“High-risk high return” is how most people would describe a ground-up real estate development due to the many risks and challenges to overcome. But while ground-up real estate development can be risky, it can also be extremely rewarding—which is why so many investors opt for this type of investment, despite the possible pitfalls.
If you want to get into ground-up real estate investing, though, it’s important that you do everything possible to mitigate risks and maximize the possibility for returns. Not sure how to do that? In this article, we will guide you on how to vet a development deal by evaluating the fundamentals, risk exposure, and financial return to help you invest in a development deal with greater confidence.
What exactly is ground-up development?
Ground-up development is the process of buying a plot of land and building on it from scratch—or the ground up. If there’s an existing building on the property, then the process involves vacating the tenants and demolishing the building prior to development.
There are a number of unique factors involved in each development project, so it can be tough to estimate how long these projects will take on average. In most cases, you can expect a development project to take as little as two years to as long as 10 years or more, depending on its complexity. You can expect most projects to come with a price tag of between $5M to $50M, and most take, on average, between two and four years to complete.
For example, in Los Angeles, a $25 million, 50-unit multifamily development project takes about 3.5 years to complete. That includes about 1.5 years for entitlement and permitting plus two more years’ worth of construction.
As a result of development taking a long time and requiring industry knowledge, developers typically charge 3-5% of the total project cost as their fee. This also varies, obviously, depending on the scope of the project, the experience of the developer, and other factors.
Why is…