Is construction profitable? How do you raise capital?

Forgive me if I placed this question in the wrong forum, etc, I'm not sure who the right audience is to ask this question. 

For those of you in real-estate, what are your thoughts on going into construction business (or that's what my family calls it) right after graduation. I'm pursuing a business undergrad degree in USA at a decent school (by decent I mean it's a semi-target for banking). However, I have family in India and I go there for summers. A lot of well-off people back home have construction businesses (residential). They build villas, apartments, gated-communities and make a huge profit. But I know you need lots of capital to start this sort of thing, and unless your family is already well-off (the people in India have generational wealth through land) it's hard to justify to a bank and convince them to give capital to a 22 year old to start this sort of business in India. 

I am looking at consulting/ banking out of undergrad but also this as a career option because it's really profitable back home in India. What steps would I have to take, how do I direct my career if I want to do this out of undergrad? Aka build credibility enough to raise capital, etc. 

Is this even possible at 22 or am I dreaming too big? I haven't done much research (I will going forth I'm planning on speaking to my dad's real estate friend, contact those Indian people directly, etc) but for starters I wanted to ask on here. 

 

Based on the most helpful WSO content, entering the construction business, especially in a market like India, can indeed be profitable but comes with significant challenges, particularly around capital requirements and market understanding.

  1. Capital Requirements: As you've rightly noted, construction requires substantial initial capital. This is often sourced from personal savings, family funds, bank loans, or through partnerships with other investors. In India, where family businesses and generational wealth play significant roles, entering without such backing can be challenging. You would need to present a robust business plan and possibly some form of collateral to secure bank loans.

  2. Building Credibility: At 22, building credibility will be crucial. You can start by gaining relevant experience in the field. Working in consulting or banking, as you mentioned, can provide you with valuable skills in financial management, project management, and strategic planning—all essential for running a successful construction business. Additionally, these roles could help you build a network of potential investors and advisors.

  3. Steps to Take:

    • Education: Continue to leverage your business degree to understand the fundamentals of business management, finance, and real estate.
    • Work Experience: Consider internships or early career positions in real estate development, construction management, or related fields. This experience will be invaluable.
    • Networking: Use your family connections and any professional contacts you make to learn from those already successful in the field. Understanding the nuances of the local market through these connections can provide insights that are not available through formal education.
    • Market Research: Conduct thorough research into the Indian real estate market, focusing on trends, legal requirements, and the economic environment. Understanding the specific needs and regulations of the regions you are interested in will be crucial.
  4. Feasibility at 22: Starting a construction business at a young age is ambitious but not impossible. Your success will depend heavily on the groundwork you lay in terms of education, experience, and network building. It's also about the risk you're willing to take and the resources you can gather to support your venture.

In conclusion, while the path you're considering is challenging, especially at a young age, it is not out of reach. Focus on building a solid foundation through education, experience, and networking. This will enhance your ability to raise capital and execute successful projects in the future.

Sources: Overnight 23-year old BTC Millionaire? Life Choices, Life Plan (for Everyone) to Ponder, From Real Estate Finance to Founder of Development Company - Q&A, How many of you actually plan on going independent?, Life Plan (for Everyone) to Ponder

I'm an AI bot trained on the most helpful WSO content across 17+ years.
 

No, you just don't start running construction or development deals on your own out of school unless it's your family business.  Construction takes years of on the job learning.  If you have the connections, you work for a family friend and learn the business from them.  Can you read construction drawings?  How would you know what subs to hire?  Do you understand sequential order of trades and typical duration?  The local permitting processes?  How would you know if people are taking you for a ride and taking advantage of you?  What bank would guarantee your cash flow with loans?  What type of bonding or insurance would you secure?  What would be your accounting procedures, and what contractual forms would you use?

Apologies for being blunt, if this is something that interests you, but please work for an established construction firm first to learn what you don't yet understand you don't know and can overcome some Dunning-Kruger effects.

 

No, I definitely agree with you. Like I said I don't know anything about the space. But what I meant was like I wouldn't be involved with the construction or hiring people or making projects. As far as I know, how it works in India is like someone with money buys a large lot of land and hires someone else to do the construction and let's say they build a 100 apartments in that site, they split 50/50 and that's what I meant when I asked would it be profitable, etc, not necessarily starting a construction business by myself from the ground up. 

My apologies, I should've been more clear

 
Badduck195

No, I definitely agree with you. Like I said I don't know anything about the space. But what I meant was like I wouldn't be involved with the construction or hiring people or making projects. As far as I know, how it works in India is like someone with money buys a large lot of land and hires someone else to do the construction and let's say they build a 100 apartments in that site, they split 50/50 and that's what I meant when I asked would it be profitable, etc, not necessarily starting a construction business by myself from the ground up. 

My apologies, I should've been more clear

You still need to understand construction, buddy.  What is the budget for that 100 unit building?  How do you vet that?  Are you properly scoped and specced so you don't get hit with deal crippling change orders?  How do you know your "50/50" partner isn't padding their budget?

Construction is hard and it's really, really risky.  It's why developers make money - not for some stupid fucking Excel pro forma, not for getting an extra $1/sf on the lease up, but for managing and mitigating risk during the construction process.  WSO is extremely oriented towards finance, so the "numbers" part is what people like to focus on, but that's really immaterial.  All the risk comes from when you put the first shovel in the ground until you get your final sign off.

