Real Estate Development 101
Our process for doing profitable real estate development deals.
Hey Friends!
Welcome to another edition of Unfollow the Herd.
I’m sharing our 3-step process for doing real estate development deals this week.
Before we dive in, sharing a quick update.
Last week I was thrown in LinkedIn jail for 36 hours.
If that’s where you follow my content, consider following my other socials (in case LinkedIn boots me again).
Real Estate Development 101
Before we dive into our process for doing real estate development deals, let’s start with the basics.
What is real estate development?
Real estate development is creating or improving buildings or land to use as residential, commercial, industrial, or mixed-use.
This involves several activities, including:
Land acquisition
Site/deal analysis
Design and planning
Marketing and finding tenants
Construction and project management
What are the benefits of real estate development for investors?
Investing in real estate development projects can provide several benefits for investors:
Potential for high returns
Cash flow through rent or sales
Diversification of investment portfolio
Tax benefits like depreciation and deductions
Ability to control the asset's value through active management
The last one is our favorite competitive advantage.
How do you invest in real estate development projects?
You can invest in development projects in a variety of ways.
Equity investment: Partnering with a developer or development company to fund the project, taking a stake in the project and sharing in its profits.
Debt investment: Providing a loan to the developer with an interest rate and a repayment schedule
Real estate investment trusts (REITs): Investing in publicly traded companies that own, operate, or finance real estate properties
Crowdfunding platforms: Investing in real estate projects through online platforms that pool funds from multiple investors
Private equity firms: Partnering with private equity firms that invest in real estate development projects
How do real estate developers fund projects?
Real estate developers fund projects through a combination of equity and debt, which can include the following sources:
Equity funding: Developer's own funds, individual or institutional investors
Debt funding: Traditional lenders such as banks, or alternative lenders such as private equity firms, crowdfunding platforms, or REITs
Combo of both: Developers may use a mix of equity and debt funding to finance their projects, including mezzanine financing, bridge loans, or joint ventures.
Our 3-Step Development Process
This is oversimplified, but it gives you a view into how we approach our real estate development deals.
The numbers in the examples below are from a recent luxury storage deal.
Step 1. Find Your Delta
The first thing we look for in a development deal is Delta.
Delta is where the appraisal price of a project is greater than the estimated development costs = giving you an immediate delta (profit).
This is what banks like to see before lending you money for a development project.
You need a project that costs 70% or less of the ARV (after-repair value)
After-repair value (ARV) ✕ .70 − Estimated repair costs = Maximum buying price.
This is key.
Step 2. Calculate Hard Costs
The Hard Costs of a development project include labor, materials, and utilities.
Here's an example of the Hard Costs from a recent storage deal:
- Structure cost: $500,000
- Land Cost: $100,000
= $600,000
Step 3. Calculate Soft Costs
The Soft Costs of a development project include architecture, design, and legal.
Example from our storage deal:
- Architect + Engineer: $20,000
- Financing/Appraisal: $15,000
- Builder Risk Insurance: $5,000
- Developer fee: $35,000
Total costs: $675,000
Appraisal valuation: $980,000
Bank Loan: $686,000 (70% LTV)
This simple 3-step process allows us to consistently complete profitable real estate development deals that our investors love.
💥 You just unlocked your first development and found enough delta.
When you’re ready, there are 3 ways I can help you:
Learn about investing with us at MAK Capital
Explore 1:1 mentorship with me by applying here
Subscribe and listen to the MAK podcast here
Until next time, folks.
💸 🏡 📈
- Marc Kuhn
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