How Real Estate Developers Make A Profit
Real estate developers are the CEOs of their businesses. The ongoing need for the business to be profitable is top of their mind. They also juggle a lot of other responsibilities.
Real estate developers are responsible for all aspects of the construction of new properties. They may purchase raw land, build houses, manage construction crews, oversee the project’s design, and even sell the finished product.
In addition to these responsibilities, developers must ensure that the project meets all legal requirements and that the final product is safe and attractive.
Not all property developers seek to build the same types of properties. Some have goals that include:
- Building green – i.e. using sustainable materials and creating a passive building
- Developing affordable homes – building more affordable accommodation
As a property developer, your business also has a duty to create value, and your job is that of the CEO i.e., you’re the leader with experience in sales, financial management, and project management. Most developers use third parties, but they still need a reasonable understanding of all areas of the business, including how to ensure the correct type of development is chosen so it makes a profit.
As a real estate developer, you need to know if a site will be profitable. The location of the site is one of the most important aspects of any property development project. Not all spots are the same, and all places aren’t ideal for all types of buildings. Plus, there are many other considerations for a developer before they know the site has development potential, including:
- Zoning – can the site be rezoned if necessary?
- Area – is the location of the site near vital infrastructure like shops, utilities, schools etc?
Once you know what you can build on the site i.e. either a commercial or residential development, you can explore what type of commercial or residential building is viable. For example, can you build apartments or townhouses, and if so how many? Or for a commercial building is an office block more suitable and profitable than a warehouse facility?
Proximity to roads, highways, airports, and other transportation systems is a highly sought-after characteristic of both commercial and residential property, and prospective buyers or renters will pay a premium for close access to transportation and other amenities.
Site Access And Safety
Access to the site is an essential consideration for all developers and contractors. You can’t neglect to consider the safety requirements of property development, and the site may present some challenges like if it is on a steep hill.
No expense should be spared when it comes to choosing the right teams of builders and contractors. They need excellent safety records for all stages of construction. Property developers that choose to cut corners will end up out of business. A property developer’s reputation is made and lost with every development. Therefore choosing profit over safety and a high-quality build is risky.
For example, you can be tempted to want to finish the construction project faster, but this is likely to result in subpar building quality and may increase the likelihood of causing major construction site accidents.
From a construction worker’s viewpoint, accidents do happen and they can be fatal. Or workers can be left with long-lasting health problems that may threaten their ability to work. What does help them to do the job is knowing they can file a compensation claim for their injuries and also find out in advance the likely payout.
To be successful and create higher returns, developers tend to use debts or equity from other partners. These partners can add significant value through a considerable balance sheet, asset class, or construction expertise.
Debt financing refers to borrowed capital upon whose repayment the lender can secure a title and expect a fixed return.
Since property ventures require a significant amount of money to succeed, even prolific developers with plenty of liquidity frequently rely on debt financing to fund their projects. One of the main advantages of using this method is that risks are minimised.
Experienced developers are happy to use loans for their developments as it spreads the risk. Moreover, this leaves you free to pursue other opportunities. Just like an entrepreneur, developers are always looking for the next deal.
Seasoned developers are comfortable managing multiple projects simultaneously to improve their revenue and profit.
As such, debt financing maximises your ROI performance and is typically the more cost-effective solution.
Property developers are always seeking knowledge of their marketplace. Who is building what and where? Being a competent communicator and networker is key to learning what competitors are up to and how they may provide their business with opportunities or threats.
To be a successful property developer, you need the following:
- Market knowledge
- Property investment and development experience
- Industry knowledge and business acumen
While there’s no particular recipe for elevating profit as a real estate developer, it’s fair to say that if you are committed to continuous learning, quality and safety and are disciplined to reach your goals, you’re on the right path.