The fact that your understanding of real estate development is "I buy land and hire someone to build it" should be a very strong sign that you should run, not walk, towards a different career.

 

CFO for US-based construction business here. Not the developer... the actual firm doing the construction (ie: purchasing materials, building structures, etc). Can't speak to anything related to India but I can tell you that:

  1. Yes, construction can be very profitable. 
  2. In the US, it is highly regulated and difficult to do business.
  3. Despite #2, it is very easy to get into business and you don't really need that much capital to get started if you are successful and can keep growing (again, the construction piece... not the actual developer side).
  4. It is very difficult to do construction right and it is a very valuable skillset. 
  5. As Ozymandia said, developers who don't understand what they are doing are suckers and you can spot them in a minute. Relying on simply "hiring a construction firm" is a fast way to just light money and credibility on fire. 

The natural progression in the industry (at least in the US) is: every subcontractor wants to be a general contractor. Every general contractor wants to be a developer. Every developer wants to be an investor. That is not just the classic "professional envy" of wanting the job that your client has, there's truth there because the skills for the lower tier make you better prepared for the next rung up the ladder. It does not work in the opposite direction. 

"And where we had thought to be alone we shall be with all the world"
 
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My former co-worker/good friend is Indian. His dad is a big shot developer in India. Anyways he sent his son to study in the US. He end up working with me as an analyst at our acq shop and would always talk about development in India. His dad built like mixed-use stuff with ground floor retail and higher level apartments.

Anyways he invited me to his wedding over there and it was wild. I remember getting out of the airport and he picks me and the other friends up with two mercedes SUVs with drivers. The wedding was insane. Ive never seen anything like it. It was like a Disney level experience with elephants and fireworks and crazy amounts of good food. They went all out. We stayed a couple days and given my background in RE, his father showed us around. The amount of development happening there is wild and construction costs are mad cheap. The biggest issue is the land prices where many areas are starting to rival top tier cities in the US. The land is the biggest factor over there, not the cost of construction. Theres just so much demand there as well. I always have a pre-conceived notion that India was super poor, but I ate at world class restaurants, stayed in an amazing hotel, and had a great time. Still saw plenty of poverty as well, the contrast is eye opening.

My buddy eventually went back to India to help his dad as their portfolio was increasing, which made sense. He was making peanuts here, where as over there he was living in a massive mansion in the city with servants and drivers, etc. Based on my small knowledge of what I learned, construction/development in India is way more profitable. You have a crazy amount of demand with little supply. Booming middle class that continues to spend as well. If you can buy land further out of cities and land bank, you'll make serious dough. Its hard to do that level in the US.

 

Do you mind me asking which part of India your friend is from, South or North, and which city if you know?

As well, I know you mentioned land right that you need to buy it or have it familially. Some of the land my family has been given to a developer who took the plots of say 300-400 people (around 600 acres) and said will develop it into villas, and each person gets one villa, meaning he will give away 300 villas but he's building like a 1000, so he gets 700 let's say. After all the costs gone (construction labour, equipment, permits, etc), he's still making a huge profit. I guess my question then would be, this developer who took the land of people isn't like a big shot or didn't exactly go to Harvard. How do you think he went about convincing people, is it better to directly speak with these people when I make my summer trip to India next?

 

I have some background in this space. There is a vast difference between 1) construction and 2) development of major projects (your skyscrapers, airports, etc.) and vs. in construction of small projects (i.e., building a single-family home).

If you are the owner of a small construction company, then it could very well be profitable for you. Good construction labour can be hard to find, so you can easily command a premium (like mechanics and plumbers charging lots), and your risk is relatively low in the grand scheme of things.

Things get much more hectic the more complex things get, with the risk increasing exponentially. This is especially true when the general contractor (GC) signs contracts where they must own the risk of delivery. These are often called lump-sum turnkey projects (meaning they get paid a lump sum, say $100m to deliver a building) and the owner just "turns the key" and it's ready. This means any risk of poor quality, mistakes, accidents, is borne by the contractor. If your total labour, materials, equipment, insurance, etc. etc. costs are higher than $100m, guess what, you lose money. Penalties for delay can be borne by the developer for not delivering for their customers, but you can be sure they will try and claw this back from the GC. Because fundamentally these more complex GCs are supplying a commodity service (kind of like banking), bidding for projects is intense, with many submitting extremely low price bids in order to win the project, and then using the concept of "change orders" to claw back any money and profit they can get their hands on. Your success as a GC also depends on your ability to navigate the local supply chain and regulatory environment (as someone mentined above), so unless you have connections you will struggle.

Margins for large GCs are horrifically low (3% is a banner year), which creates a vicious cycle of poor investment into technology, which perpetuates their poor productivity, which hampers their margins further.

Developers are different - they are on the real estate side and bear investment risk much more than execution risk. If they cannot sell units or the project at an attractive rate of return vs. financing costs, then they of course lose money. But that also means they enjoy much more upside.

I could literally type up pages about the inefficiencies in the construction market, but to summarize, I wouldn't recommend get into "construction" unless you have family connections.

 

Agree 1000000% on the litany of inefficiencies in construction industry and business model. I am, however, beginning to see some realization of long-promised but never-yet-delivered improvements via technology. It's patchwork... but quite a few platforms are bearing fruit *IF* (as you noted) you have the wherewithal to invest in and fully utilize them. 

"And where we had thought to be alone we shall be with all the world"
 

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