Real Estate

7 Common Mistakes Rookie Real Estate Developers Make

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.

4. Overpaying

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.

Final Word

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

Real Estate

What does 2023 hold for the real estate industry? Big banks Predict Fed Pivot, Recession

According to a recent survey, most economists at major US financial institutions expect a recession to hit in 2023. The Wall Street Journal surveyed 23 firms that deal directly with the Federal Reserve, and most of them anticipate that the US will enter a recession in 2023, with only two expecting a recession in 2024.

While many analysts surveyed are becoming more pessimistic about the economy, Credit Suisse, Goldman Sachs Group Inc., JPMorgan Chase & Co., UBS Asset Management, and HSBC believe the economy will defy the unfortunate trend as the price rise slows.

This article looks into the big banks’ predictions about a looming 2023 recession, a Fed pivot on the interest rate hikes, and how these could impact the real estate industry.

What the Big Banks Anticipate

These companies, also known as main dealers, have raised the alarm about several issues, including Americans’ expenditure of their pandemic savings, bond maturities, and the downturn in the property market, directly leading to banks being more stringent with their lending requirements.

The economists mostly agree that the Fed is mostly to blame, as it has been gradually increasing interest rates over the past few months in an effort to slow the economy and control inflation. Although inflation has slowed recently, it is still significantly greater than the Fed’s target.

Seven rate hikes by the Fed in 2022 brought the benchmark rate to a 15-year high of 4.25% – 4.50%, up from 0% to 0.25% the year before. In December, Fed officials clarified they were committed to a gradual rate hike that would bring the target range for interest rates in 2023 to between 5% and 5.5%.

Yields on US government bonds with maturities of three months to two years are greater than those of 10, 20, and 30 years. This phenomenon, known as an inverted yield curve, has preceded every recession since World War II.

In October 2022, the Fed’s estimate reports showed that Americans still have around $1.2 trillion in excessive savings, down significantly from a high of more than $2.3 trillion in 2021. Additionally, the personal savings rate fell to 2.4% in November from a high of 4.7% in January 2022 and 7.3% in 2021.

Most economists also expect higher rates to raise the unemployment rate from November’s 3.7% to above 5%. While this is still historically low, continued rate increases would result in the loss of millions of jobs. The economists cited the number of people filing for unemployment has remained relatively low.
They have also predicted that the slowing effects of higher interest rates will become more noticeable in 2023, even though the economy has held up reasonably well during the rate hikes of 2022. That said, this current US interest rate is the highest it has ever been since 2008.

If the economy contracts, most economists believe it will be a mild recession. By late 2023, they anticipate a recovery in the economy and the stock markets, partly due to the Fed’s shift toward a monetary policy of rate decreases. Many economists expect high returns from bonds and modest gains from stocks in 2023.

How the Looming Recession Could Impact the Real Estate Industry

Although it may seem counterintuitive, the property market may thrive during economic downturns. Here is how the impending recession might affect the market:

Rising Mortgage Costs

Following a year of increases, mortgage rates continued their upward trend in the final week of 2022, ending the housing bubble that the 2021 pandemic had spurred. According to Freddie Mac, the average rate for a 30-year fixed mortgage has increased to 6.48% as of January 5, 2022, compared to 3.22% from the same time in 2021.

Increasing mortgage rates would make it harder for some would-be buyers to get mortgage financing. However, the Federal Reserve is likely to decrease rates to stimulate the economy in the event of a recession, so consumers can expect any challenges brought on by the increase in rates to be transitory.

Decline in Existing Home Sales and Less Affordability

According to the National Association of Realtors (NAR), existing home sales plummeted 7.7% in November 2022 compared to the previous month and dropped 35.4% from November 2021. NAR also reports that this current fall had been ongoing for 10 months, the longest streak since 1999.

The trend may continue with the forecasted economic slowdown coupled with affordability concerns. Moreover, the fact that many mortgage holders still have rates below market rates will contribute to a decrease in home sales in 2023.

Experts also anticipate that refinancing mortgages will continue to be infeasible for most current mortgage holders, restraining mortgage origination activity.

Historical increases in interest rates have led to less affordability. Although home prices slowed and fell in some areas, they are still significantly higher than before the pandemic, making it difficult for many families to afford homes.

The low supply of homes in the market to fulfill buyer demand is one of the main reasons home prices are currently high. Although most economists agree home prices will drop, there’s no consensus on whether home prices will continue to slow down or plummet in 2023.

The recent decline in mortgage rates notwithstanding, a section of the experts believe home values may plummet if buyer demand decreases in 2023 due to the recession and rising interest rates.

Some economists expect home prices to fall considerably further in 2023 due to rising mortgage rates. Most firms predict that the prices could fall by as much as 20%.

However, some analysts say a sharp drop is unlikely, so investors can keep their hopes up. That’s because home prices rose sharply during the pandemic housing boom, and a 20% decline would return the industry to February 2021 levels. They don’t expect the slowdown to throw many borrowers into negative equity.

Final Word

Most of the major financial institutions predict a recession will likely occur in 2023. Recessions are a normal part of the economic cycle and may impact the housing market, possibly slowing home sales. However, investors should treat these predictions cautiously as the economy continually shifts.

