7 Steps on How to Become a Real Estate Developer. *AMA on RE Development*

[Antifragile]

In case you haven't noticed, real estate is kind of a big deal.

Just think about it – where would we all be without homes to shelter us, shops to buy our groceries, or offices to work in? Pretty much nowhere, that's where.

And when it comes to real estate development, things get even more interesting. After all, it's the developers who are responsible for creating all these places we call "homes" and "offices".

But what exactly is real estate development?

I struggle to find other job description as varied as a "Developer".

Development ranges from the acquisition, renovation, and re-lease of existing buildings to... Buying raw land, carving it and and the sale of parcels to others. Developers convert ideas on paper into real property. Because developers are responsible for the success or failure of a property, they typically take the most risks. And as with any value skew they can receive the greatest rewards.

Real estate development is a process. It is planning, designing, financing, constructing, and managing of real estate. In other words, it's the business of creating homes, shops, warehouses and offices.

There are a lot of different challenges that come with this line of work. For example, developers need to be well-versed in a variety of areas, including construction, law, finance, and marketing. They also need to be able to think on their feet, as the market for real estate can be very volatile. The approval and construction time is long and can crest a market cycle!

Different developers focus on different areas of real estate. Some specialize in residential development, while others focus on commercial or industrial projects. There are also developers who work on a mix of projects, or who simply dabble in a bit of everything.

Whatever their focus may be, one thing is for sure: real estate developers are essential to the success of our communities.

Here I give you a 7 Steps on How to Become a Real Estate Developer. For $9.99 you get this course. But wait, there is more! ...

If you have been on this forum for more than a minute, you know I lied about the course or the exact 7 steps. There is no such thing as a "follow these steps" recipe in business and RE Development is no exception. Instead of expecting a course, you can...

Ask me anything on RE Development.​

The real estate industry is divided into: residential, office, commercial, industrial, and land. I will answer questions about: residential (rental and condo), office and industrial.

The process:

• site acquisition,
• regulatory approvals,
• market analysis,
• design and planning,
• construction and development financing,
• joint ventures,
• construction,
• marketing and sales.

I will answer questions on specific parts of the development process.

Like any business, there have been books written. Volumes of books on various parts of the process. I'll do my best to answer questions.

For more info on me and what I do, please listen to @Kak Kyle Keegan Radio show.

All questions here are welcome here.

 

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[Antifragile]

Thanks for doing this bro! How does it start? A vision for the area or a vision for the project to be built?

Edited - I missed the Q altogether @Kak.
Let me try it again:

It starts with a vision on where we want to develop. Choice of municipality.

Then it's about a product type. Usually driven by the demand in the said municipality. If people are priced out of condos, we deliver rentals. If there isn't enough industrial, we try to find industrial lands etc.

Remember that when an opportunity is obvious, it's obvious to everyone - resulting in a lot of competition. So you'll want to develop toward the higher end of the market for your product type when you are new, where there is more margin for error. Low-end projects typically have slimmer profit margins.

What we don't do is fall in love with sites or do "hobby developments". It's about meeting the demand.

 

[Antifragile]

What are the warning signs that tell you not to develop in a particular city or town (regulatory)?

Excellent question! 10/10

When looking for a place to purchase a site, it's important to do your research first. You don't want to end up in a situation where you've purchased a site, only to find out that the municipality has placed a moratorium on building. Here are some tips on how to avoid this situation.

The first thing you need to do is research the municipality in which you're interested in buying a site. You want to make sure that the municipality is friendly to business and has a good track record of issuing building permits.

You also need to be aware of any potential legal constraints that could prevent you from building your project. For example, if the municipality has a zoning bylaw that doesn't allow your project, you won't be able to proceed.

Finally, be aware of any political constraints that could impact your project. For example, if the municipality is in the middle of an election, the new government may have different plans for the area and your project could be cancelled.

By doing your research up front, you can avoid any unpleasant surprises down the road. So, do your homework and choose the right municipality to avoid headaches and delays with your project.

1. Read the Official Community Plan (OCP) and Zoning by-laws.
2. Call the city staff and discuss your idea.
3. Meet with Mayor as par of due diligence.

The above is the job for a Development Manager at my office.

 

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[Antifragile]

Sounds like patience is important.

With the long time between start to finish in the process you describe, what sort of overlap is there? Which parts of the process are done concurrently?

Another amazing question - thank you.
There is some overlap in steps of Real Estate Development.
For example, once you have acquired the land, the regulatory process can begin.

The regulatory process includes obtaining all necessary approvals:

• demolition permit,
• rezoning,
• development permit
• building permit etc.

This takes time - years. In some municipalities some steps can overlap - i.e. rezoning and DP could be concurrent.

Once you applied for approvals (but are still waiting) developer doesn't wait. The market and economic feasibility must be considered at this step. If the product is not feasible, then the project will not move forward. Part of is would have been done during the due diligence (prior to acquisition!). But remember in a hot market your due diligence is often incredibly short - 30 to 60 days.

