The housing sector has awarded savvy entrepreneurs with countless opportunities to capitalize on what can only be described as a healthy market. For the better part of a decade, real estate investors have been able to take advantage of great conditions and ride a wave of appreciation to attractive profit margins. As a result, the industry has seen an influx of talent, not the least of which is hoping to realize the same benefits as their predecessors.
The success of today’s investors have persuaded others to get in on the action. Now, it is quite common for a traditional, career-oriented individual to aspire to learn how to become a real estate developer. Of course, becoming a real estate developer doesn’t happen overnight; there are steps that must be taken in order to realize one’s true potential.
A real estate developer is a person (or company) who practices a wide range of investing activities within the housing sector. More commonly referred to as a real estate investor or rehabber, today’s real estate developers are tasked with coordinating at least one of several viable exit strategies. The primary responsibilities of a typical real estate developer include (but are not limited to) the acquisition, sale, wholesaling, leasing and improvement of the subject properties.
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The income potential of real estate investors is directly correlated to their knowledge, experience, education, and the particular exit strategy they intend to use on a respective deal. There is no objective value one can put on an investment’s potential to do it justice. That said, there is plenty of potential in real estate investing for those who are willing to put in the work.
Most real estate developers subscribe to the 70% rule. The 70 percent rule is used by developers to determine how much they can pay for a deal while still leaving plenty of room for profit. Simply put, most investors won’t elect to spend more than 70% of the home’s after repair value (ARV). That way there is at least a potential profit margin of about 30%. Of course, somewhere in the neighborhood of that 30% will be dedicated to closing costs and other expenses, so it’s fair to assume the 70% rule will give investors the potential to make a 25% profit if everything goes according to plan.
According to the real estate data company’s latest Home Flipping Report, however, “The average gross flipping profit of $65,000 in 2018 represented an average 44.8 percent return on investment (percentage of original purchase price).”
Traditionally, savvy investors may enjoy everything from impressive profit margins and flexible hours, to passive wealth-building opportunities and tax incentives. However, the benefits are only made available to those who are willing to work hard. It takes a particular individual to invest in real estate with a high degree of success, which begs the question: Is a real estate development career right for me? Do I have what it takes to invest in real estate?
Whether or not someone should invest in real estate will depend entirely on what they want to achieve, and what they are willing to do to achieve it. Real estate can be incredibly rewarding, but it’s accompanied by a significant caveat: it takes a lot of hard work and dedication. Despite the simplistic view most reality television shows on rehabbing paint, investing in real estate successfully will require a lot of hard work; not only that, but it’ll take someone that’s willing to step out of their comfort zone and network with everyone. It is true what they say: real estate is a people business, and investing is no exception.
Those convinced a career as a real estate developer is right for them are fortunate enough to be able to follow in the footsteps of their successful predecessors. At the very least, countless investors have invested in real estate with a high degree of success for quite some time. There is already a proven way to invest in real estate. Follow this template to get started on your first deal:
The first thing aspiring real estate developers need to do is educate themselves on the ins-and-outs of the industry. Investing in real estate is a complex process; there’s a lot to take in. From the individual exit strategies used to make a profit to the unfamiliar nomenclature, rehabbers need to gain a more comprehensive understanding of how the industry works. A proper education will serve as the foundation for the most successful careers, which begs the question: Where can hopeful redevelopers turn to for a sound real estate education?
There are several places one may expand their real estate education. I am a huge proponent of reading, for example. Books written by today’s best investors offer valuable insight into a world where education can mean the difference between success and failure. Another way is to attend a real estate investing educational class in your area. However, no education is complete without tirelessly exhausting every resource. Therefore, in addition to every other resource, investors should pay special consideration to three of the best sources of knowledge: experience, the Internet and school.
Comparable to today’s best educational facilities, experience is invaluable. Nothing can prepare an investor for what’s in store more than implementation. The act of investing has a way of teaching investors that no book or resource can replicate. Experience coincides with real-world consequences, so tread carefully. Proceed to practice real estate investing, but don’t stretch yourself too thin. Work in the field, but only to the extent you are comfortable with. Whether that means working with private money lenders or simply building relationships, investors need to gauge their skillset and take things one step at a time.
The advent of technology has placed some of the world’s greatest educational opportunities at our fingertips. The internet, in particular, has granted access to educational resources since its inception. Blogs, e-books, business websites, and just about every “educational” piece of content made available on the internet is simultaneously accessible and valuable in one way or another. It is worth noting, however, that not all internet-based learning opportunities are created equal. The sheer volume of internet resources ensures that some content is better than others. Prospective investors need to vet their sources accordingly. Reference trusted sites and don’t take everything for gospel. Learn to cross-reference and fact check everything.
