Development and Capital
Assuming you have a good understanding and skill set in development, how much capital would you need to be able to raise to feel confident about going out on your own and starting your own shop?
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Hey Texas_Forever, what a lonely thread. I'm here since nobody responded ...so maybe one of these discussions will help:
If those topics were completely useless, don't blame me, blame my programmers...
Would all depend on what strategy you're going to execute, but most developers I know started by finding a deal or a niche and scraping the capital together as they go. It's more about having the relationships than the dry powder.
The real thing to think about is how long can you go without paying yourself a salary or earning any fees/promote, while dumping money into pursuit costs to carry the deal until the point where you can bring in a partner.
what do you mean when you say most developers you know started by finding a niche?
They become experts in a certain area. Say suburban multifamily development outside of Denver. Through becoming an expert in that area they've developed connections with the players they need in order to make a deal happen. They identify a deal and lock-up the land. They can then start lining up the capital because there is a deal to be analyzed with an expert in that field vs "raising money to be called when needed".
I appreciate the response. I spoke with an older guy recently who told me about his first and only deal in real estate, which is what he's lived off of for the last 30 years. He said he found a really shitty hotel in a big city, raised money from investors to buy it and turn it into a nice hotel, and it ended up cash flowing a ton of money. He said it was his first deal and he never worked again. But that's why I asked the original question. Hearing about guys that have just gone out, found a deal, and made it happen seem to be in direct contrast with what I see so often on this forum, where people make it sound like you need decades of experience as a developer to go out and do deals.
More than one way to skin a cat, my friend, especially in real estate.
I’m noy saying that this is necessarily the case, but it sounds like he may have gotten lucky and then was smart enough to live off a gravy train instead of rolling the dice repeatedly.
I mean, you have to understand the difference in what this guy did and what the experience of most guys on this forum is. Your anecdote is a guy who found a good deal, probably hustled his ass off, and is content making a comfortable living off the cash flow instead of turning his investment into a bigger real estate concern. Good for him, knowing when to quit is half the battle.
But most folks on this forum are either brokers or REPE guys. For the latter, you do need a lot of experience to raise the capital. Essentially you're asking for commitments for deals that haven't materialized yet, and that requires a lot more trust than being able to walk the building and feel the bricks of the asset someone is pitching you on. And people speak to their experience; someone with 5 years in REPE who is looking to rise high in that business will speak more authoritatively to his/her career path requirements. A person in development is going to tell you that raising money is the easy part, and executing is what's tough, not the other way around.
Could you expand on the difference between what developers say vs others? I had a call this morning where a developer literally said that same exact thing to me, that finding money isn't really an issue.
Well, this is echoing what others have said above, and is also coming from the POV of a developer, so take it with the same grain of salt I mentioned above.
But I'm constantly looking around for deals where I can add some value, either by entitling land or rezoning existing assets, or just straight up buying well, etc. Long story short, I find an asset to develop, generally put up hard money to lock in a contract, and only then go out looking for investors. Obviously anyone giving me money needs to trust that I can execute, but in general, they can walk the property and dig into my underwriting and understand the bones of the deal. Given all that, why should it be hard to raise money? If my deal sucks then yeah, it'll be tough, but with a good business plan, people have relative certainty on their returns.
Contrast that to a REPE guy raising funds. If I'm an investor there, I am tying up a lot of capital for a long time (or at least committing to maintaining minimum liquidity), with all the same risks that come with development, in terms of the quality of the personnel executing the business plan. I have a major additional risk in that I have no idea yet where my money is going to be deployed. I can't see a 15% IRR deal in front of me and decide yes or no; I'm trusting that the principals aren't going to put me in a bunch of 6% IRR deals for the sake of deploying capital. Yes, I'm aware there are structural concerns which mitigate that, but even so.
TL;DR - one group is saying "give me your money so I can go out and find some lucrative properties to buy" and another is saying "here is my plan for a piece of property, give me $$ so I can monetize it".
If we are assuming the above, capital is not a big issue, the capital partner will want to see you have skin in the game, so they will want you to put up 5% - 10% equity, so if you have $100,000 and lets say that represent 5% of the equity stake, the equity will be $2,000,000 at 50% LTC, you could do a $4,000,000 development..... the bigger issue you will have is getting the bank to issue a recourse loan if you do not have any net worth, they will require a personal guarantee, if you want your capital partners to sign that, expect to pay a lot more for their money.
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