Developers take the most risks at 3 stages:

1. acquisition,
2. construction pricing, and
3. sale/disposition.

Design, site planning, engineering, and construction can begin once the product has been selected. Product selection is more than "industrial" or "condo". It is choosing the exact product the market wants. Example: 2,500 sq ft industrial with mezzanine, 3 parking stalls, grade loading (x 20 units). Yet, construction will not start until permits and financing are in place. This means that the construction pricing phase will overlap with the seeking financing phase.

Construction and development financing are two of the most important steps in real estate development. The goal is to get the project financed and completed as quickly as possible. This can be difficult, because lenders want pre-sales. But developers do not want to sell without knowing construction pricing! To get construction pricing we tender the project. And to tender the project we must have IFC drawings - essentially all approvals in place. To get there developers spend time and millions in consultant fees that would have been nice to finance. This is where equity financing bridges the gap.

Equity financing is when the developer puts up their own money to finance the project. This can speed up the process because there is less paperwork and fewer delays. For our projects, we have equity investors for this reason.

So yes, there is some overlap in steps of real estate development.

Does this answer your question? The question is so good that one could write a book on how to sequence development steps! For this thread, I am trying to keep it at a Development 101 level.

Do you or your company own the projects you do, or do you build/develop for other end users too? Is this speculative? How do you differentiate between speculative versus having customers before starting?

You guys are amazing. I am really enjoying these great questions. @thechosen1 you hit the bulls eye. How do we reduce the risk of development? We do that by passing on the risk to operators. We do not own our own product and do not operate our buildings. For purpose built rental and office, we sell to REITs. For strata industrial, we sell to end users and investors. For condo we sell to the general public.

Unfortunately, we always start speculative "gambling" on the need being there when we are ready to sell. But as soon as practicable, we pre-sell. Rarely we have an opportunity to deliver a build-to-suit on a cost+ basis for a specific user. 90% of the time, we analyze the market need, buy land, design, develop and market product for sale.

 

[Antifragile]

How you did you gain your experience and expertise in all those different aspects? The toughest to me seems learning the construction aspect of it if you aren't from a construction background.

I don't know the first thing about construction!

Does that surprise you?

My path was different. When I decided to become a developer, I too thought that having construction background would have been great. But putting in 4-5 years into one area, only to realize it's not enough and I need to learn marketing, then to realize I need to learn legal, finance etc... Too much. Instead I decided to prioritize and narrow my focus:

#1 - Money. I needed to find a way to get a lot of it. It doesn't have to be mine. Ideally its from a bank and whatever can't come from the bank, equity investors. Equity investors are like silent partners, I control the project, but they have ownership too. For 3.5 years I focused on becoming the best in raising capital (loans and equity) and it turns out having one specialized skill at expert level is great.

#2 - Legal. Some think that real estate development is a tangible business. Meaning that you can tough the buildings, it's tangible. I disagree. A building without a tenant is a negative cash flow and is not an asset. We are in the intangible business. We ultimately create value through paperwork! How crazy is that? But yes, I said it. It's all about legal documents and agreements. This is why I focused on various legal structures. I learned all I could and applied all learned. Lawyers have this skill, but remember, they are not there to help you do business. Lawyers are there to protect your downside. They will kill deals 9 out of 10 times. As a business owner, I am able to not only negotiate, but structure legal paperwork the way that serves me.
Another example: GP/LP structures are part of this "legal" skill set. I negotiate and design them with my equity partners, my lawyers then draft documents or correct what I drafted.

#3 - Instead of focusing on getting experience in all other areas of RE Development, I found business partners that have skills I do not. Then we hired employees that brought more skills we didn't have. And so on...

Note: I would not be able to do 1/10s of the business we do without my partners and employees.

For marketing and sales we outsource this task to major brokerage houses (Colliers, Cushman, Avison Young, CBRE etc).

Second question: How do you gain ahold of good zoned land? In my country the only instances where you can do that is in strange industrial areas which are an entirely different field than normal houses. Residential land is out of the question because the market is so hot. So how do you do it?

That's one question I won't be able to answer. It's the same question that FBA folks here would ask "how do I find my product when everything is already on Amazon?". It is hard. If it was easy, there would be no money in it.

But I will share:

1. We work with trusted real estate brokers, who bring us deals
2. We attract capital because of our ability to find good deals in a tough market. This is the value we bring to our investors.

I'll end with a confession. I love real estate. Mainly because I'll never stop learning. My priorities shifted and I am now focused on economics and macro events affecting prices. This allows me to buy and sell with conviction. One day I'll immerse myself into construction too, but I don't need to do that to run our business. Is it a must for you to be a mechanic to own a car repair shop? Or a chef to own a restaurant?

 

[Antifragile]

It makes it interesting and gives you credibility.

