How would you prepare for a small townhouse development?
I want to do a 5 unit townhouse development. My life goal was to get into real estate, but unfortunately I was pushed into Pharma PE. I have two years of real estate experience in undergrad as an acquisition analyst for a hospitality PE firm. But since graduation I've worked in Healthcare PE. I now have a good amount of capital that I'd like to finally use to jump into development.
I've chosen to do a townhouse development of 5 units. I've read some of the books that some highly regarded MSRED programs use. I've built out my contractor list and an actively involved in the Real Estate Investment Group in my city.
I've spent a good amount of time researching sites, developing banking relationships, have a top-notch real estate lawyer and have procured some LP capital if needed.
My problem is everything I've done has been in excel. I have no actual experience developing anything.
What do I need to look out for? Any pitfalls? Any materials I should read? Who are the individuals that I need to lean on for this first development?
Thanks for any help.
Bump, really interested to see how this goes.
What kind of capital do you have and what sort of lending terms are you looking at?
So, given the above statement, you really need to partner with someone who has real development experience and construction expertise. Millions of pitfalls exist here and you really shouldn't rely on third party consultants that much. A contractor (who will put some of their own money up) would be a good partner for these type deals, that's a major risk point.
Agreed. I just closed a debt deal for the construction of 32 for-sale townhomes...I would highly recommend you find a partner with the right experience, especially for your first development. Whether you partner with a contractor, a consultant, or a developer, just make sure your incentives are properly aligned. They should make money when you make money.
Lending terms will very greatly depending on leverage, strength of your relationship with banks/other financing partners, recourse, market-specifics, etc. Our deal was structured as a revolving line of credit at 9.9% with a 2% origination fee. Banks will offer cheaper capital but you'll likely need to check more boxes.
Check out biggerpockets.com
Get yourself an experienced and reputable GC, and ensure they don’t get paid in full until the job is done.
Be mindful of the timing. Despite every agent and developer who’s selling a property all shouting that real estate is booming....it’s really the tail end of the cycle and we are seeing massive distortions to market prices to to people’s altered habits during the pandemic. One thing about real estate is how many simple people there are involved who truly don’t understand macroeconomics AT ALL and are bullish by default (now is the time to give me your money!)
Also ask yourself if you want to build to rent or build to sell....two very different games. Both are very good games but have somewhat different rules.
The good news here is you acknowledge you need to learn and are asking for information. By asking for help and learning you’re already better off than many who enter the market and suffer. Real estate is ultimately a simple thing compared to other investments but that still doesn’t mean it’s easy, and mistakes can be very expensive. So keep learning and at some point you’ll know when the time is right to jump in.
All the best to you and if you ever want to talk it over more hit me up. I’m in the buy and hold rental business so our interest may at some point align, and it’s good to know other smart people in the industry.
Monetary things aside...
Try to find builders with excellent quality work and not have been sued or part of a lawsuit in the past due to issues/poor quality. This will save you tons of headaches and potential losses post-building of new development. This is probably thing here, but find right people as well, this will be the key in execution.
nothing new. find a great partner and/or GC who has done it before and get involved as much as possible in the process without getting in the way. you could have $10M in the bank but could still screw up a 5-unit development and lose money. you can read all the books in the world, there are things you just won't learn until you go through multiple developments.
kudos for sticking with your interests though.
Advice already posted re: GCs & construction, so...
1. Do you have brokers looking for sites? Or are you looking for sites yourself? What pricing can you get to? Is it feasible to get a deal done at that pricing?
2. Have you every bid for a site / put in an offer? How are you with legal agreements?
3. How are you with communicating a plan to investors? How much equity do you have access to?
At the end of the day you need to (1) look out for everything, (2) avoid any and all pitfalls, (3) at this stage there is little more to be learnt from reading, and (4) no one (buck stops with you). Your primary job is to deal with the risks involved and ensure they don't materialize. For example, you say that you have a contractor list: have you met with any of them spoken? Know their fees? Know their strengths/weaknesses? There's just so many odds and ends in the development game to keep a handle on. That's why so many success stories are from people who've been in the game for many years.
Good luck
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