I've been working in real estate development for almost 6 years now and really have the itch to go out on my own. I've been fortunate enough to be at companies where I've been able to see and actively participate in each part of the development cycle in the multifamily housing space multiple times. Given the current economic climate, what do I need to sure up before taking the dive? For those that have gone out on their own recently any words of wisdom, you can divulge?
FYI- I know there are posts that have talked about this in the past. I want to ask the question from today's perspective. Thanks in advance.
No to all. What are my chances of starting the next Related?
I don't think it's a matter of you knowing or not, but more of a matter of do you have all the puzzle pieces. You can be an MD with 20 years experience working for a developer, but if you don't have the equity/LP's, construction team/GC, relationships with investment sales teams/real estate agents for deal flow, then you can't really go off on your own despite your experience level.
After working for a developer for a couple months, I left to "go off on my own," (well technically I joined my family's business, a mom&pop shop), but I only had a couple of months of experience working for a developer. The reason I felt confident joining and being able to grow my family's business is because my dad has construction knowledge and is a GC, we have some equity to invest, the strategy that I learned from the developer I worked for is quite repeatable, and I built relationships with banks during my time working for the developer and learned how they financed deals. My strength lies in sourcing, underwriting, and financing deals, without the other puzzle pieces (most notably my family's equity and my dad's construction knowledge), I would not have been able to do my own business.
When you say you want to start your own development shop, what scale are you talking about? Are you thinking about 2-4 units or like 10, 20, 50 units+? At the smaller scale of 2-4 units (that's where I operate), institutional knowledge is quite useless. As I've mentioned in previous posts, construction knowledge at this level is much more important, but you can trump construction knowledge by having a home run deal that has enough profit margin to support a GC and mistakes. If you're talking about 2-4 units scale, then it is possible, but very difficult to do your own deals by yourself, but you will need some equity for a down payment and likely have to start with renovation projects to gain experience or find a reliable GC, build equity, and create a track record to prove to the bank that you know what you're doing before doing ground-up development
At larger scale 20 units+ there are two strategies I've seen that you can implement depending on your resources. If you don't have deep pockets then you can focus on entitling land and then selling it. However, this strategy is very high risk/high reward and is basically an all or nothing game, but requires relatively little equity. I've seen one fairly new developer in my area who partnered with the owner of a run down autoshop in a market that the mayor wanted to develop/gentrify. Their deal was that if the developer could entitle the land, then they would sell it and split the profits, but the developer would be responsible for hiring zoning attorneys, architects, engineers, etc... The developer spent ~$75-100k to entitle the land, but his share of the profits was ~$3mm. Although this sounds amazing (which it is), if the city gave him nothing, then he'd be out $75-100k with nothing to show for it and it is tremendously difficult to find this type of deal. Not only did he find a piece of land that was ripe for entitlement, but also had an owner that was willing to go through the process with him allowing him to avoid any cost of carry. This is incredibly rare.
Another start up developer I know of was a VP at a larger developer and he now develops 20-100 unit properties on his own. His strategy is sort of the opposite of the entitlement approach. He buys land that is already entitled and builds the new development according to the plans. I have no insight into his underwriting, but I imagine they are very tight (I've toyed with the idea of pursuing these types of projects and played around with underwriting). He basically needs a "best case scenario" to come to fruition for each of his projects. He also must have very deep pocketed investors (he has 6, 30-100 unit projects in a high COL city) and there is no way in hell he has the equity or balance sheet himself to finance these deals from working as a VP for a developer. He probably also has a good relationship with the GC at his previous development shop and is able to get decent pricing. This strategy requires much more infrastructure and equity/balance sheet than the entitlement strategy, but it is also less risky in the sense that it is not an all or nothing game and it is repeatable (Coming across land that is ripe for entitlement is very difficult and not a stable strategy). You just have to be very cautious of your budget and make sure a black swan event like Covid19 doesn't wipe you. So as "advice" to OP, I think this path to starting your own development shop is the "straightest" path if you are relying on your institutional experience and want to develop more institutional sized projects. I think your major hurdle will be finding investors. Finding a GC that is reasonably priced is definitely helpful, but usually there are only a handful of GC's around that can develop 20 units+. If you are bidding for a piece of entitled land, the pricing that one of these GC's gives you is probably the same as what they give other developers bidding against you, so often times it comes down to who is willing to make less money in order to win the deal. Either that or you are competing with a developer with an in-house construction team that can build the project at a much lower price, in which case you just move on to the next deal