I see. Well, for you and those readers who too are curious:

1. You cannot gain insight into my credibility based on what I claim to be my results.
2. Follow the money. What am I selling you? What are you buying? What do I need to prove to you for you to buy my product? The answer to all is - nothing. I don’t care whether you think I am credible or not.

The only way to gain insight into my credibility is to know me. A few members here (and MJ) have that info. And some @Kak radio show listeners now do too. The rest… please judge my posts and thoughts on their own merit.

@ljean, the more it matters who said it, the less it matters.




P.S. @thechosen1 thanks bud.

 

[Kak]

It makes it interesting and gives you credibility.

I know some of the more private details. He’s credible and a wise contributor here. I’m thankful for this thread.

Of course, you can say, “oh Kyle is just friends with him,” but anyone can talk themselves into or out of anything.

His responses to questions in this thread, alone, are already showing obvious competence in this arena IMO.

@Antifragile a bit of a mindset question…

Are you special?

Is there something about you that makes you innately better at real estate development than anyone else that works hard, consumes as much wisdom and education as you do?

Were you born with this talent or was it developed?

One of my points I always seem to be making to people that don’t go after big things is that it’s not just for “other people.”

If you’re reading this thread and think to yourself: “ @Antifragile is just better at this than I’ll ever be.” Have you asked yourself why that might be? What made him able to do this? There are real estate developers all over the world… Why does he get to be one?

My thesis is that these “other people” were normal people until they became, via deliberate action, high-achieving people.

 

[Antifragile]

You know your stuff! Interesting to read how you have it under control.
One more question: How do you avoid getting scammed by contractors? My dad used to dabble in RE development (nothing big) but, from stories I heard, everytime a project went wrong it was always the case that the general contractor either lied about stuff or underdelivered on their work by such a degree that it was a failure. So how do you pick the right crew?

Great question. This is not a problem for us.

Let me start by saying that every deal we start by a meeting with our contractors (GC). This is the first consultant we talk to. We treat them as our partner in the success of a project. What does this mean?

Let me take a step back to explain this. There two very general ways of dealing with construction.

1. You can do a bid process and have GCs submit their bids for what you want them to build. This is where problems often arise. Something comes up and any change is a "change order". GCs weren't involved in the design, so they later find things that just can't be build that particular way. There is now a misalignment and who's paying for that? Often Developer thinks "I got screwed" and the GC thinks "I got screwed". We don't like this method.
2. You can work collaboratively (which is what we do). We negotiate with the GC the terms of their engagement. We do this by agreeing on terms such as GC's profit margin as a % and their general conditions monthly payments. Once you have these two, the GC is on our side. We work side by side to submit the tender to the sub contractors (subs) and get our open tender numbers to analyze together. We listen to the GC but ultimately being the developer we make the decisions which sub to choose. This leads to a fixed-price contract (here it's a CCDC2 format).

I mentioned above that GC is the first consultant we talk to, this is because their input into design helps us avoid change order as much as possible.

On top of the above, at our company we have what is called "owners rep" - a VP of Construction to guide the above process.

I can imagine constructing a large building there's going to be some setbacks.
How do you stay on schedule for completion?

This is harder to explain. Back to collaborative nature in my reply to @notorious above. By working as partners with a GC we can do things differently. For example, during this pandemic our GC mentioned their worry that lumber pricing could be higher. Our VP Construction asked me to pre-purchase all lumber for our residential building. We did just that. Later we had flooding, this lead to disruptions with truckers and our VP asked for extra payment to truckers to go around flooded areas but to continue delivering our materials. This kept us on schedule but cost a little more. On another project (industrial), we decided to spend more money to cement to cure faster to tilt before winter weather. It cost a lot more but felt like "insurance" against bad weather. It ended up being coldest winter in 30 years here and our project was on time. Another example is when we chose to paint the building (industrial) before windows installation. Again this was weather depended and normally a bad idea. Why? because windows installation damage the paint. But you can repair patches of damaged paint, but when it gets too wet/cold you might not be able to paint the building!

Long way to say that collaboration with the GC and proper sequencing of the construction is how we tend to stay on time and on budget. Hope this helps

 

[Antifragile]

@jdm667 thank you for reading and for more insightful questions!

Let's dive into it:

When it comes to real estate development, there are a number of macro and micro factors that come into play. Let’s take a look at some of the most important ones.

Macro factors first:​

• Inflation is always a key consideration, as it can impact both how much people are willing to pay for property and how much lenders are willing to lend.
• Immigration is another key factor. – it can both increase demand for housing and introduce new construction methods and styles.
• Population migration, meanwhile, can impact city specific demand for real estate.
• Unemployment rates and median wages are also important considerations. They can impact how much people can afford to spend on housing.

Micro factors are no less important.​

• Vacancy rates, for example, can give you a good idea of how healthy the real estate market is.
• Total population patterns can help you understand where growth is likely to occur.
• The regulatory environment affects timing.
• Political environment can have a big impact on the development for obvious reasons. Some areas are so anti-development they are not worth analyzing.