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

Real Estate

How Hybrid Working Environment Has Impacted Real Estate Industry

The COVID-19 outbreak and accompanying move to remote work have impacted real estate. Many firms have rethought their physical workspace needs as workers work from home. This has reduced demand for traditional office space and increased demand for co-working spaces.  Some commercial real estate developers have had to focus on residential properties or retrofitting office buildings for hybrid work environments. This comprises specialized workstation locations, social distancing techniques, and increased cleaning processes for in-office and remote workers.  Hybrid work settings have affected real estate development. With the option to operate from anywhere, corporations may seek properties in lower-cost places, changing real estate values and development patterns. 

According to the 2022 Accenture report, 68% of fast-growing companies have adopted a hybrid work model, and more than 83% of employees prefer it. Although the hybrid workplace model has been around for some time, it increasingly became common during the pandemic because of the lockdowns.

Inevitably, the real estate market is changing in response to the evolving trends in office attendance and the widespread belief that hybrid working models are here to stay. Here’s a look at the impact of a hybrid working environment on the real estate industry and how investors can adapt to its changing demands.

Impact of Hybrid Work Models on the Real Estate Industry

Reduced Demand for Office Space

It is no secret that the widespread adoption of hybrid work models has revolutionized the commercial real estate market. According to a report from CBRE, demand for office space fell in September for the fourth month in a row as occupiers delayed lease decisions.

One of the reasons for the decline is evaluations of hybrid working arrangements by companies. Some organizations may also reduce the size of their workspace due to underutilization.

In addition to catering to employees’ interests in working from home, many companies realize they can make substantial savings by minimizing office space.

Reduced Market Value for Commercial Spaces

A working paper by experts at NYU and Columbia warns that the value of commercial real estate across the country could drop by as much as $500 billion from its pre-pandemic level by 2029 if current trends in working from home don’t change.

The locations of both workplaces and residences significantly impact real estate values and development. When there is less demand for office space, the lease income that the building generates decreases, and so does the building’s market value.

That’s a disaster for commercial space owners, equity investors, and lenders and may lead to bankruptcy and foreclosures.

Increased Demand for the Residential Real Estate

After companies started adopting hybrid working environments, many employees considered moving out to the suburbs, rural areas, or smaller towns because of preference and the high cost of living in the city. 

As people no longer commute to and from work daily, there’s no need to live close to a place of employment or a public transportation hub and incur high costs of living. That has led to a dramatic increase in the demand for suburban real estate, which may cause a rise in average prices.

What can Real Estate Investors do?

Low occupancy is costly and may render your office building redundant if you do nothing. That said, you can optimize your property in a few ways to help attract occupants, increase demand, and enhance tenants’ satisfaction.

Repurpose Existing Buildings

Office space is becoming obsolete due to the rising popularity of home office workstations. Overbuilt office buildings in areas where property values are declining, vacancy rates are growing, or places far away from public transit are particularly at risk.

RentCafe believes that in 2020 and 2021, 41% of apartment conversions resulted from previously used office space. Investors whose assets are in this position may find that converting their property into residences is their best choice to avoid foreclosure.

Integrate Home Office in Living Spaces

Recent 1-year estimates from the American Community Survey (ACS) by the Census Bureau show that the number of persons who work from home increased from 5.7% to 17.9% between 2019 and 2021.

The necessity for several home offices to support two or more persons working from home has expanded in recent years. Investors can introduce a home office idea tailored to the specific requirements of people working from home. Adding a space specifically for work can drive up the price of new houses and raise the value of existing ones.

Open Data Centers

Companies used to host their private networks and resources locally. However, companies are recently shifting their IT operations to data centers to reduce the need for expensive commercial real estate while improving their IT assets’ performance, reliability, and cost-effectiveness. 

Further, the need to securely store and share data among employees who spend time in and out of the workplace has prompted businesses to explore new solutions to accommodate mobile workers.

Hybrid work may cause a surge in demand for data centers, which would be good news for investors in the sector. One thing that is certain about cloud, colocation, and managed data centers is that their global relevance will grow with the speeding up of digitalization.

Co-working Spaces

Research and forecasts indicate that the co-working space industry will grow by 11% annually ($13.35 billion) between 2021 and 2025. In reality, not everyone can work from home. To make use of time when they don’t have to be at the office, employees who need to clock in a few days a week of office time may look into renting a shared office. 

After over two years in business, 72% of co-working spaces reported a positive financial return. That bodes well for real estate investors who put money into shared office spaces.

Short-Term Leasing

Landlords rarely signed short-term leases in the past because it was easy to find new tenants prepared to commit to longer terms. The economic situation is not as rosy at the moment. Currently, landlords are eager for any kind of tenant they can get, as many experts believe it will be years before occupancy rates return to pre-pandemic levels.

Companies that wish to keep a physical office presence but are still unsure about their long-term needs often opt for flexible lease terms. You can increase your office space occupancy by providing shorter lease periods, cooperative rates, and adaptable layouts.

Final Word

There is little question that the hybrid working model is here to stay. However, this may not inevitably indicate a sharp downturn in the real estate industry. It is essentially an opportunity for the sector to adapt in response to consumer and market demands. Real estate leaders must conform to the shifting preferences of their customers by offering fresh, cutting-edge products and services.

By Gurpreet Singh Padda, MD, MBA