How do developers make money?

Question

How are developers making money?

From estimates I've received there is zero money in any project I can find. Industrial, multifamily, and residential.

Do I need to GC the project myself? Is there something I'm overlooking?

All the larger projects in my area, contract top tier contractors/builders for multifamily or commercial/industrial which can't be cheap. I don't know how they possibly make money. When I read the business journal, many of these projects sell within months or years of completion. They sometimes share the cost to build and it might be $40M to build and $42M sold. It doesn't make sense to take that big of a risk for that little of a return even though the actual return on investment is higher considering you're only putting a fraction of that in due to leveraged debt.

What am I missing? What do I need to learn about making these deals work?

Henry Clark · Answer

Bring value or make value.  Bring value- have a business plan for the spot.

Make value- take trash and make it pretty.  Look for nasty properties.Looking back at your posts. Your in the Birmingham AL area

A.  Don’t get hung up on one property.  Make 3 offers with 3 day offers subject to.  Make your profit going in.

B.  Assume a Buyers market.  Get your financing in place.  Set your price and walk away.  If they make a counteroffer go crazy with a counteroffer.  They ask $1mm, you offer $700k.  They come back at $900k.  You say $600k with $300k due in 5 years with no interest.  They take 2nd position behind bank.

Now go hunting.

Loopnet.  Industrial. Birmingham

There are several great looking properties.  Not doing due diligence or deep dive here.  You have to do that.

1838 Vanderbilt road.

Clean up

Divide into 2,000 to 5,000 sqft units

Land- parking rental, check with neighbors if they want to buy, self storage, semi parking, construction lot rental, other uses.    Talk with every chip, power drink, little Debbie, tortilla, etc dealer as a distribution site.

You have to look for value or make value.  Always go for double value.  If you put $1mm in, you want a $2mm asset on the back end.

There are many many check off items if you do this. You need to make a checklist and cover the ones that will knock you out.  Abestos, water contamination, fire suppression, flood zone, etc.

There are literally tons of opportunities in Development even in the market today.

Look through the properties on loopnet industrial there.  Look at each one and see what value you can bring to them.

Han T. · Answer

Not sure how the numbers on your end work. But here's an arbitary example:Buy land: 400k

After permit/zoning/drawings/etc done: land value = 1m (cost of permit/zoning/etc only 200k)

Build Phase 1 (50 units), costs 5M, entire project appraise for 7M.Build Phase 2 (50 units), costs 5M, project appraise & eventually sells for 15M.At each stage, the value of the land./project increase more than the costs put in and that's how Developers, just like the BRRRR deals, add value and make money.

Ben Glaser · Answer

What's your cost per sqft? I'm in the midwest, metro area.

Ben Glaser · Answer

@Eric James I think he's saying the entire project. 50 units 7M, second phase 50 units also 7M, equating to $15M total.

Mike Smith · Answer

I know that most investors lump developers and builders into one category, but in my mind they are separate.

Developers - buy raw ground and do horizontal construction (utilities, roads, sidewalks, etc)

Builders - buy build ready lots and do veritical construction (homes, commercial buildings, apartments)

Many times both tasks are performed by the same person/company, leading to the confusion.

How developers make money:

1.  Buy raw ground (400k)

2. Get the ground entitled and engineered (200k)

3. Pay for all horizontal construction (1.4m)

4. Sell build ready lots. (40 lots @ 80k per lot)

5. Profit = Lot revenue minus hard costs = (40*80k) - (400k + 200k + 1400k) = 3.2m - 2m = 1.2m

This is just a made up example, but that's how the money is made.

The first big problem with land development is that it typically takes years from getting land under contract until the first lot is sold.  The market can/will change dramatically in those years.  Because the numbers are so large, if the market moves against you, you will probably lose hundreds of thousands or potentially millions of dollars.

The second big problem is that because development is so risky, banks will want a minimum of 25% and up to 40% hard cash from the owner put into the deal.  There simply isn't any way to find the "no money invested" deals in land development.  In the deal above, the owner would need to invest between 500k - 800k hard cash to do this deal.

Henry Clark · Answer

Self storage.  $1.3mm. All in cost. 25% down at $310k.  Sold one year later at $2.4mm at 40% occupancy.  Take out saleA commission and capital gain taxes.

Country subdivision. 75 acres at $9,000 per acre.  Another $200,000 in development costs.  Say $1mm total.  We will make 22 lots from 2 to 8 acres.  Sell for $100k to $130k.  Pay sales commission and capital gain tax.

Again. Look at your loopnet industrial listings.  I saw about 10 that subject to due diligence were money makers.

You have to be creative and bring value.  It does take bigger dollars up front. But bigger payoff and less tenant hassles.

Han T. · Answer

Hey Ben, I was just giving an example. I can't recall the deal as it was discussed last year. The only 2 things I recalled was the land was bought at 400+k.Will need 10M of construction equity, and the rest of the construction costs, total 30M, would be funded by debt, in phases, as the value of the development goes up.

We didn't fund the deal because we ended up investing elsewhere.

This was also a Midwest, but suburban city centre, so it was zone as a medium residential (24units/acre, ~6+ acres).

Many apologies.

How do developers make money?

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