Hey guys, I'll keep it short: I am currently working as a trader full time, hours are very long, around 12-13h Monday to Friday.
I have been reading about real estate and following the market in my home city for around 3 years now and am very keen to get started. The idea is very straightforward: buy a good piece of land in a good area of the city and develop a block of apartments. Given my capital, it's nothing huge, would say 9-15 apartments of roughly 60-70 squared meters each. Funding is done via some small personal savings and the rest is coming via a personal mortgage + project financing once I buy the piece of land.
Any sort of advice for this project? Execution seems to be the key in my opinion, as I've spent enough time looking at different land areas and now have a strong sense of price / overall market, what is a good deal to carry over 3-5 years if something goes bad, etc.
Thanks for the help!
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No way I can do it then haha
Not saying you cant make it work but no one here can give you any useful answer to a generic scenario you just laid out. To be somewhat useful I'll add I think you have an extreme under appreciation about how much hand holding a development takes. Even for a 10 unit building you (or someone you trust deeply) are going to have to be on site every day for at least an hour or two.
I would at the very least recommend partnering with a real estate friend that knows what he's doing. People grossly underestimate how many missteps you can take in real estate investments. As I always tell friends, real estate is definitely not rocket science, its not complicated to comprehend, but there is ALOT you NEED to know in order to execute a successful investment. Development is the easiest to miss on too. Like you said you figured out where pricing IS - but do you know how much you SHOULD really be paying? There are many small moving parts and contingencies that will add up to very significant amounts over time and if you don't even know what those costs are, how could you possibly know the right price to pay for a piece of land? Find a real estate friend and do it when him/her. If I for instance said i've done some research on bond trading and decided to dump my life savings into on the side with 0 professional experience, would you advise I do that? Just my 0.02.
Yep, makes a lot of sense, forgot to actually mention will be working with family that will be on site every single day of the project.
I guess what I am trying to find is a model of thinking and assessing those costs. Is there a generic real estate model people use for personal investments?
I would start by looking for a BOE (back of envelope/back of napkin) analysis (try adventures in CRE), which you can use to quickly assess if a price is even within the right ballpark. It will have high level inputs (i.e. hard costs per foot, soft costs, financing costs, projected rents, taxes etc). As for the actual model, it should be built out over time (as you go through diligence) and bespoke to the deal. For instance each city would have its own zoning, permitting fees, mortgage taxes, approvals constaints/timelines etc. All of these things affect buildable sf, timing, costs etc.
Are these family members people with a background in construction or development? If not, this is unquestionably a worse idea than trusting your neighborhood heroin addict to be on site.
Shit will go wrong. On every single project, shit goes wrong. If its family that fails to catch it, now you have a situation where your family are pissing away your money, and that can cause shit to go wrong quickly. If I had some of the arguments I've had with owners reps, GCs, etc, with family members, I'd probably not be on speaking terms. However nice it sounds right now, people have a tough time separating the business and the personal.
There's an old adage, never hire someone you can't fire just as easily. When it's your money at stake, that goes double.
You should really consider buying an existing 2-10 unit existing multi-family building where you can live there and manage/slowly upgrade the other units
I was also thinking about that, looking for cheap deals around but haven't found anything in the last few months...
My honest thoughts: I applaud you for your entrepreneurial spirit. However...there's a 75+% chance you need to put down your pipe because this is a fantasy...especially if you don't even have a basic model at this point.
That said...I'll pay along in the slim chance you might be able to pull this off. Here's my first word of caution...your actual costs will be double from your initial pro forma. And your actual revenue will be half of your initial projections.
People without experience simply don't understand the actual costs involved. For example...your actual hard construction costs might be $130 sq/ft...but your all in cost per sq/ft can easily exceed $200 sq/ft.
Another consideration is that at that scale...you'll get killed on property management expenses unless you self-manage.
When it comes to financing spec MF residential...your overall net worth will need to be comparable to the overall development cost...and you'll need a good chunk of liquidity in reserve post-equity contribution.
And good luck trying to find a reputable contractor to take on such a small project in this current market. It'll be a serious challenge. I've had problems trying to get contractors to take on $55MM projects. All of the quality contractors are super busy. You need them more than they need you at the moment...and that's reflected in their pricing.
