Is there money in real estate development?
Real estate development can be a profitable venture, but it is far from reality shows that depict house flippers making easy profits in hot markets. Real estate investments generally follow several basic principles, which have remained unchanged for several centuries.
• Appreciation – The main source of real estate profits are in property appreciation. This increase in value is achievable in several different ways, whether by selling or refinancing properties. Some appreciation is in valuable minerals, if the underlying landowner owns the mineral, oil, or gravel deposits and rights. This can also include forestlands, where the titleholder is the owner to any timber rights. It is important for landowners to read their property deeds, as sometimes these mineral rights were signed over to other corporations more than a century ago. While the corporations that existed more than 100 years ago may not be in existence today, shell companies may have bought these rights and have the legal capability to mine or have access to minerals on properties.
• Raw Land – Raw land is undeveloped land that requires development. As cities expand and overflow with higher populations, the land outside city limits become annexed into city limits, which then makes these outskirts more valuable to developers. Developers then purchase these raw pieces of land to develop them and sell the lots to homebuilders. Many hard money lenders offer real estate development loans for these types of difficult properties, as most traditional lenders are forgoing lending on complicated projects.
• Residential Properties – When looking to develop raw land into residential properties and developments, the biggest contributing factor to appreciation is the location. Residential areas are more valuable if they are located near transit routes, shopping centers, schools, playgrounds, up and coming neighborhoods, etc. If nearby neighborhoods are in the process of being purchased by property flippers and are being sold for more than their original purchase prices, this may also be a sign of a popular area that is desirable to potential developers. Flippers can increase property values by adding new bathrooms or kitchens in short periods and putting homes back on the market.
• Commercial Properties – Commercial properties’ gains depend on development, improvements and location. The most desirable commercial properties that are in demand help drive up nearby prices.
• Inflation – Inflation can also cause properties to increase in value, but the reality is that everything else multiplies consequently too.
When developers complete raw land projects, they need to be prepared for possibility changing zoning, completing environmental studies, short plat or subdivision approval, obtaining permits, surveys, installing necessary utilities, grading land for drainage and writing CC&Rs. Additionally, when marketing to builders, it may be necessary to help assist them obtain a commercial construction loan or commercial building loans depending on zoning requirements.