When it comes to real estate development, it’s essential to understand both the macro and micro factors at play.

Then, there is market area and competition.​

Existing inventory is key to understanding the potential success of a new development.

• What is currently on the market?
• How much of it is already spoken for? (Sold, leased?)
• Any new projects that may be in the pipeline? These could pose a threat to your own development down the road

These will give you a good idea of the level of competition your new development will face.

It's also important to consider similar products that may compete with your development. What are people currently buying in the area? If your development doesn't have a unique selling point, it may be difficult to attract buyers. However, if you can price your product correctly, you may still be able to find success in the market.

Location is always an important factor to consider when analyzing real estate development.

• Proximity to key metro locations can be a major selling point, as can the quality of the surrounding environment.
• Existing inventory stock
• Other buildings in the area,
• Schools and churches,
• Parks, clubs, and recreational facilities, and other amenities,
• Shopping and entertainment are also important factors to consider.

Finally, it's important to look at the physical conditions of the development site. Visibility and accessibility are key, as is the slope of the land. And availability and quality of utilities, such as: water and sewer/septic, electricity, etc.

By considering all of these factors, you can get a good idea of the potential success of a new real estate development.

 

[Antifragile]

how does one scale a real estate business past this one man operation level I've been in so far ?

This is a great question because it applies to all businesses. Not just RE.

Development is complex and does require big capital. The way to solve this problem and to grow is to leverage other people’s money. @Kak mentioned this many times on his radio show. People value money differently. What is a lot to you or me, is very little to Elon Musk.

In our business, I’ve done every imaginable equity investor structure!
From pure consulting engagements to get fees to pay for office and staff, to JV, GP/LP, Co-ownership, Corp. etc.

 

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[Guest-5ty5s4]

It makes it interesting and gives you credibility.

he has it, I know he hasn't posted all his private stuff here on the forum but trust everyone else, even those who have heckled him, he is credible.

This is a big problem with the internet. You don't know who's legit. Some people want personal brands and some don't. Once you're out there, doxed, everyone will be harassing you.

 

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[Antifragile]

Are you special?

Only in my mom's eyes.

Is there something about you that makes you innately better at real estate development than anyone else that works hard, consumes as much wisdom and education as you do?

Of course not. And I am not naive to think that I am the best either. There are people and companies better and worse.

I know where you are going with this question Kyle. For anyone reading this thread and thinking if they could or should try to become RE Developers, is it achievable?

The answer is the same as any other business: yes to some, no to others. Some of the things I've done were pure luck and other things were pure skill. As the saying goes "you have to be lucky to be good and good to be lucky".

Were you born with this talent or was it developed?

Nobody is born with skills, skills are developed. I don't have a "talent", you and I both know that I am a regular guy doing my best to become great at what I do. And I've had some modest success because of that.

We digress from the RE development AMA...

Thanks for the Q's!

 

[Antifragile]

For raising capital, Pitch Anything by Oren Klaff

I was in a hurry when typing this @MetalGear , allow me to expand on my post. This book for me was a 10/10 on usefulness. I've been applying principles similar to these for my entire career. Similar to MJ's Unscripted book, it was a validation of methods that worked for me but neatly arranged and explained.

For example, here are a few quotes:

"Pitches are sent from the modern—and smart—part of the brain: the neocortex. But they are received by a part of the brain that is 5 million years older (and not as bright.) This is a serious problem if you are trying to pitch anything."

"When frames come together, the first thing they do is collide. And this isn’t a friendly competition—it’s a death match. Frames don’t merge. They don’t blend. And they don’t intermingle. They collide, and the stronger frame absorbs the weaker."

"The lesson of the cop frame is an essential one: If you have to explain your authority, power, position, leverage, and advantage, you do not hold the stronger frame."

"“The revenue is $80 million, expenses are $62 million, the net is $18 million. These and other facts you can verify later, but right now, what we need to focus on is this: Are we a good fit? Should we be doing business together? This is what I come here to work on.”"

"...three of the most fundamental behaviors of human beings: 1. We chase that which moves away from us. 2. We want what we cannot have. 3. We only place value on things that are difficult to obtain."


In summary, the Pitch Anything book is pure gold.

 

[YanC]

Thanks very much for doing this @Antifragile . I do have a question that is not exactly related to develoment, but more real estate in general.

I run a small real estate business, which is basically a one person thing, with me leveraging my capital to borrow money and undertake projects (so far I buy, rehab, hold and rent). I hire contractors (plumber, electrician, ...) and have one "full time contractor" who does the cleaning mostly. I'm reaching a point where I'm not sure I could borrow more to keep doing projects, and I actually don't really want to as I'm comfortable with the amount of debt I have now but maybe not more.

As I assume a development business like yours requires plenty of capital and people, my question is: how does one scale a real estate business past this one man operation level I've been in so far ? It may sound a bit vague but I'm curious about general thoughts, guidelines or ideas you may have on the topic, not a step by step how-to answer.

