Last Updated on February 17, 2022 by Mark Ferguson
I have worked in the real estate industry as an agent, broker, landlord, house flipper, and educator. While I have done many things in the real estate business, I have never been a true developer. Some may call flipping houses developing, and I have done some minor development—but nothing major. I think of developing as taking raw land and building something new or changing the use of the land. Developing could also involve scraping old buildings and building new or changing the use of land that already has existing buildings. I have done some of this but nothing that I think would label me as a real estate developer. How hard is it to become a real estate developer, and what is entailed?
What does it mean to develop real estate?
Some people may call flipping houses development because it is taking a dilapidated house and turning it into something completely different. I think of development as taking one type of property and changing it into another type of property. Here are some examples of developing real estate:
- Building a new house, apartment building, or commercial property on an empty lot
- Scraping a house and building a new house or apartment building or commercial property
- Changing a single-family home into a multiple-family home
- Changing a single-family home into a commercial property through change=of=use zoning
- Changing the zoning on raw land
- Subdividing raw land into smaller parcels
- Creating subdivisions from raw land
- Adding on to a house, apartment building, or commercial property
- Scraping existing properties
There are many other ways to develop real estate, but from my perspective, it involves making the property more valuable not by repairing buildings but significantly changing the buildings, land, or use.
My background in development
I have not been a true developer in real estate, but I have done many things.
I have flipped almost 200 houses, and my 200th flip is supposed to close this week. When flipping houses, we have easy flips and more-involved flips. We have torn down part of houses and added onto houses, but I have never built a house from scratch or torn down an entire house. When flipping houses, we have changed lot lines and bought multiple lots that we sold separately. I have done development with flips but no major development projects.
I have bought residential and commercial rental properties over the last ten years. Most of my residential properties are single-family homes that we made some repairs on and rented out. I have had more extensive projects with some of my commercial rental properties. I have bought strip malls, small shops, retail, industrial, and small apartments. I recently bought a property with three houses and a commercial property on it. This property is zoned commercial and would be perfect to change into a commercial property at some point, but I do not plan to be the one to do it.
I have bought properties with just land as well. A few years ago, I purchased 32 acres that I was thinking about developing into a minor subdivision. The property was an awesome deal that I pushed for $90,000. I could turn it into a minor subdivision with 7 lots. I went through the start of the process, met with the county, and even allocated water for the lots. I decided not to do the deal because the water was going to cost me $350,000, I had to pave the roads, bring electric in, and go through a year-long approval process with the county. I could make a couple of hundred thousand on the deal if everything went perfectly, but it would take a very long time and tie up a lot of money. I decided to sell the land ($165,000) and continue to flip houses, which to me was less risky.
I have also bought lots and sold lots a few times that were great deals, but I never built a new house on those lots.
Below is a video of the property with 3 houses and commercial property.
Why is it difficult to be a real estate developer?
Doing minor real estate development is not terribly difficult, and how difficult it is can vary greatly based on the type of property and where the property is located. Some governments are easier to work with than others. I personally have never ventured into the big development game because it can be very risky. I am not saying I would not do it for the right deal or will never do it, but so far, the potential rewards have not outweighed the risks. Or maybe I am not thinking big enough!
I had a 250,000-square-foot commercial property under contract to buy a few years ago that would have been a massive development project. It was a vacant commercial building that had been used as a manufacturing facility, and I wanted to turn it into multiple smaller units that could be rented out. I was also planning to build roads and parking lots and possibly subdivide the property since it also had almost 20 acres. When I got all of the numbers together, it would take at least $6 million in repairs for just one floor of the building, which has only 125k square feet!
I did not have this much money. I would have to get partners together and banks, and it would be a lot of work and coordination. Could it be done? Yes. However, I had to look at the risk/reward of spending years developing this property, the money sunk into it, answering to partners and banks, and the problems that are sure to come up. This could be a 10 to 20 million dollar property once stabilized, but it might cost $10 million to stabilize it and years of time.
If I had $100 million dollars to play with, I would do that deal and see how it turned out. In the stage I am in now, it could ruin me and is not worth the risk. Now, if the pay off was $20 to $30 million, it might be worth it. We all have different risk tolerances and time to work on a deal like this.
It was hard for me to develop a big deal, and I have been in real estate for many years! Again, I am not saying it is impossible to develop real estate or not worth it, but it is tough to do big developments because of the money needed, the time needed, the government restrictions, and the risk of a project that takes years to complete.
How much time does it take to complete a development project?
The big turn off for me on many developments is the time it takes to complete a project. I have bought a number of commercial properties that were already built but vacant. It has taken years in some cases to rent them out, and they were already built! I have seen projects from other investors in the works for more than 5 years before the development was even started or developments in progress for 6 years before the entire deal fell apart.
There are a number of reasons why it takes so long!
- You have to buy the property at the right price, which can take months or years of negotiating
- You have to make sure the city or county will approve your plan
- You have to gather funding and convince others your plan is solid if you don’t have the money yourself
- You have to buy the property
- You have to create the plans for the development either before or after purchasing it
- You have to get city or county approval for the development
- You have to find the right people to do the work
- You have to do the work
- You have to sell or find tenants for the development
This is why it can take years to complete or even get to the final stages of developing real estate.
Why go to all of this hassle to be a developer?
I am sure most people are turned off by what I have said so far. A lot of work and time is involved to be a developer, and there is no guarantee any of it will work. After going through all of this, the market could change and there might not be any demand for what you are creating.
Why go through all of this? Because some of the richest people in the world are real estate developers. While it takes a lot of money, time, and risk to develop real estate, there can be massive payoffs.
9 out of the top 10 richest people in real estate are developers.
Donald Bren: net worth 17 billion
Donald Bren is a real estate developer in Southern California and the richest real estate person in the world. He started out building one house at a time and eventually created Mission Viejo California and owns the Irvine Company which started Irvine California. His wealth did not come overnight, and he took some major risks, but as you can see it paid off!
How to become a real estate developer
If you want to get into real estate development, the best path is usually to start small or work for a bigger development company. Many builders became national names by starting building one house at a time and slowly growing. Many big commercial developers started with small strip malls and worked up to bigger and bigger deals. Many land developers were builders who needed to create lots for their own buildings.
Working for a company or developer who already is doing big stuff is another way to get in the game. Some of the bigger companies need a lot of people to help them source deals, lease properties, manage the construction, etc. There can be a lot of opportunities working for developers, and while working for them, you can gain many contacts and insights into how it is all done.
What are the risks of developing real estate?
One of the biggest risks in developing real estate is that you will sink a ton of money into a project and it will not work out. The big question is why didn’t it work out?
- The market tanked: In 2008 the real estate market crashed causing many builders and developers to go bankrupt.
- The project can’t be completed: The city may change their mind about zoning, the money might run out, or a partner may back out of the deal.
- The demand is weak: Sometimes there just aren’t enough buyers or renters for a project.
- The costs are much higher than expected: The costs of real estate projects are almost always more than you think, even when you plan for more than you think!
- It takes much longer than expected: It takes a lot of time to develop real estate as we have seen. If it takes too long, you may run out of money or the market may change.
Real estate development is not easy, but it can pay off in a big way. If you are willing to put in the time and money it takes to be a developer, it can be life-changing in a good or bad way! I may become a developer at some point, or should I say do bigger development projects, but the end result has to have a massive payoff for me to take the risk.