How do I know I have what it takes to start my own development shop?

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.

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Comments (24)

Mar 29, 2021 - 10:19am

Do you want to do solely development?

I would say the safe answer is to find an existing asset, a small one, and try and find investors to help you take that down.  Nothing will teach you the ins and outs of the business like managing something day to day.  And while it's not a perfect transition to true development, you'll start to learn enough about negotiating with subs, about the technical ins and outs of boilers and roofing systems and appliance installation, that will give you a good baseline for when you start digging up dirt.

The truth is that no one knows if they're ready to do this.  Some people are awesome project managers who will get an asset built on time and under budget, but who have no head for the bureaucracy of running a business.  Some people might be the reverse.  Six years is ahead of the curve, I'd say, but the good news is that you have a marketable skill set and as long as your first project isn't a complete tire fire, you'll always be able to fall back into the kind of role you have now.

And from today's standpoint - debt is cheap but not necessarily easy to come by, concern about sponsor risk versus asset risk is becoming more and more prevalent, from what I've seen.  Equity is somewhat the opposite.  

Mar 29, 2021 - 11:15am

Not to be too callous here - how much money do you have? Are you able to guarantee construction loans? Are you able to personally cover pursuit costs and/or overages? 

Also related to money - what do your debt and equity relationships look like? Are you able to get a loan? Are you able to get equity? 

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Mar 29, 2021 - 3:04pm

This is valid question. Coming from development this is not callous at all. I do have a few relationships to equity. Their appetite to invest in me is another thing. Any advice or resources to raising equity?

Mar 29, 2021 - 12:42pm

Relationships with brokers to find a deal?

Access to capital (equity)?

Access to capital (debt)?

Relationships with consultants (architects/structural/etc.) to design a building?

I'm assuming you know your way through the approvals process.

Ability to manage GC / construction team?

Ability to manage budget & monthly cash to remain afloat?

Ability to lease-up upon completion?

Relationships to sell?

Mar 30, 2021 - 10:42am

It takes about 5 years to secure land, design, permit, construct, lease-up, and sell/stabilize a multifamily development. If you have been at multiple companies in less than 6 years then you likely haven't managed a project from A to Z, much less multiple. You do that a few times and you will have your answer.

Also to CRE comment. You need about $1M to fund pursuit and $1-5M in liquidity for a lender to take you seriously. If you don't have money then secure a site and co-develop with a group or rich guy who can fund the deal and guarantee the loan with you. Also, be prepared to not have an income for several years either. 

“Capitalism: God’s way of determining who is smart and who is poor.” Ron Swanson

Apr 5, 2021 - 4:37pm

+1 for getting a sugar daddy. You'll likely have to fork over a portion of your promote, but my guess is you won't have the liquidity or NW to qualify for a loan. Some LP's will help, but a lot won't. 

Mar 30, 2021 - 2:47pm

What kind of stuff do you want to develop and at what scale?  And what do you think you do best/ what's your edge?  Acquisitions, project management, capital raising?   

Unless you are a beast, it's really hard to do everything. I've always been better at the PM/ entitlement part and weaker on capital raise (now I have a small network I will pitch stuff to who can steer me in the right direction if they aren't interested themselves). For better or worse, I've usually focused on wonky, small-mid sized deals that have hair.

On the other hand, I know of people who are great at raising capital and don't get deep into the execution side and works for them.  I have buddy who had no development experience but was well connected and just does vanilla value add deals in Midwest that he packages for yield hungry investors in California.  He is crushing it and sometimes I wonder whether I took the hard route lol.

Mar 31, 2021 - 8:31am

If you are looking to develop in Florida -- I can build cheap with dried bamboo sticks and Gorilla Glue. Not sure about wiring as my sub-contractors use silly string and might violate some child employment laws. I'm Yale Skull & Bones for reference checks. Let's do business! By the way I am a Hasidic from Williamsburg and my business partner is in High School. Windows are expensive though, those are from Home Depot. You should see the bill on those! 

Most Helpful
Apr 4, 2021 - 1:41pm

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

  • Intern in RE - Comm
Apr 4, 2021 - 3:53pm

This is great. How old was the VP when he broke off? Also as someone who probably will and wants to start in the MM investment sales market, do you think that's a good path to go down if I eventually want to do my own deals? 

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