Hope this question makes sense and is interesting to you.

 

[Guest-5ty5s4]

Of course not. And I am not naive to think that I am the best either. There are people and companies better and worse.

I know where you are going with this question Kyle. For anyone reading this thread and thinking if they could or should try to become RE Developers, is it achievable?

The answer is the same as any other business: yes to some, no to others. Some of the things I've done were pure luck and other things were pure skill.

This is ten percent luck
Twenty percent skill
Fifteen percent concentrated power of will
Five percent pleasure
Fifty percent pain
And a hundred percent reason to remember the name

--
Okay, I loved your answer to this, sorry to hijack, carry on

 

[Antifragile]

If you were to operate in the market with high level of corruption, would that be beneficial or detrimental to your style of doing RE business? It looks like that it takes different kind of thinking to succeed in that kind of markets.

Theoretically, if you bribe someone in power you can get approvals faster. I've never done any business in countries like that, so I don't know the ripple effect - downside. My gut tells me that it would be detrimental, but I have no experience to back that claim. You are probably right, it takes a different kind of thinking to succeed in corrupt countries.

In our world here, I am not even allowed to buy a cup of coffee for city staff! Seriously, nothing is permitted, no matter how small a gesture. And I am OK with that. Levels the playing field.

 

[Antifragile]

This is gold. Thank you Antifragile. I'm an architect, so I have always considered the real estate business and its one of my goals some day. I have plenty of questions but I dont want to abuse. Sorry for my english.

Thanks for your kind words! And don't worry about Engligh, glad to have you asking questions.

First question: For what I read, Did you start in the business by asking for loans (leverage) for developments and finding investors? Or do you started with some of your own capital aswell?

All my deals I've always started with my own capital in them. But since my capital limits what I can do, I always try to bring investors and syndicate a large portion of equity required. This way, instead of doing 2 projects, I can do 10. The answer to your Q is both

Second: How do you find investors? What it takes to convinced them (what do you show them and how do you sell them the project)? When do you do it?

I entered this industry as an employee, worked my way up to a C-suite job. This means I've had years to build relationships needed before we started our business. Both investors and lenders knew me and our team from launch date.

Third: Im not sure if I get one part (language barriers probably), by high-end you mean starting with the most obvious (less risky) business where you can afford mistakes and get a safe return, or by high end, you mean aiming to users that have the wallet to pay.

That was a very general observation. If you build a luxury single family home, you may be able to charge a premium if someone really wants it. But when you are building price attainable (read "commodity") condos, people often compare your unit to the building next door. You can't charge a premium and so any mistake is hard to hide. It's the assumption that Luxury projects have higher profit margins (which isn't always true either!).

Fourth: What is the capitalization rate that you expect? Or any other money numbers you take in account that makes the development viable?

To assess viability of a project we look at Profit on Cost (aka Return on Cost "ROC") and Internal Rate of Return ("IRR"). If ROC is 15% and IRR is 25%, it's a clear go. If lower, then hopefully it's close. But ROC below 10% is out and any IRR below 20% is out.

Cap rate applies to income properties at the time of leasing/renting. And we do not usually use this metric until later when we sell the building to an operator.

Fifth and I dont bother anymore: In your experience, what are the most profitable developments? What are the common conditions among them if there is any?

Thank you

This changes all the time. Prior to 2017 Office was the dominant asset held by institutional investors. Then it dropped and Industrial became king. Condos make good money most of the time but know that most of the developers (from what I can tell) are in condo residential, there are fewer who are in commercial. We focus on building a pro-forma first and then acting according to the results we see. What does this mean? If condos start making more money than industrial, we shift to condos. That's because real estate markets do not go up and down at the same pace in every sector. We are lucky to have talent at the office that can handle multiple asset classes.

 

[Antifragile]

I haven't read the whole thread yet but I do have a few questions for you:

What does a typical day for you look like now?

Unfortunately there isn't much typical in my day. What I do one day differs from another depending on where my attention is needed the most.

Nonetheless, I like coming to the office downtown after a workout (swim/bike/run). My day then revolves around:

• Review of paperwork (legal or other). For example, when we submit an offer on a new site, I'll review the PSA that our acquisitions team would prepare, as I did this morning before typing this response here.
• Meetings. I think this is probably true for most businesses. Meetings are a way for me to get information from staff and make decisions, give direction.
• Writing/reading/planning. This can be anything, from the latest industry reports, to HR, to investor relations... It's a miscellaneous bucket.

Like I said, nothing is every typical in my day. I don't get into the office at the same time or do the same thing every day. It's totally the opposite.

What about when you were building this company from the ground up?

That time was different because we had no staff, no support. At that time my partners and I did everything with our own hands. Including sending mail! Which I've never done before and had to find a post office near our office. I don't know how to briefly describe a typical day at the start of a business. It wasn't "structured" and but it was focused:

#1 was securing new business (think sales) that would generate us income. Everything came after that.

