We all know that real estate developers can make big money; they also take significant risk. How can “mom and pop” real estate investors get into the development game?
Two Lower Risk Real Estate Development Options:
Buying stock in a development company
Starting with a small rental development where you’re adding one unit.
Trading Real Estate
There are plenty of companies that are traded on the NYSE whose business focus is on real estate. For example, there are real estate operation companies, holding companies, home builders, fund managers and developers. When looking at investing in these companies take into consideration a couple of things:
Look at the history and growth of the areas the company develops in. Population growth is moving south to GA, FL, SC and the southwest, like Texas. A developer needs areas that are in a growth phase to be successful.
Also look for companies that have healthy cash reserves and low debt. Debt can be positive if there is expansion of the business, however too much debt can we worrisome.
Small Rental Developments
If you are an investor that likes the physical part of real estate and enjoys adding value to property and reaping the rewards, a small real estate development might be the right thing for you. Capital is necessary for this strategy but the rate of return can be substantial. Here is a way to start on a small scale:
Step 1 – Define an area where there is a need for additional rental properties – high demand and low supply.
Step 2 – Identify property within the defined area that contains homes on large lots with R-2 zoning.
Step 3 – Target those homes. There are a few ways you can go about this:
Keep watch for properties to come on the market
Create a targeted list (this technique is taught at OTA Real Estate)
Watch for distressed properties in the area (also taught at OTA Real Estate)
Step 4 – Once you have identified a property get it under contract with the correct contingencies to give you time to do your due diligence and secure your deposit.
Step 5 – This is the chicken and the egg scenario. Plans will need to be drawn and a budget created, but which comes first? It is often difficult to get plans if you can’t give the architect or designer a budget, and how can you give them a budget if you don’t have a plan. Here is a good rule of thumb: using a remodeling cost guide, find out what the cost per sq. foot is to build in that area and estimate the size of the unit desired (how much buildable space is there left on the lot?). Then multiply them for a starter budget – for example: say it is feasible to build a 2 bed 1 bath 800 square foot unit and the cost per sq. foot is $200 ($200×800 sqft = $160,000 budget.
Although this may seem easy-peasy, there is a great deal of detail and due-diligence that goes into the real estate development process. But once again, the upside potential can be worth it.