Starting RE Dev/Value-Add Shop
What are the things you would want to have lined up prior to quitting your job and launching your own development/value-add company?
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You'd need quite a few things. This list is by no means exhaustive, but the first few things that come to mind when I think about our development/value add deals and the aspects of each deal:
1. Equity. Pretty self explanatory, you would need an equity source to even get a loan and to cover initial costs like overhead. Whether it's your own equity, partners you are starting the company with, or relationships to other groups (probably gained through your full time job) you would need to be very secure that you would have enough once you have a deal actually in place and while you searched for a good deal.
2. Debt sources. Think about how hard it is to get a residential mortgage for normal people, now try and get a loan for over 100x that amount. Without a track record or exceptional personal finances, you would probably need to get creative financing or the backing of someone/firm that's reputable and can sign the guarantee. Without these sources in place the deal is doomed before you even do market research or contact a broker to find a deal.
3. Experience. This one might be the most obvious, but definitely should be said. You should go through quite a few full cycle deals at your current firm before you think about doing it on your own. If you don't know how to execute then it doesn't matter if you can secure loans and equity because you'll just lose it all.
4. Risk appetite. It's easy to say "oh I'll just buy a small apartment building, strip center, etc. and repaint and release and it'll be easy profits!" but don't forget there is significant risk of losing multiples of your current net worth. If you can't realistically lose several million dollars then there is going to be risk and that risk is not always appreciated in full. If you don't mind the risk and willing to deal with it for the potential returns, then ignore this step.
5. Partners/employees. I'm going to go out on a limb and assume you are not a lawyer/accountant/marketing specialist/financial analyst/leasing agent. Maybe one/some of them but not all. And while you can outsource some things, you'd need to surround yourself with competent people and have them also willing to risk a lot by joining a start up.
Thank you for the detailed information. Here is some additional background on me to provide context.
I graduated from UG 5 years ago and work for a large development company that is talked about often on WSO. I work on the development team (project management focused) and spend a lot of time on entitlements, permitting, design, and construction. Outside of work, I have syndicated ~5 small apartment value-add deals with FF money over the last 3 years. My professional experience is ground up development, but I chose value-add multifamily to get started with because it’s too difficult to manage a development project while also having a full time job. I recently entered a co-gp partnership with a company that has agreed to provide 100% LP equity and 80% of GP equity and sign loan guarantees (of course I am giving up a lot of promote in this structure) and we are targeting 50-150 unit apartment properties. They are aware of my full-time job, and they are primarily responsible for asset management and construction management until I quit. I want to quit my job and focus on this opportunity full time (which will help me negotiate better fees/promote), but I don’t have sufficient pipeline to quit my job yet. I own a home with my fiancé and don’t want to rely on acquisition fees to pay my mortgage. Also, I am cash poor as most of my money is already tied up in deals. Trying to find the right time to make the leap and avoid falling on my face.
As a side note, I am well versed in office, retail and multifamily ground up development and find these much more interesting than value-add multifamily. End goal is to run a small, 5-10 person development company.
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This is a good starting list. I would also add having a proper legal and accounting team/company in place is vital. Often overlooked but essential to smooth operations.
Honestly a lot, I've considered leaving my job and just running acquisitions with partners, but you need a lot of capital to place for GP share (or partners who can at the cost of promote), you need a pipeline, you need networth for loans, you need a sizable enough SREO for any LP to invest in you alongside a good track record. All that takes time, luck, and networking to meet the right people.
You can skip steps if you have a lot of money and focus on smaller deals, but raising LP equity by yourself is pretty tricky with no direct track record to point to.
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