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This is a topic and area of real estate I love, but I don't see it talked about much on this forum. So I'll start a thread about it. Please feel free to add to it, I'm still new at this and will probably miss a few things. I also have never done commercial but a lot of it is similer.
Why real estate development?
I love building things, and hate old houses. I love taking raw land and turning it into a house, or neighborhood. When you work with a clean slate you can set things up just as you like. Also the money is very good in it, if you find the right area.
What do you need to know?
Frankly a lot, I'm still learning. Their are a ton of things that you need to know, from local zoning regulations, to soil types, to construction methods. You really need to know the business from top to bottom, and what things cost. But building can really be boiled down to one simple equation, after that its not simple!
Value of new house-cost of house-cost of land=profit margin
Lets break it out.
First, and most important, you need to know what the local market will support. Screwing this up will quickly make you go broke, more so these days. So do your homework, and know whats selling and for how much.
Now you need to know what the kind of house your going to build costs. Raised ranch's cost less than colonials, three story beach houses cost the most. Trendy modern houses cost a fortune. My usual rule of thumb for a standard raised ranch or colonial is $90-$100 per SF. BUT my actual numbers are far lower than that, as should yours be, those are retail numbers. This will also very greatly by state, my state is one of the most expensive in the country. Why is this cost second? Because this is more or less a fixed cost. The cost of building a house doesn't very all that much, not enough to make you lose money. It may move a few percent because materials go up, or the buyers want some more features. But its not going to change enough to hurt you. Unlike say rehabing their are not big surprises, thats one benifit of starting with a clean slate. The next part is where you can lose your shirt, even if you get the first two parts right.
Land
The land is the big variable, and this changes greatly by region. But this is where your going to spend your time, and money doing homework.
For example:
You need to consider what kind of land your buying, from three important perspectives:
1. Location, will people want to buy a house located here? Is it near town? On a main road? Close to schools? This is vital!
2. What type of land is it? How much site work is needed? This is where you absolutly have to do your homework. Sometimes you will spend $50k-$100k PER HOUSE to make the site useable. Roads are VERY expensive to put in, as are utilities. Are there wetlands that will restrict your use? Can you hook up to sewer and water? If not is the soil suitable for a well and septic? Is their ledge? Will you have to blast? Blasting costs big $$$. You need to take all of this into consideration, I have seen people lose their shirt in this area. They buy something and realize a large chunk is marsh and useless, or they find out their is ledge underneath, etc.
3. This part is tricky, you have to know all the town/city's zoning regulations and ordinances relating to what your doing. By know, I mean realy know, I have a lot of them memorized. I also have the regs on PDF on my computer for quick look up. You will be in front of the zoning board, wetlands board, etc. Know the regulations well enough so you can fight for your project! Next you need to consider the neighbors, because sometimes they can kill you. A lot of times with larger projects they will try to fight them. If you have your stuff together they are not always able to do it. Eventualy if you do this enough you will be in court, just a matter of time. Still try to avoid that, its not cheap.
Lastly your going to want to make put a team together:
1. Attorney, your going to need one who does mostly real estate. They can make and save you a lot of money, find a good one.
2. Surveyor, every parcel is going to have to be surveyed before you close on it.
3. Wetlands specialist, lots of that around here. They charge $100 an hour to come out and poke holes in the ground to look at the dirt. Educate yourself on this so you can spot odvious signs to save money. These guys can be critical, sometimes you can't even make an offer on the property until they come out and do their thing. I spent $600 on one once and didn't even end up buying the parcel, ouch.
4. Subs, lots of subs since your not actualy doing the work yourself. Your going to need someone to do the site work, foundation, framing, insulation, sidding, roof, gutters, drywall, compound, painting, hardwood floors, railings, carpet, garage doors, plumbing, electrical, HVAC, etc. I don't beleive in project managers, I don't think they can do a better job than me and unless your building a huge number of houses you don't need one. Its your money, if you want a good house done fairly cheap you need to watch it and make sure the subs don't screw you.
Thats really about it, my only other bit of advice is again, you need to watch your subs and constantly check your suppliers to keep them honest. Also these days most of your money to build is going to come from private lenders. Very, very few banks are lending on new construction. Its a ton of work, but I find it very interesting and it pays well. The margins are good, so insted of having to flip say 20 houses a year you could build 2-3 and make the same money. Heck one is really a years pay for 3-4 months worth of work. But the margins are good because its not easy and not everyone can do it.
