Do Not Buy For Cash Flow, Develop!

I took my first job in real estate working for a developer while I was in law school. My boss was my mentor and I picked his brain every day about real estate in the hopes to live like he lived one day. He was very wealthy and worked a few days a week. I never saw him in a bad mood and he always had a smile on his face. I wanted to be just like him. At the time, I was very focused on buy and hold cash flowing multifamily, but he told me that buying multifamily is a great way to preserve capital, but if you want to really be rich you need to develop.

Since then, I've been focused on developing properties, and because of it, I never had to raise outside capital. The money I bring in from deals are used to fund other deals. Too many people today are focused on raising outside money, but to me, the stress of managing money for other people is not worth it. The whole point of getting into the business is to remove the stress of reporting to others. I would rather work for myself and manage my own money.

I've done a little over 100 deals as of this writing. I own 120+ units and have an additional 200+ units in different stages of development. I add value to each property I purchase and as I grow, I'm more focused on ground up deals that bring in the big bucks compared to the renovations. Here is one example of a smaller deal I've done, and how the real wealth is created much faster with developing properties.

The Plan:

I found a half acre lot on a busy road that was zoned commercial and was for sale by owner with approvals to build two small office spaces. In today's market, no one is building small office space like this anymore because there is too much vacant space available at cheaper prices. The asking price was $350,000 but I ended up purchasing the property for $160,000 cash. I spent an additional $40,000 on legal, engineering and architectural drawings and my team was able to convince the township to give us a zoning variance to build 7 townhomes on the lot instead. A week after getting the approvals, a local builder offered me $750,000 for the property. I did not sell.

Construction and Sale:

After receiving the approvals, I went to a local bank who gave me 100% of the construction costs which came to 1.2 million in construction financing to build the townhomes. Once completed, we had 7 townhouses that sold for an average of $436,000 each. We paid the bank back their 1.2 million and made just over $1.8 million on the deal. So in just over 2 years, 200,000 was turned into $1,800,000.

Conclusion:

We could have easily taken the zoning approvals and flipped the property for a very quick and easy return, but developing the property took the profits to an entirely new level. This is just one example of how focusing on purchasing land in more affluent markets is a much faster way to financial freedom then buying and holding for cash flow. After we completed this deal, we thought about how we could just as easily add a zero to the end of the numbers we were working with. If we can purchase a property and get it rezoned for $2,000,000, why can’t we make $18,000,000? We have yet to do a deal quite that big, however, we continue to look for those types of deals because of the many home runs we hit at the smaller levels.

If you think buying and holding multifamily for cash flow is the quickest way to build wealth, try taking a look at developing properties. You will be surprised.