But since we had no sales/income in the early days, we had a lot of time on our hands. We didn't have projects to execute, systems or people. Prioritizing was easy back then - find a way to make a dollar to survive. That's it.

That meant a lot of calling, meeting brokers, underwriting deals, then finding capital, making "the pitch" etc. I was a crazy time.

It's still a little crazy today but certainly nothing compared to the beginning. I am glad to be past it, it was too much if you ask me.

What were you most focused on in the beginning? Was it building a quality team to cover the things you can't do, seeking out investors, etc?

I've trailed into the answer above. Main focus was finding deals, because deals meant income. Anyone asks me what they should do when they start a business - the answer is so simple it's laughable. Find a way to make your first dollar. Rinse and repeat. Don't let your ego stand in the way of progress. Ego may tell you to "focus on a bigger project" or "complete this big thing to 99% or that big thing" but that's wrong. Only one thing matters - making money to survive the early struggle.

In fact, I am a believer in the concept of "The One Thing" (there is a book on that). What one thing if you did consistently now would have the biggest impact? In the early struggle of a start up - that's generating income for your company. It's the One Thing.

Why did you choose RE? Why is it fulfilling for you?

I've failed a number of times to launch something. It started back when I was at University trying things with no capital, knowledge or connections. My mindset was all wrong back then.

Real estate emerged much later as a choice because I thought it was simple. Buy land, build a building - sell it. Done. Simple. I wanted simple. I craved simple because I failed a few "complicated". The truth is, I wanted something I could understand and make money. Real estate seemed simple and the rest is history. It's not simple, but I thought it was when I started. I was wrong and lucky.

Is it because you're improving the living conditions for the community?

No. I have to be open here and tell you that never crossed my mind. I separate business from charity. When I have enough wealth to do hobby projects, I'll do something to improve the conditions for our community. Today I am focused on delivering what the community wants and charging market rates for our product.

If I'm off the mark, what actually gives you meaning?

Meaning... gee, talk about asking big and hard questions. This is very philosophical. I feel most satisfied when I accomplish things and I feel most joy when my kid giggles playing with me. Meaning for me is having enough experiences to be an example for my family. Meaning for my life is to have freedom to give something to people around me and make some positive (even tiny) impact on other people's lives. It all starts with my family.

 

[Antifragile]

@MJ DeMarco, I noticed this thread became "GOLD", I assume you did that. Thank you very much!

 

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[Ginotocino]

Hey @Antifragile , Thank you for making this AMA thread. I want to get into real estate development as a conventional builder or an investment builder. I want to be build properties and keep them. Currently, I flip ~$1-2.5 million dollar houses by doing cosmetic rehabs, full guts, and by adding additions in the SF Bay Area.

Main question: I was wondering if you find that it's harder to develop and keep properties in expensive cities? Should I look further away from the main metropolitan area (i.e. 30 min away, 1 hour away)? Also, is there a construction price to rent ratio or some kind of metric to know if a market is great for building and keeping properties?

From what I hear, the construction prices seem to be all over the place. Related says it cost $1 million per unit for a 5 over 1 affordable housing complex in SF. Core companies says it's $800k per unit in San Jose. At the same time, Riaz Capital says their costs are about $250k a unit (micro multifamily units) for 3 stories of Type 1 wood frame over a concrete slab.

 

[Antifragile]

There is a lot of talk about "return to office", but it looks like a lot of people will still be working from home instead of an office.

Oh yes, lots of talk about "return to office". And I think both are true, some will come back and others won't. Generally speaking office isn't dead. But my opinion is that there will be a clear division between old and useless (vacant too) office buildings and brand new, perfectly positioned class A. The latter will perform well. For those of us who must have office to run our businesses, we'll pay a premium.

What do you think the empty office space would be converted to, and how will that affect the RE market short & long term?

Hmm... I am not sure there will be as much "empty" space as people think. There will be a flight to quality. People who must have office will secure better quality office. But low B and C office will suffer because it will be hard to convert it to anything. It might need to be re-developed through demolitions. But that can only happen when the price for brand new is high enough to justify demo of an income asset. This only happens in the hottest markets.

Some people think that you can easily convert empty office to residential (for example - rentals). That's not the case. It is very hard to make sense of it.

• Old buildings sometimes need upgrades that are very expensive (seismic etc.)
• Office is usually located in places where you don't necessarily want to live (bad for residential, like away from schools, parks)
• Worse yet, the floor plates for typical office do not divide into nice residential living space. It wasn't designed with that purpose and is hard to make it work.

Love all the questions. Keep them coming even when they are so hard I don't know how to answer!