Lets keep adding to this thread, maybe someone will find it usefull.
Why real estate development?
I love building things, and hate old houses. I love taking raw land and turning it into a house, or neighborhood. When you work with a clean slate you can set things up just as you like. Also the money is very good in it, if you find the right area.
What do you need to know?
Frankly a lot, I'm still learning. Their are a ton of things that you need to know, from local zoning regulations, to soil types, to construction methods. You really need to know the business from top to bottom, and what things cost. But building can really be boiled down to one simple equation, after that its not simple!
Value of new house-cost of house-cost of land=profit margin
Lets break it out.
First, and most important, you need to know what the local market will support. Screwing this up will quickly make you go broke, more so these days. So do your homework, and know whats selling and for how much.
Now you need to know what the kind of house your going to build costs. Raised ranch's cost less than colonials, three story beach houses cost the most. Trendy modern houses cost a fortune. My usual rule of thumb for a standard raised ranch or colonial is $90-$100 per SF. BUT my actual numbers are far lower than that, as should yours be, those are retail numbers. This will also very greatly by state, my state is one of the most expensive in the country. Why is this cost second? Because this is more or less a fixed cost. The cost of building a house doesn't very all that much, not enough to make you lose money. It may move a few percent because materials go up, or the buyers want some more features. But its not going to change enough to hurt you. Unlike say rehabing their are not big surprises, thats one benifit of starting with a clean slate. The next part is where you can lose your shirt, even if you get the first two parts right.
Land
The land is the big variable, and this changes greatly by region. But this is where your going to spend your time, and money doing homework.
For example:
You need to consider what kind of land your buying, from three important perspectives:
1. Location, will people want to buy a house located here? Is it near town? On a main road? Close to schools? This is vital!
2. What type of land is it? How much site work is needed? This is where you absolutly have to do your homework. Sometimes you will spend $50k-$100k PER HOUSE to make the site useable. Roads are VERY expensive to put in, as are utilities. Are there wetlands that will restrict your use? Can you hook up to sewer and water? If not is the soil suitable for a well and septic? Is their ledge? Will you have to blast? Blasting costs big $$$. You need to take all of this into consideration, I have seen people lose their shirt in this area. They buy something and realize a large chunk is marsh and useless, or they find out their is ledge underneath, etc.
3. This part is tricky, you have to know all the town/city's zoning regulations and ordinances relating to what your doing. By know, I mean realy know, I have a lot of them memorized. I also have the regs on PDF on my computer for quick look up. You will be in front of the zoning board, wetlands board, etc. Know the regulations well enough so you can fight for your project! Next you need to consider the neighbors, because sometimes they can kill you. A lot of times with larger projects they will try to fight them. If you have your stuff together they are not always able to do it. Eventualy if you do this enough you will be in court, just a matter of time. Still try to avoid that, its not cheap.
Lastly your going to want to make put a team together:
1. Attorney, your going to need one who does mostly real estate. They can make and save you a lot of money, find a good one.
2. Surveyor, every parcel is going to have to be surveyed before you close on it.
3. Wetlands specialist, lots of that around here. They charge $100 an hour to come out and poke holes in the ground to look at the dirt. Educate yourself on this so you can spot odvious signs to save money. These guys can be critical, sometimes you can't even make an offer on the property until they come out and do their thing. I spent $600 on one once and didn't even end up buying the parcel, ouch.
4. Subs, lots of subs since your not actualy doing the work yourself. Your going to need someone to do the site work, foundation, framing, insulation, sidding, roof, gutters, drywall, compound, painting, hardwood floors, railings, carpet, garage doors, plumbing, electrical, HVAC, etc. I don't beleive in project managers, I don't think they can do a better job than me and unless your building a huge number of houses you don't need one. Its your money, if you want a good house done fairly cheap you need to watch it and make sure the subs don't screw you.
Thats really about it, my only other bit of advice is again, you need to watch your subs and constantly check your suppliers to keep them honest. Also these days most of your money to build is going to come from private lenders. Very, very few banks are lending on new construction. Its a ton of work, but I find it very interesting and it pays well. The margins are good, so insted of having to flip say 20 houses a year you could build 2-3 and make the same money. Heck one is really a years pay for 3-4 months worth of work. But the margins are good because its not easy and not everyone can do it.
Lets keep adding to this thread, maybe someone will find it usefull.
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