How Do Real Estate Developers Make Money?

real estate construction

Land development has always been one of the most challenging arenas for real estate professionals.  In the most general sense, a real estate developer is someone who buys raw or improved land with the express purpose of improving, enhancing or developing the property to increase its market value.  There are a myriad of ways for successful developers to turn a profit. Since they are often shepherding a project from beginning to end, the risks are sometimes substantial, but so are the potential rewards.

Recognizing Potential 

The best developers are sometimes born with a sixth sense that allows them to recognize the potential upside in a property.   Often, they see future value that others fail to see. At a minimum, developers need a broad base of real estate knowledge since they will be involved in everything from acquisition to zoning, permits and approvals to building and/or redevelopment and possibly sales.  The smart developers understand how to make money at each stage in the development process.

Under a scenario familiar to most, a developer will buy a single parcel of land or a large tract (often purchased through a string of separate acquisitions) and then either improve the land themselves or sell it to a builder or to individual homeowners at a profit.  There are also successful developers who never building anything at all. Some choose to hold onto an improved property and usually look to rent out space and realize income through a steadily increasing rental stream.  

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Wearing Many Hats

Developers also manage to earn additional fees and commissions through multi-tasking. Many developers are also property managers who acquire, develop, sell or ground lease to a third party and then retain management responsibility and monthly fees.  Expertise acquired through years of experience in improving and adding value to properties enables developers to earn additional income through construction management and development consulting fees. It takes an expert to coordinate the work of Realtors, engineers, architects, appraisers, environmental consultants, traffic experts and other professionals who must somehow work together to turn dreams into reality.

Most developers finance acquisitions and development through some combination of equity and institutional debt.  Some seek equity partners who invest money for a proportionate share of the profits. Others have careers that are largely fee based and they have little or no equity in their projects.  In today’s rapidly evolving real estate markets, it is critical that developers maintain a skill set that lends itself to the art of redevelopment. Yesterday’s deserted shopping mall is tomorrow’s mixed-use property and the former brownfield on the outskirts of town may well be converted to warehouse distribution to serve the ever-increasing demands of cyber shoppers.  Successful real estate developers have one finger on the market’s pulse and one eye on the future. They are visionaries who can predict trends and see beyond dirt, bricks, mortar and balance sheets to help realize a property’s highest and best use.  

 

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