 

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[forester]

Cool thread. Ive been quite successful in the realm of real estate. Timber and land to be precise. Ive been a forester for 25 yrs. Owned my own forestry consulting firm for 15. Ten years ago bought my first parcel, cut it , paid for it with the timber and sold it to an abutter for exactly what I originally purchased it for. Made six figures in less than one month. Since then Ive averaged one of these deals a year. Was on a roll to up the # of deals p/yr to 3-4..but the market in my state , since 2021..is too hot for my level of risk. Im a strategic risk taker not a reckless speculator. Seeing where the market was headed, I got my real estate license in 2020, and have since focused on representing the selling of large timberland parcels vs the buying of them. And..when they sell providing forest management services to the new owners.
Its a good gig and that brings great satisfaction. But..Im chopping at the bit for the market to cool and for good deals to make a reappearance. Buying timberland for myself is my real passion.

 

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[Antifragile]

What did you do as your job when you were an employee and what C-suite job did you get to?

I started on the finance/accounting team (Manager of Finance, Director) until eventual CFO role before founding our company. Back then I chose this path because running finance meant seeing everything and being in every meeting. Short of being the CEO, of course, it was the best place for me to see all decisions and learn all aspects of the business.

At the same time, I'd always volunteer to help other employees and unsurprisingly everyone always said yes to me doing their work! This meant I was exposed to acquiring real estate distressed assets (court), buying hospitality venues, running a dive bar, negotiating leases with tenants (i.e. reviewing Starbucks lease is an experience that's highly valuable to this day), managing tenant leases and evictions, helping sales centre staff, underwriting construction costs with estimators etc. I was everywhere because I needed to learn. That attitude kept getting me promoted. But it wore me out. I still had to do my own job tasks (like running my own team) on top of all these other tasks.

When I reflect back and do some soul searching, I feel I worked too long and too hard. Back then I was so focused on "making it" that I ate poorly and exercised very little. I literally had the financed BMW that MJ mentions in his books *facepalm*. My life wasn't much in balance, it was a total grind. On top of that I had a side hustle business with a partner. I was always reading, learning, doing side gigs to earn more money.

There is probably a better and shorter path than mine! But since you asked, I thought I'd share...

Today, I am glad I have the scars of my experience.

 

[Antifragile]

With regard to the bankers are you dealing with money center banks, strong regionals or community banks? Also, how much face time are you putting in with them? Dinners, lunches, golfing, etc?

Thanks in advance.

Note that I (and my business) is based on Canada, not the USA. But I've financed deals in San Diego about a decade ago and know a little about the USA banking.

What you consider Community Banks are called Credit Unions here. And they have been my main source of great deals. They are excellent at the beginning, when deals are smaller. But with scale, we run into problems with their limits (they have lower caps on how much they can lend to any one borrower). At that point, we typically can allow them to syndicate deals and do more business. Eventually, all roads lead to national "tier 1" banks.

My behaviour is not typical in many respects, and one of the "weird" things about me is that I don't do "dazzle you with dinners and golf" to get a deal done. Unlike most, I spend surprisingly little time with my lenders. Typically, my key guys maybe get 1 to 3 meetings a year! We may go to a nice restaurant, but that's about it. We'll also run into each other (pre-pandemic and now again) at various real estate events. My reputation is that I'm a man of my word and will tell you what it takes to do deals with us. It's not snobby, it just saves people time. I think bankers want to do business and if I make it easy for them to get approvals from their credit department, they will not miss any lunches with me, they'll be happy. How do you make their lives easy? Preparation. Our financing packages are very detailed, we are aggressive in our asks but within reason. Everything you banker needs to get it explained to credit is available at his/her fingertips.

Again, my approach is not typical and maybe I am doing it all wrong and missing out on something better. But I am who I am, it has worked very well for me over the years.

Side story: for the property in San Diego, I knew no one. I was from Canada and needed a land loan. And I didn't feel like flying out there to find a lender, technology (even 10 years ago) was already good enough to find a solution over internet. Google was my friend. I called over 80 people, asked receptionists! for new bank names and introductions, received almost exclusively a "no, we can't do it because you are in Canada and have no assets in the USA, we can't cross the border" answer. The funny thing about life... and @Kak told that to @thechosen1 ... with enough push, something always works out. I collected over 20 lenders, whom I called back (annoying yes, useful? Yes again.) Finally one guy took pity on me and introduced me to a retired financing broker. That broker felt my pain, he could tell I'm now close to 100 phone calls in... He said "I'll do you a favour, there are only three lenders who can do it and I'll introduce you to people who can make it happen". He did just that. I used his name as a springboard to get my loan and in the end got two LOIs. Only one was feasible but that was enough and terms were excellent (market).

I share this story because it describes me and my approach. I don't believe that pampering someone with golf is my thing. I want you to work with me for other reasons. Main reason - because it is good for you! Because my grit should give you comfort in my commitment to repaying your loans. I am sure @SteveO can share his experiences and confirm that lenders primarily want to know they are lending to good people. "Buying" loyalty can work, but it also attracts the wrong kind of lenders.

