Real estate development can be a long, involved, complex, somewhat risky process or a fairly short, smooth process. Some real estate developers buy an empty parcel of land and build from the ground up, while others simply buy an existing structure and rehab or remodel it. Some developers start out with a buyer already under contract while others take on “spec” projects, which are riskier. Whatever type of real estate development you choose to do, there are essentially three steps to the process. Here is an overview of real estate development.
Pre-development is often the longest and most involved step in the development process. This is where you are researching land use and permitting, pulling together finances, acquiring land or the rights to purchase land, surveying and exploring any environmental issues or complications. Pre-development is where your biggest risk lies because you are already investing in something you aren’t yet sure is going to eventually pan out. Investors at this stage are generally guaranteed a higher rate of return if things do pan out because of the risk involved. Pre-development is also probably the most important step in the entire development process. The more you ducks you have in a row prior to breaking ground or starting construction, the more smoothly the process is likely to go once you do. The faster construction happens, the sooner you get back your initial investment and start making a profit.
Once construction begins, the risks are reduced, but definitely not eliminated. In some cases, construction begins with clearing land and pouring foundations, but in other cases, it simply means upgrades or improvements can begin. There is still any number of obstacles that can arise to halt construction or keep it from being completed, but the more thoroughly you prepare in pre-development, the more likely construction is to sail smoothly through to the finish line.
Not all developments will continue on to this stage because not all developers plan on operating their own projects once they are completed. Some developments are “build to suit” projects for corporate chains like McDonald’s or Walgreens. Once construction is completed, the company comes in and takes over operations. Operations, however, is where most development projects achieve their full potential. Whether you sell the project to someone else or continue to manage it once it is completed, the goal at this stage is to recoup your expenses and rake in a tidy profit.