What would you do if you had to start over?

Question

Hi Bigger Pockets,

My name is Kyle. I am going to be a real estate developer and am having trouble getting started. I would really appreciate insight from anyone who has had success in real estate development.

Some specific questions I have are:

How did you get started?

What were your first couple deals?

What would you do if you had to start again today with 20k, 50k and 100k?

Thanks Bigger Pockets,

Kyle

Scott P. · Answer

Hi Kyle, by "developing" I'm assuming you mean turning land into lots which have utilities.  Also it appears you'd like to build on at least some of those lots.

If I was starting over and wanted to do that from the ground up I would keep my 9-5 - or find a 9-5 related to construction, development, or real estate if yours is not - while I house hacked 5 times within 1 hour of my 9-5:  1 fairly move-in ready duplex, 1 duplex that needed remodel, 1 SFR that needed remodel (which I might flip or might rent), and then I'd hire a builder to build a SFR new which I'd move in to and then I'd buy an already developed lot and build a SFR or duplex by subcontracting it all out.

At that point you'll probably know what you like and dislike and what you're best at doing and you'll have a network of folks to get advice from and you'll know what builders and buyers want from developers and builders.  You'll also have property equity. You'll have gained a huge amount of experience and it will be super valuable.  Also, be certain you pay all your bills on time during this period - especially to people who supply labor materials or labor to  you.  That credit rating and reputation will be vital for you.

Then, I'd look for an area in the State I'm most familiar with which is no more than 3 hours from my home and which has the least restrictive planning and zoning regulations. I'd look for 5-10 acres of brown field or green field land which could be bought and get permission to do due diligence on it. Then, I'd hire an experienced 10-25 person Civil Engineering firm firm to estimate timeline and cost for the zoning, planning, utilities, etc. and to draw a layout of the lots, streets, utilities, etc. That would be your first cash outlay. If the Engineer doesn't estimate construction costs, you might leverage the network you built on those first 5 endeavors to learn how to get those costs estimated.

I don't know what area you're in but there are likely State and local permits, hearings at a Zoning commission where neighbors may voice concerns, Health department approvals, etc.  There will be many, many decisions to make such as how to build the streets and who will maintain them, a HOA or the City/County, etc.?

When all that is complete, you'll decide if you think you can develop the lots for a cost that when combined with costs of the houses will total to a number that people can/will pay.  You'll also decide if you have enough $ to develop the lots or how to finance the development.  In my area, if you go forward, even when you are complete, people will then wait to see if others move in to the development first or if, like @Tim Johnson said, you go BK.

There are a lot more details but this should give you a high level view for informational purposes.

If I was starting over, I'd do all of these things more often and sooner.  At the time I started, I just didn't want any more risk than I took, because, like @Tim Johnson said, it's easy to to BK as a developer or builder.  The potential rewards to me weren't worth the stress of BK.  YMMV.

There are many paths to success but these are the thoughts that come to my mind as I consider your question about developing and building.

Best of luck to you with whatever you decide!

Tim Johnson · Answer

What does a real estate developer do?  Ask yourself that.

My wikipedia definition:

A person that finds raw land, builds something on it, sells it or leases it.  Be commercial, industrial or SFH.

You need serious money to do this in today's market, need a lot more money than 100k.

My advice is to figure out what you want to do exactly- Flip houses, rent houses, build houses, build commercial. Then find a mentor.  Until you become laser focused, your like a cat chasing it's tail and will never get started.

Real estate development is huge risk, you can have huge rewards but you can also get go BK in mins.

Tim Johnson · Answer

As a builder you will never make it having a 9-5 job unless you have the best team in place.  New construction is a super fast paced run by the seat of your pants game.  You are going to break even on your first few jobs without the sub game lined up.  Those subs are cut throat until you have connects built.  We use scheduling software that makes it look easy on paper, but in reality, I don't think I have had one go perfect as planned.  had them very close, but not perfect.  I'm not going to to lie, you hit a ton of doubles and triples, but one strike out and you could be out 100k or more.  For me, I always made the most money on the land purchase.  I would look at finding land maybe one or 2 lots and then selling the idea to a builder to get started, the cost of entry would be less and you reduce risk but cost overages.

Amanda G. · Answer

what I would do first actually has nothing to do with how much I had in my pocket. I would find the local real estate investment groups and go soak up everything they had to teach me. Good luck!

Scott P. · Answer

@Caleb Heimsoth makes a good point.  Kyle, I don't know your situation and can't give you advice but I can give you the information that i started without a LLC.  There are pros and cons to being a Sole Proprietor or having a LLC or a SubS or whatever.  Liability insurance was always my first line of defense.  YMMV.

As far as doing this w/a full-time W2 gig, my last new build was about 6000 SF heated living area w/a 3.5 car garage and is my current SFR.  I drew the house plans, pulled my permits, and sub'd everything out except for some low voltage wiring and a couple of minor things i did myself.  I jokingly tell people that there were no liens and no lawsuits - and every sub got paid in full (which is all true).   I did it while working well over 40 hours/week at my 9-5.  the point is that it can be done.  There are ways to find subs and things to say and not say to help it all work out....

Obviously that wasn't my first "rodeo" though.

The key is to start in a controlled way if you're of the mindset to start small and work your way up.  Look for a 9-5 that will help you gain knowledge for real estate investing and use that 9-5 to build capital.  And remember...pay all your bills on time.

Caleb Heimsoth · Answer

@Kyle Leeyaw. I would realize I don’t need an llc

Ed B. · Answer

I like Tim Johnson's advice. Couldn't have said it better.

Kyle Leeyaw · Answer

Thanks for the strategy Scott. I see  the value in it. It exposes you to the different levels of development (adding value to propety) while gradually building your risk tolerance. I agree with you as well Tim. A 9-5 may likely hurt the success of any large projects. But the starting ones Scott mentioned would probably be manageable. As long as its near your area.

Andrew Syrios · Answer

Buy more... a lot more.

Kyle Leeyaw · Answer

Thanks for the reply Tim. To add more clearity, I would like to build homes. Mid raises to start.

The inital startegy I am thinking about is buying a home on a large lot already zoned for intensification. Then renting that home while I work with an engineer/architect for the designs. Then pre sell the units so I can have the down payment for the construction loan. I think i understand the process from a theory stand point.

But I know developmemt is a very involved process so will be difficult to execute with my 9-5.

So should I first get a home and airbnb for cash flows and build equity. That should be enough for me to leave my job and focus on executing development. But I get moxed messages some recommend going straight for the goal and don't waste time with the airbnb.

I know I will need to borrow to finance any of these ideas. But I wondering which is the right play to focus on. Its very easy to get lost in all the noise for real estate startegies. So I am wondering how most developers got started. I'm 25 so I am in no rush as long I'm taking steps towards the goal of construction residential mid raises to start off.

What would you do if you had to start over?

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