 

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[Kak]

Thanks for doing this bro! How does it start? A vision for the area or a vision for the project to be built?

 

[Guest-5ty5s4]

Do you or your company own the projects you do, or do you build/develop for other end users too? Is this speculative? How do you differentiate between speculative versus having customers before starting?

 

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[notorious]

I really like real estate development because it's scalable in terms of project size.

The hardest thing is starting out. Especially since real estate developers need deep knowledge about a lot of different things, i.e construction process, legal, financing, selling. So my first question is: How you did you gain your experience and expertise in all those different aspects? The toughest to me seems learning the construction aspect of it if you aren't from a construction background.

Second question: How do you gain ahold of good zoned land? In my country the only instances where you can do that is in strange industrial areas which are an entirely different field than normal houses. Residential land is out of the question because the market is so hot. So how do you do it?

 

[notorious]

I don't know the first thing about construction!

Does that surprise you?

My path was different. When I decided to become a developer, I too thought that having construction background would have been great. But putting in 4-5 years into one area, only to realize it's not enough and I need to learn marketing, then to realize I need to learn legal, finance etc... Too much. Instead I decided to prioritize and narrow my focus:

#1 - Money. I needed to find a way to get a lot of it. It doesn't have to be mine. Ideally its from a bank and whatever can't come from the bank, equity investors. Equity investors are like silent partners, I control the project, but they have ownership too. For 3.5 years I focused on becoming the best in raising capital (loans and equity) and it turns out having one specialized skill at expert level is great.

#2 - Legal. Some think that real estate development is a tangible business. Meaning that you can tough the buildings, it's tangible. I disagree. A building without a tenant is a negative cash flow and is not an asset. We are in the intangible business. We ultimately create value through paperwork! How crazy is that? But yes, I said it. It's all about legal documents and agreements. This is why I focused on various legal structures. I learned all I could and applied all learned. Lawyers have this skill, but remember, they are not there to help you do business. Lawyers are there to protect your downside. They will kill deals 9 out of 10 times. As a business owner, I am able to not only negotiate, but structure legal paperwork the way that serves me.
Another example: GP/LP structures are part of this "legal" skill set. I negotiate and design them with my equity partners, my lawyers then draft documents or correct what I drafted.

#3 - Instead of focusing on getting experience in all other areas of RE Development, I found business partners that have skills I do not. Then we hired employees that brought more skills we didn't have. And so on...

Note: I would not be able to do 1/10s of the business we do without my partners and employees.

For marketing and sales we outsource this task to major brokerage houses (Colliers, Cushman, Avison Young, CBRE etc).

That's one question I won't be able to answer. It's the same question that FBA folks here would ask "how do I find my product when everything is already on Amazon?". It is hard. If it was easy, there would be no money in it.

But I will share:

1. We work with trusted real estate brokers, who bring us deals
2. We attract capital because of our ability to find good deals in a tough market. This is the value we bring to our investors.

I'll end with a confession. I love real estate. Mainly because I'll never stop learning. My priorities shifted and I am now focused on economics and macro events affecting prices. This allows me to buy and sell with conviction. One day I'll immerse myself into construction too, but I don't need to do that to run our business. Is it a must for you to be a mechanic to own a car repair shop? Or a chef to own a restaurant?

You know your stuff! Interesting to read how you have it under control.
One more question: How do you avoid getting scammed by contractors? My dad used to dabble in RE development (nothing big) but, from stories I heard, everytime a project went wrong it was always the case that the general contractor either lied about stuff or underdelivered on their work by such a degree that it was a failure. So how do you pick the right crew?

 

[Antifragile]

Hi @Ginotocino

First of all, congratulations on what you are doing. I think flipping SF homes in SF area is very hard work. You never know what you find when you get into renovation.

We are a merchant developer and do not hold any properties. Part of scaling up when you have limited capital is syndication of equity. In our GP/LP structures, developer gets what is called a “promote” using a “waterfall distribution“ structure. This means that I make more money by selling than by keeping. And since we do not do any projects under 100 units, keeping a project would lock down too much of my own capital. All this is to say, that unfortunately I am not of much help to your plan!

But I will say that yield in secondary markets are much higher than in primary markets today. The pandemic made a shift to secondary markets. You should be able to better control both the costs and achieve higher rents in secondary markets. The metric we use is a Capitalization Rate (CAP) when selling our projects for income valuation.

Hope this helps.

 

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[Simon Angel]

I like being called handsome. Flattery will get you everywhere with me!

It takes one to know one

I haven't read the whole thread yet but I do have a few questions for you:

What does a typical day for you look like now?

What about when you were building this company from the ground up?

What were you most focused on in the beginning? Was it building a quality team to cover the things you can't do, seeking out investors, etc?

Why did you choose RE? Why is it fulfilling for you? Is it because you're improving the living conditions for the community?

If I'm off the mark, what actually gives you meaning?

Thanks, handsome!

 

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