People are aware that real estate development is an investment vehicle that has a huge potential for staggering profits, but they also realize that there are risks as well.
To learn about the pros and cons of real estate investment, we spoke with Anthony Galeotafiore. Galeotafiore is an experienced real estate professional who has worked in the real estate field as a developer, lender, dealer, and consultant. His current focus is on non-performing commercial mortgages in New York and Florida, and his company, AJG Capital Group, also designs and builds residential and commercial real estate projects.
What is Real Estate Development?
According to Galeotafiore, real estate development often involves taking raw land and bringing everything together to turn that raw land into either residential, industrial, or commercial real estate. Real estate development can also involve the refurbishment of existing buildings to be leased at a higher price. Some types of real estate development are less risky for investors, while others have a higher risk.
How Do You Make Money in Real Estate Development?
The key to making money investing in real estate development is to work with a savvy developer who has great ties within their area of expertise in their field. Developers are like producers of movies. They need to have extensive professional contacts in their field to see a project through to completion.
For example, a developer must work in concert with architects, engineers, surveyors, city planning departments, contractors, leasing companies and lawyers to turn a raw piece of land into a shopping mall, residential neighborhood or factory.
Developers need to have the skills to work with all of these real estate professionals as they finance and buy land, decide the best build-out end result, work with architects to design the project they envision, obtain the required building permits, supervise the construction, and then decide whether to rent or sell their development.
The best developers are creative problem-solvers who don’t mind taking some well-calculated risks. They also can forge and maintain strong relationships with a team of other professionals who will help them carry out their plans.
One of the greatest pros of developing real estate is that the rewards can be incredibly high. Over a few years, the developer will have taken raw land and turned it into a housing development or shopping center. Then, the developer can sell the homes or shopping center for a handsome profit or rent or lease out the buildings and spaces.
One Can Minimize Risk:
It is not true that all real estate development is risky. In fact, some types of real estate development carry a high yield with low risk.
A good example of a high yield/low-risk development would be a “build-to-suit” project. A good example of a build-to-suit project would be a McDonald’s franchise location. The developer needs to secure the location that will be approved by the local planning department and obtain the building contractors, but they will get all of the building plans from McDonald’s. There is little risk that, at the project’s completion, McDonald’s won’t lease the space for a long term because it was exactly what they ordered built. Also, the contracts in such build-to-suit agreements leave little room for companies to back out of their lease upon project completion.
Another real estate development with lower risk is a planned housing development. This is less risky as long as the developer has adequately assessed the need in the area for homes in the target price range. The reason this type of development is less risky is that building contractor specialists can move from house to house within the development, completing each part in stages. Housing developments are also becoming easier and cheaper to produce because of pre-manufactured materials. They are far more prevalent and of far better quality today than in the past.
Longer Time to Achieve Profits:
Unlike investing in a home that one can immediately rent out to a tenant, real estate development takes longer to achieve a profit. The land must be purchased, permits granted, the building completed, and spaces leased. Real estate developers and investors must have the stamina to wait for the profits to be realized.
Because of the latency period in accruing profits, investors who do not desire or cannot wait for profits from a completed project are advised to consider investing in real estate developments through real estate mutual funds and real estate exchange-traded funds. Both of these vehicles work with many developments simultaneously, offering a more regular return on investment.
Because of the number of steps involved in a real estate development project, complications can and will often occur. Examples of complications that have to be solved by developers include problems in acquiring permits, legal conflicts with nearby landowners, and delays in the building process. Savvy developers have considered and worked through the many hurdles and steps in a project well before the land is purchased. They are experts in their local area and consult with the best partners to navigate around the shoals that could break a project on the rocks.
Anthony Galeotafiore reminds us that investing in real estate development has the potential for extremely high yields. It is important to realize, though, that these are longer-term investments. Investors need to choose a developer wisely who has proven to be able to assemble and manage a highly professional and competent team. The developer needs to have the requisite skills to predict and navigate around all types of complications in advance as well as the skill set to know how to choose prudent projects in the region and market.