a kitty is by landlording yourself. Start with a two-flat, live in half and rent the other. When you can, go for a multi-unit and get that running. Learn the demographics of apartment dwellers in your area. Figure out what matters to people (carpets, usually) and what doesn't (landscaping, usually).
Madison, Wisconsin is one place where commercial landlords operate non-profits that provide housing, which has been controversial. The law here actually forbids using rent money for important things like administration or advertising. It's not clear how a non-profit is supposed to pay for that, but the law certainly makes it difficult for one that isn't supported by a for-profit company or a non-profit with other dependable sources of revenue.
(I am really interested in this angle myself, as a tool for neighborhood stabilization, but this is not a promising legal environment.)
I would say that your "hand-to-mouth" description is probably accurate in the early stages. You really have to throw all your profits back into the development to make sure that you can grow your income enough to cover expenses. There would be a large section of shared/sunk costs associated with a development of any size.
You also need to stop thinking like a homeowner. Yes, your money comes from "loans", but you need to understand that whether these loans come from a bank, or from your cousin Fred, or whomever, that it is an investment in you. They are giving you money and hoping you will then create an income stream for them. For most homeowners, the satisfaction of living in the home is sufficient. For you, you will also have to make the numbers work -- again and again, repeatably, and month after month.
The CRE financing markets will probably be closer to (pre-boom) normal by the time you're ready for them. If by then you have experience, assets, and a network of people you know can make things happen for you, the business plan will come together in a snap. Real-estate isn't complicated that way. But the pitfalls are many. I don't know what the overall environment is going to be like then, but it's likely that you'll be competing with fewer small-time landlords -- the boom created, and then broke, many of them who thought this would be easy but had no idea what they were getting into.
posted by dhartung at 10:08 PM on October 21, 2009
And of course this whole market is in the tank right now and may remain so for several years. That gives you time to prepare.
I would advise you to get into the real estate business one way or another. The simplest open door is usually sales. Find a CRE developer you like well enough and work for them for a few years, networking like crazy. You might even develop a relationship where he'll help finance your first project. Learn the legal and financial constraints of building a for-profit apartment complex. Then you'll know how to do it all for less money, somehow.
The other way to educate yourself and build up a kitty is by landlording yourself. Start with a two-flat, live in half and rent the other. When you can, go for a multi-unit and get that running. Learn the demographics of apartment dwellers in your area. Figure out what matters to people (carpets, usually) and what doesn't (landscaping, usually).
Madison, Wisconsin is one place where commercial landlords operate non-profits that provide housing, which has been controversial. The law here actually forbids using rent money for important things like administration or advertising. It's not clear how a non-profit is supposed to pay for that, but the law certainly makes it difficult for one that isn't supported by a for-profit company or a non-profit with other dependable sources of revenue.
(I am really interested in this angle myself, as a tool for neighborhood stabilization, but this is not a promising legal environment.)
I would say that your "hand-to-mouth" description is probably accurate in the early stages. You really have to throw all your profits back into the development to make sure that you can grow your income enough to cover expenses. There would be a large section of shared/sunk costs associated with a development of any size.
You also need to stop thinking like a homeowner. Yes, your money comes from "loans", but you need to understand that whether these loans come from a bank, or from your cousin Fred, or whomever, that it is an investment in you. They are giving you money and hoping you will then create an income stream for them. For most homeowners, the satisfaction of living in the home is sufficient. For you, you will also have to make the numbers work -- again and again, repeatably, and month after month.
The CRE financing markets will probably be closer to (pre-boom) normal by the time you're ready for them. If by then you have experience, assets, and a network of people you know can make things happen for you, the business plan will come together in a snap. Real-estate isn't complicated that way. But the pitfalls are many. I don't know what the overall environment is going to be like then, but it's likely that you'll be competing with fewer small-time landlords -- the boom created, and then broke, many of them who thought this would be easy but had no idea what they were getting into.
posted by dhartung at 10:08 PM on October 21, 2009
You can just get a job working for a developer. A background in project management, biz, or architecture might help.
posted by salvia at 8:14 AM on October 22, 2009
posted by salvia at 8:14 AM on October 22, 2009
Can anyone give me an overview description of what the work / process is is like?
It depends. That's like asking "what does a teacher do" without specifying what subject, grade, public/private, and so on. It's a long discussion. Very generically, the developer is responsible for marshaling resources and negotiating with stakeholders to increase the value of a piece of real estate. This can mean something purely legal (entitlements), land development (subdivision, entitlements and utilities), vertical improvements (building construction), capital or operational improvements on existing buildings, and so on.
The thing is, I have no educational/professional background in real estate per se.
Several schools across the USA offer focused MBAs or other graduate programs in development. Some focus more on high-level financial trades involving real estate, and some more on the nuts and bolts of development. Some undergraduate programs that would lend themselves to real estate include business, pre-law, construction, architecture, urban planning, and housing/urban development. However, a great many people in the last growth market got into real estate without any formal training.
