Real estate developers are some of the most important people in this industry.
They are responsible for turning raw land into thriving communities and businesses. But how do real estate developers make money?
Keep on reading to learn more about the different strategies real estate developers use in their business.
Developing Residential Land
One way real estate developers make money is by acquiring land, developing it into a residential area, and then selling the individual lots to homebuilders.
They may also sell the entire development to a single builder or choose to build the homes themselves and then sell.
The developer’s profit is the difference between the purchase price of the land and the cost of development, minus any money that is borrowed to finance the project.
The size of the profit depends on how much the land and development costs increase during the construction process.
Costs include surveying land, subdividing into smaller plots, obtaining necessary permits and approvals, and building infrastructures such as utilities and roads.
In order to maximize their profits, developers must carefully choose their land and development partners, control their costs, and keep their projects on schedule.
It is hard to predict what the future real estate market will do. A developer could buy land and start to build houses only to find that the market has crashed and they are stuck with a bunch of unsold houses.
So, what do real estate developers do to help predict the market?
They look at trends like the increase in millennials buying their first home, increasing the demand for houses. Or decrease in the number of people getting married and having children which also reduces demand.
Their scope could even stretch as broad as looking at how farmers earn money with their land, and how it has changed over the years.
By analyzing these types of trends, developers can make an educated guess about what the future real estate market will look like and make decisions accordingly.
Trend on the Rise
As the climate crisis continues people are looking for ways to incorporate sustainability into their homes. This means that developers who can create homes with features like solar panels, rainwater harvesting, and green spaces will be in high demand. Not only are these homes more environmentally friendly, but they also offer significant cost savings for homeowners.
Developing Commercial Land
When most people think of commercial real estate developers, they think of the people who build office towers, shopping malls, and apartment complexes.
However, these types of projects only make up a portion of the commercial real estate development industry.
In reality, developers engage in a wide range of activities, from building new construction to redeveloping existing buildings.
Some developers even specialize in a particular type of project, such as hospitality or healthcare.
No matter what type of development they’re involved in, all developers share one common goal: to make money.
There are many different ways for developers to make money from their projects. The most obvious way is through the sale of the property itself.
However, developers can also generate revenue through the leasing of space in their buildings.
In some cases, developers may even choose to keep ownership of the property and manage it themselves. This can provide a steady stream of income, but it also comes with a higher level of risk.
Some people think that malls are a thing of the past, but reports are now saying that open-air shopping centers are on the rise.
This could be a great opportunity for developers to get in on the ground floor of this trend and make some serious profits.
Tactic for Success
Find an equity partner. An equity partner is someone who will invest money in your project in exchange for a share of the profits. This can be a great way to raise capital for your project without having to take out a loan and will allow you to do more deals without tying up all of your capital.
Renovating Older Properties
In cities, vacant land is a rare commodity. With the ever-increasing population, developers are constantly looking for ways to maximize space and create new homes and businesses.
However, this often comes at the expense of older properties that are simply in the way. As a result, many cities are filled with abandoned buildings and eyesores.
In 2022, developers will make money by renovating these older properties and flipping them for a profit.
By breathing new life into these buildings, they will not only improve the appearance of the city but also provide more housing and commercial options for residents.
This also means developers often generate income with rental properties. Ultimately, the redevelopment of older properties will be a win-win for both developers and cities.
Currently, Downtown areas in big and small cities are trying to preserve the history and character of the area by designating them as a historical district.
A real estate developer with this expertise has a higher chance of winning these large projects.
Being a Visionary
It takes a special kind of person to see potential in a space and be able to visualize what it could become.
A successful developer must be able to spot trends, understand what people want, and see beyond the current state of a property.
They need to have the vision to see how a space could be used in new and innovative ways. This requires not only creativity but also a keen understanding of the market.
For example, it is seeing a potential rise in the number of people wanting to live in smaller homes so they are able to live a more sustainable lifestyle and building a tiny house community.
Or taking a brownfield on the outskirts of town and turning it into a warehouse to keep up with the demand of online shopping.
Real estate developers who are able to predict trends and visualize a property’s best use can be very successful in making money from their projects.
Trend on the Rise
Mixed-use developments are becoming increasingly more popular. Instead of dividing residential and commercial areas, shopping malls and living spaces are being combined into a single community. For residents, this offers the convenience of being able to walk to shops and restaurants. For businesses, it provides a built-in customer base.
Property development process:
- Pre Purchase Stage – Secure development site & finances, due diligence, understand your risk and feasibility study.
- Negotiate Contracts & Purchasing – Negotiate prices, draw up a contract, and purchase.
- Planning and Development Approval – Apply for the required planning permissions and secure development approvals.
- Drawing and documentation – Hire an architect, work with engineers, design the development and obtain design approval.
- Pre Construction – Appoint builder & project manager.
- Construction – Prepare the site, manage the construction and obtain certification at key stages.
- Completion – Sell for profit or turn development into an investment property.
Having a Strong Network
When it comes to real estate development, having a strong network of partners is essential.
These relationships can provide developers with preferential treatment and cheaper rates, making it easier to get projects off the ground.
Furthermore, partners can offer valuable advice and support, providing an extra level of security for developers. Of course, developing these relationships takes time and effort, but the benefits are clear.
For any developer serious about success, building a strong network of partners should be a top priority.
Relationships every real estate developer should have:
- Lawyers and Conveyancers – To protect your interests and draw up contracts.
- Bankers and Lenders – To finance your projects.
- Real Estate Agents – To negotiate your deals
- Surveyors – To assess the land you’re looking to buy.
- Architect & Engineers – To design your development and oversee construction.
- Builders – To construct your development.
- City Council Members – To get approvals for your project.
Selling Air Rights
When most people think of real estate, they think of the land and the buildings on it. But in densely populated cities, there is another valuable commodity: air.
That’s why developers often sell the air rights to their property, effectively giving the buyer the right to build upward.
By selling the air rights, developers can raise more money for their projects and avoid having their views obstructed.
In some cases, they may even be able to build taller than zoning regulations would normally allow. Of course, not everyone is happy about this practice.
Critics argue that it leads to further overcrowding and that the buyers of air rights are effectively being given a free pass to ignore city zoning ordinances.
But whether you love it or hate it, there’s no denying that selling air rights is a lucrative business for real estate developers.
Tactic for Success
The real estate market continues to heat up in 2022, with demand outpacing supply. Developers who can get their hands on land or existing properties before they hit the market will have the advantage.The best way to do this is by building relationships with local agents who have access to properties that are not yet listed.
As we have seen, there are a number of different tactics and strategies that real estate developers use to be successful in the market.
By understanding the needs of their target audience and being able to adapt to trends, developers can create projects that will not only make money but also improve the lives of those who live in them.
Tara is a licensed real estate agent in Southwest, FL. She helps buyers and investors find their dream home by educating them about real estate and how they can use it as an investment.