Also...since you mentioned meters...I assume this prospective project isn't within the US. That in itself might limit the amount of accurate information you can receive on here.
You're much better off looking for a value-add acquisition.
In the event you do decide to move forward...I'm happy to rip apart your pro forma. I'm actually serious.
This all might seem harsh...but I'm merely trying to save you from yourself.
Thanks a lot for the advice! It's actually in the capital city back home in Eastern Europe and I am working from London.
I see the point regarding the actual vs projected costs and this is the thing that worries me a lot. Having said that, I believe that if I don't lever too much and can carry the project (due to the convergence of countries in Europe) I should be fine medium term, say 3-5years...
We have to self-manage indeed and we are seeing the same dynamic back here, contractors are over-booked due to the boom in the market and we need them. Haven't secured them yet but think we can use a team we have worked with in the past...
How does your initial pro-forma look like?
I'm not going to do a pro forma for you. Honestly...if you aren't familiar with how to underwrite such a project...that's probably a pretty good sign that it isn't the right investment for you.
That said...I wish you well and I'll share a little bit of additional insight here.
When it comes to development projects in the US...you need to contemplate the following items when it comes to your pro forma. These items include your soft costs that are in addition to the actual hard construction costs.
architectural and engineering (your design costs) impact fees/utility connection fees/construction permit fees performance bonds/letters of credit for public improvements operations reserve construction interest reserve marketing/pre-lease expense (this could also be attributed to the operations reserve line item) builders risk insurance/liability insurance property taxes utilities closing costs (financing costs/title insurance/appraisal/legal) FF&E
Most lenders will also want to see a 4-5% contingency added to the final budget to account for potential cost overruns.
Seriously...look for a value add acquisition. You should be able to get better financing terms (assuming it has stable occupancy) with a lower equity requirement and can get immediate cash flow. It also allows you to demonstrate and refine your operating skills.
The project you're contemplating will completely disrupt your life for around 24 months. If you're really set on getting exposure to development...look to passively invest in the GP side on a deal. You'll get a comparable yield without all the headache. It can also serve as a much needed learning experience.
One final note of caution...you'll have difficulty obtaining debt for your desired project without any experience. You can expect a high interest rate and a 40% equity requirement.
Again...I sincerely give you credit for thinking about making such an investment. But know your limits and fully understand all that's involved.
i would also like to point out that you are making the decision to start entering the market in the future instead of the current, if you are developing. Your input assumptions on rent market and costs will be in the future instead of now, which adds even more uncertainty in the models.
Based on my experience, I would at least add in more than usual contingency, make multiple scenario assumptions for downcase (time overrun, cost overrun, lease-up not going well...), set milestones and limits regarding your equity so you won't panic with sunk costs, and check where is your point of no return where you will be forfeiting your equity.
I would also make sure to check if there is any upcoming supply or development in the area to check for oversupply.
But this idea is inspiring. If you do manage to get project finance for this, it probably means your plan is reviewed critically and pretty much on the right track. Best of luck!
I see, I think it makes a lot of sense to think in the future and make assumptions/ projections for that, I've done that partly but probably needs more thought into it.
Any good materials you would recommend to improve myself and learn more about models, frameworks, etc.?
Sent a PM to you so I can send you some models.
This one may be a little too simple but may work for a sanity check:
I would recommend learning how to analyze REIT's and buying REIT's with leverage that have a sustainable FFO yield in excess of the margin debt cost. No offense, but your trading skills won't carry over to development at all, that's like comparing an apple to an orange.
I thought about that a lot but because I am from a country in Europe where there are no ETFs, I really wanted to express my positive view on the particular city and areas of interest, hence the development idea came as my parents have had exposure to it some time ago. I think proper analysis, scenario analysis, risk/reward, in-depth research summarized to a few important points, these are all very helpful things I've learnt from trading...
Finance is just one sub-component of development. How much do you understand about the municipal approval process? MEP infrastructure? Construction techniques/risks? Design? Marketing? Operations? Accounting?
Given you current workload and what appears to be the level of current understanding that you have of the process, I'd recommend taking that money and putting it into a mutual fund instead.
This would be the equivalent of me buying a bloomberg terminal and becoming a day-trader in my "spare time."
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