How much money can you make developing real-estate?

riskyReal-estate development is a risky BUSINESS, but it can be very lucrative and – provided the market doesn’t turn on you, hence the risk – you can predetermine HOW MUCH money you are likely to make and WHEN you can expect to have it sitting in the bank. All in all, not a bad MM201 activity … one that scales from small projects to large ones.

Speaking of which, my projects happen to be large ones but the methodology to analyze them is pretty much independent of size … only the number of zeros will change 😉

So, whether you are building a single dwelling, a quadraplex, an office, or a 8 to 12 story apartment complex (or two, as I am doing), you will still need to collect a few key numbers – that I ran through with you in last week’s post – from a reputable Realtor and an equally reputable builder:

– The cost to buy the land

– The estimated cost per square foot to build the size /type/quality of building(s) that you are planning to erect

– The expected sale price for finished residential apartments/condos/houses

– The expected rental rates – and current capitalization rates – for any commercial space (e.g. office, retail, warehouse) that you are planning on building

Of course, you need to have a pretty clear idea of what you are building – and, their sizes – before you can really do this properly.

If you have all that, then it’s time to move to the second tab of the spreadsheet [AJC: I recommend that you spend a few minutes double-clicking on each cell to see which ones require you to insert a number, and which ones are formulas that should feel free to use or adapt for your purposes]:

– Your site may be a certain size, but you will need an architect, designer, draftsman, or town-planning consultant to tell you how many buildings / floors you can put on the site … it’s this buildable area that we are most interested in.

– I have allowed $500k for consultants’ costs (e.g. survey, plans, etc, etc.) for my large project, but it’s much better if you can call the various experts that you need and get an idea of their likely charges up front

– At this stage, I’m not building in interest cost … that will come in the next tab

– Most of this tab of the spreadsheet is self-explanatory [AJC: just drop a comment, below, with any questions!] and, completes itself, IF you have researched those numbers that I asked you to get.

Don’t get overly excited about the $7 million ‘paper profit’, as next week we’ll look at how to build in the interest component [AJC: don’t worry, the profits will still remain in ‘nose bleed’ territory IF everything goes according to plan] …

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10 thoughts on “How much money can you make developing real-estate?

  1. A friend told me that we can make money developing real state and there is no limit of money. Is it true that our profit in terms of money after investing has no limit?

  2. @ Ryan – Thanks … stick around, because we intend to cover a lot more MM201 (making money) stuff, other than just real-estate, in upcoming posts 🙂

  3. @Dean,

    There is always some limit- if your local area has a glut of buildings it won’t be profitable to build any more… In some areas today homes are selling for less than the cost to build! Filling out Adrian’s spreadsheet should prevent you from making that mistake!

    You will have another limit based on the amount you can invest and the time you have to put into each project. I don’t think you are going to be able to find too many banks willing to finance 100% of any housing project anymore. Also, you will need to spend some time on the projects too. But a business doesn’t have to have unlimited profits to be profitable enough to be worth doing!

    -Rick Francis

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  7. Adrian,
    I am an architect, and looking to start a little development/planning as a new direction for my business. Initially, bringing the ideas and skills to property holders, I hope to partner with for partial project ownership. I have been looking for a spreadsheet to use for analysis like the one you describe. Would you mind sharing a link to your spreadsheet, or sending to me? Would appreciate seeing any from other contributors, as well. Thank you. Larry

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