Learning how to become a real estate developer does not require a degree. In fact, one of the most appealing aspects of becoming a real estate investor is that anyone can do it. Real estate developers who have a broader education may find themselves with an advantage over the “field.” While a degree isn’t necessary, there’s nothing bad about majoring in business, or even marketing for that matter. Not surprisingly, today’s best investors are the result of a unique accumulation of knowledge. The more one knows about their respective field, the more likely they are to realize success on a given deal.
Becoming a real estate developer will require aspiring investors to wear many hats. In addition to networking, marketing, buying, selling and negotiating, a good real estate developer needs to know how to secure financing from multiple sources. Here are several ways to get started securing capital:
New investors need to build their own network of trusted lenders; they need to know where their money will come from before they can even look for a deal. Fortunately, there are plenty of lenders ready and willing to lend under the right circumstances. Private and hard money lenders, in particular, are great individuals to have in a network. As short-term, asset-based lenders, private and hard money lenders are the first people investors need to network with in order to become a real estate developer. While not the only sources of financing, these lenders make it easier to become a real estate developer.
Most deals will be secured using other people’s money, but that doesn’t mean investors don’t need a savings account of their own. For a number of reasons, aspiring real estate developers need to have access to their own capital. Preparing financially can significantly mitigate unforeseen risks. In the event unexpected costs arise, it’s always a good idea to have extra cash on hand. What’s more, financially prepared real estate developers are more appealing to others in the industry. It’s not uncommon for subsequent investors or lenders to gauge an investor based their own credit score or access to funds. Therefore, in addition to having cash reserves, it’s a good idea to get into investing with a good credit score. That way, lenders won’t be hesitant to work with you, nor will your past transgressions ruin any future prospects.
Today’s best real estate developers know it, and it’s about time everyone else did, too: learning never stops for the best investors. In addition to learning about the industry from a general viewpoint (outlined in step one), investors must also learn about their particular market. Prior to looking for their first deal, investors need to know where they want to invest. Real estate developers must pay special attention to each and every indicator. In addition to the obvious (median home values, inventory and demand), investors should also consider:
The more one can glean from a respective market, the more inclined they are to realize success. As a result, investors need to dedicate a lot of time to researching a particular market and its individual homes.
Most investors assume that money is made when a deal is sold, and they wouldn’t be wrong. However, money isn’t only made on the backend of a deal; it’s also made at the time of the purchase. If for nothing else, the primary tenant of real estate investing will have real estate developers purchase a home for below market value—that way there is room for a worthwhile profit margin. After all, there’s no room for profit if the acquisition costs are too high.
Investors need to purchase wisely. More specifically, however, investors need to determine their maximum allowable offer (the highest price investors can offer sellers while still leaving room for profits on the backend of a deal).
To make an offer that leaves room for profits, real estate developers should follow these steps:
The next step in learning how to become a real estate developer will require individuals to conduct the appropriate renovations. After all, not all renovations are created equal; some are objectively better than others. The idea is to make renovations that will add the most value to the house without using too much of the budget. In order to determine the best renovations, look no further than nearby “comparables,” otherwise known as “comps.” Take a page from similar homes within close proximity to the subject property and base any upgrades on their amenities. However, instead of replicating the amenities of nearby comp, simply go the extra mile.
Keep renovations in line with comps, but be sure to stand out from the competition. Upgrades should be deliberate, in that they will make the subject property better than those around it, albeit slightly. Remember, it’s entirely possible to over or under renovate a home. The trick is to find a middle ground where demand remains in tact without spending too much on each individual project.
The best real estate developers aren’t known for flipping a single home, but rather multiple homes. Rehabbers who can work within a repeatable system will be able to make success more habitual than those who simply go into each project blindly. As a result, investors need to work within the lines of a system they can repeat on a daily basis. Following a system, one that has steps in place for every process, will make it a lot easier to run a successful rehabbing business.
Real estate investing has developed a reputation for awarding hardworking individuals with a number of benefits. In addition to attractive profit margins, investing in real estate has become synonymous with a great deal of tax benefits and the freedom to create your own schedule. To many others, however, the prospect of financial freedom is simply too attractive to ignore, which would explain why more people today want to learn how to become a real estate developer than in years past.