What books, articles do I read on basic strategies for real estate business development? Where do I get ideas for a business plan? What knowledge is within my reach for me to study? Where do I start looking?
The Urban Land Institute (ULI) is a professional organization for developers and related fields. They offer a variety of publications and also support local and national conferences and other events. Start there.
Social housing (which is a big reason for my wanting to go into this), from the little that I know, is usually done by nonprofits and the government. Is providing that a commercially viable option? Can private companies survive while providing low-cost and public housing / has it been done?
It is not usually undertaken without government support. The term you are looking for is public-private partnership.
What am I expected to reasonably accomplish every five years up to the twenty - year mark?
Every career in development is unique -- there is really no expected path. I know developers with MBAs, some who started as engineers and architects, and some who never went to school at all. Some are wealthy, some appear wealthy, and some are no longer wealthy - one just cut my hair last week.
I know I have to start small, but where exactly does developing real estate start, and how does it grow, exactly? Where does my funding come from apart from loans?
The developer should control at least one of the following: land, money, expertise. Your starting point depends on your resources. Land can come from family, from a broker, from other developers, or from driving around and seeing an opportunity. Money can come from family, a previous career, banks, governments, private investors, or institutional investors. Expertise comes from networking, experience, and spending time in a market area.
So far, what I can see about the idea is to buy lots, develop houses, and then sell or rent them, use the profit to develop more houses, and so on until I gain momentum and a large portfolio. But it seems to me that it's like living hand-to-mouth, and given the recent financial crisis it doesn't seem like a good idea to just borrow a ton of money from the banks from the get-go.
You're right! Development is a boom-bust cyclical business. The smart/lucky ones spend the bust years on vacation; the dumb/unlucky ones spend the bust years bankrupt or scraping by. Development is a business of taking managed risks.
If you want to get into the business, you need to develop your skills. Developers are generalists and often develop their broad skill set by working first in related careers: design, finance, sales, brokerage. Spend some time on that, attend local events and talk to as many people as possible, and wait for an opportunity. There's a saying among developers that being lucky is better than being good, so... good luck!
posted by Chris4d at 10:11 AM on October 22, 2009
It depends. That's like asking "what does a teacher do" without specifying what subject, grade, public/private, and so on. It's a long discussion. Very generically, the developer is responsible for marshaling resources and negotiating with stakeholders to increase the value of a piece of real estate. This can mean something purely legal (entitlements), land development (subdivision, entitlements and utilities), vertical improvements (building construction), capital or operational improvements on existing buildings, and so on.
The thing is, I have no educational/professional background in real estate per se.
Several schools across the USA offer focused MBAs or other graduate programs in development. Some focus more on high-level financial trades involving real estate, and some more on the nuts and bolts of development. Some undergraduate programs that would lend themselves to real estate include business, pre-law, construction, architecture, urban planning, and housing/urban development. However, a great many people in the last growth market got into real estate without any formal training.
What books, articles do I read on basic strategies for real estate business development? Where do I get ideas for a business plan? What knowledge is within my reach for me to study? Where do I start looking?
The Urban Land Institute (ULI) is a professional organization for developers and related fields. They offer a variety of publications and also support local and national conferences and other events. Start there.
Social housing (which is a big reason for my wanting to go into this), from the little that I know, is usually done by nonprofits and the government. Is providing that a commercially viable option? Can private companies survive while providing low-cost and public housing / has it been done?
It is not usually undertaken without government support. The term you are looking for is public-private partnership.
What am I expected to reasonably accomplish every five years up to the twenty - year mark?
Every career in development is unique -- there is really no expected path. I know developers with MBAs, some who started as engineers and architects, and some who never went to school at all. Some are wealthy, some appear wealthy, and some are no longer wealthy - one just cut my hair last week.
I know I have to start small, but where exactly does developing real estate start, and how does it grow, exactly? Where does my funding come from apart from loans?
The developer should control at least one of the following: land, money, expertise. Your starting point depends on your resources. Land can come from family, from a broker, from other developers, or from driving around and seeing an opportunity. Money can come from family, a previous career, banks, governments, private investors, or institutional investors. Expertise comes from networking, experience, and spending time in a market area.
So far, what I can see about the idea is to buy lots, develop houses, and then sell or rent them, use the profit to develop more houses, and so on until I gain momentum and a large portfolio. But it seems to me that it's like living hand-to-mouth, and given the recent financial crisis it doesn't seem like a good idea to just borrow a ton of money from the banks from the get-go.
You're right! Development is a boom-bust cyclical business. The smart/lucky ones spend the bust years on vacation; the dumb/unlucky ones spend the bust years bankrupt or scraping by. Development is a business of taking managed risks.
If you want to get into the business, you need to develop your skills. Developers are generalists and often develop their broad skill set by working first in related careers: design, finance, sales, brokerage. Spend some time on that, attend local events and talk to as many people as possible, and wait for an opportunity. There's a saying among developers that being lucky is better than being good, so... good luck!
posted by Chris4d at 10:11 AM on October 22, 2009
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posted by Doohickie at 9:06 PM on October 21, 2009