Real estate development is undoubtedly one of the most popular ways to invest in the industry. According to a recent survey by CNBC, 23% of American adults chose real estate investment as the most effective way to build wealth, making it the most preferred investment vehicle.
As long as there are people, you should expect some returns when you choose to develop properties, as everyone needs a roof over their head.
Although real estate investing seems a pretty straightforward endeavor, there are habitual mistakes novice real estate developers make that jeopardize their chances of making healthy returns.
Here are some of the blunders newcomer real estate developers make and what you can do to avoid or solve these miscalculations.
1. Get-rich-quick mentality
Most developers enter the real estate industry with the expectation of making a fortune quickly. The industry may seem like a solution for your financial woes, but keep in mind that short-term gains in this industry are more the result of speculation than a strategic investment.
Indeed a 2022 ATTOM Data Solutions analysis shows that the profit received from 3-bedroom home rental units decreased in 72% of US counties.
You can succeed in real estate development if you put in the time and effort. In most instances, however, you will not realize instant success or wealth. It requires patience, effort, experience, and access to the right information to get the most out of your projects. When you commit to a plan with a longer time frame, you may spread out your losses and maximize your returns.
2. Poor Location
Any real estate developer should pay close attention to the property’s location, as it has a massive bearing on the benefits of the investment. Location may determine the property’s costs, revenue, tenant pool, laws and regulations, and market conditions.
According to the National Association of Realtors (NAR), 49% of homebuyers cited the quality of a location as a significant factor influencing their decision when looking for a home. If you develop a property in the wrong spot, it won’t fetch the right price to cover the development costs.
You should always study the cost, price changes, and trends, which can help determine if it is an excellent time to develop a property in a given location. Find out about the amenities, vacancy rates, and historical values of other properties in the area to help you make the right decision.
3. Investing Without a Strategy
Failing to establish clear goals is a common mistake among beginner real estate developers. You are more likely to make poor choices and decisions if you don’t have a clear master plan in advance.
A clearly articulated development strategy will help you achieve your objectives more quickly and hassle-free. By sticking to it, you ensure you are not wasting time and effort running in circles and instead making progress in the right direction.
Consider whether you are more interested in short-term returns or long-term capital growth or how you can achieve both goals while maintaining a steady cash flow.
Another common mistake developers make is buying or developing a property for more than what it would fetch in the market. Some potential real estate developers are more than happy to pay a premium when they come across a suitable property, especially in a hot market.
However, if you overpay for a project, you may find it challenging to meet your bottom line after settling the property’s costs. An excellent rule of thumb is a minimum 7% annual return on the amount invested in relation to the annual mortgage payments (cash-on-cash return).
Before you dive into developing a property, ensure you have done all the necessary research or consult with a professional to ensure you spend a fair amount on a property.
5. Failing to Conduct Due Diligence
Beginner property developers need to understand how the local real estate market works and how the economy can affect their projects. Without doing your research, there’s no telling if a property will bring in the kind of returns you are hoping for.
Your project’s success will depend on your ability to conduct due diligence. Before starting your project, you need to assess the impact of external factors on your business, allowing you to make informed decisions on the nature, timing, and target market of your projects.
Research the types of properties available, the prices at which they sell, and the nature of the competition before signing any sale contract.
6. Underestimating Expenses
Most developers typically consider the initial expenses required to buy or finish a project only. However, developing a property has many other potential hidden costs, which you should consider before breaking ground.
While budgeting, the smart move is to establish a hard cap and save up some money in case of emergencies or unforeseen expenditures. Conducting a feasibility study enables you to make an accurate financial evaluation and minimize surprises.
In your budget, factor in bills such as paperwork charges, property taxes, utility costs, insurance fees, or necessary property renovations.
7. Not Hiring Professionals
The urge to avoid spending money on experts because you think you can do the job yourself can be intense. Yes, hiring professionals such as qualified home inspectors may be more expensive. However, it can help you save money in the long run by preventing costly mistakes.
Successful real estate development begins with building a competent team. If you don’t hire the right people in your team, you risk having inaccurate financial structures or poorly thought-out strategies, which can spell disaster for your project.
You should get advice and help from professionals in different fields to ensure appropriate planning, design, and execution of your project according to your strategy. Consult lawyers, architects, accountants, and urban planners to help you.
Real estate developments are a solid investing path, and the stats back this assertion. However, not all real estate developers will realize returns on investment, especially if they are new to real estate investing.
If you want to make the most of your money, it is crucial that you avoid the mistakes mentioned above, such as wrong location, underinvesting, and sinking money on a property without an investing strategy.
Investing in real estate is no longer a secret kept for the nation’s ultra-wealthy! People like you are participating in the action and taking advantage of the numerous benefits of real estate investment.
While the commercial real estate sector is going through a transition, we’re keeping our eyes on what’s important: solid fundamentals. When you’re allocating your hard-earned funds, think long-term and keep it all in perspective.
When you are ready to reap the rewards of real estate investing let’s talk.
By Gurpreet Singh Padda, MD, MBA