You have to acquire property to develop, which will require capital for a down payment. Then you can use the property as collateral for a construction loan for development. These loans tend to be pretty high rate with extension penalties, so it is important to stay on schedule as much as possible. Developer is using infinity’s cash and balance sheet, but infinity doesn’t have to do any work. It’s a pretty common set up, but terms (ownership stake, rights, % capital contributed) vary greatly.
ie, not really a “side hustle” if you need a ton of money to actually make money doing this.
OP probably wants to know what he can do on the side that requires little to no outlay.
let me explain although a few people explained it quite well.
I buy the land but let’s say I have never developed a condo building ever in my life. So I partner up with a builder who has built quite a few in the area. I go to him and say hey doood i have this land and zoning as is says i can build 4 unit condo building. you want to chip in some money and partner up as GP in this (of course I get his at-cost for his construction work). The banks like that a guy who has built similar buildings before now has his own skin in the game. so they say yay to the loan.
There are contingencies of meeting deadlines and what not and our pay structure is as GP, allocated by % of invested equity but he makes bonus for hitting certain milestones…
He is the builder or construction company owner- he and his men and his vendors come in and hammer away.
I am the developer - yes, although i don’t lift a finger at the site, I am. I also do the whole waterfall and equity and GP payment structures and cash flow modeling, etc.
NOW, after a few successful builds, i don’t need the builder as partner or GP. I just hire him and pay him for his work.
It is very fun and interesting work and you make really solid returns.
If the OP wants to make money and wants to put in 0 work, then well index fund is your only friend.
This is a “side hustle” because you are hustling a bit and I do this side hustle as my side job. My neighbor does the exact same in the area we live in. he’s an MD - the medical doctor MD not some hacksaw managing director at some bank.
how is the split between you 2? 50/50? also how do you know which land is good. time it takes to develop. and what is the roi. how much $$ you drop?
not being rude but a RE forum has full of these info and chats…
the actual construction takes 5-8 months - I do class A/B residential buildings
i drop 20% of total project costs…may have other equity - LP - investors for a few percentages. LPs make 7% preferred.
split is definitely not 50/50…In no sane world, does GP and LP split evenly. After the 7% hurdle, I make +70% of the remaining profits.
I model at most conservative assumptions to arrive at around 7%. If any of the assumptions go in the right direction, I make more than 7%.
To give you an example, Brooklyn…excluding land acquisition costs, the total construction cost is around $450/SF and avg selling price is $1,300/SF in Gowanus area.
Nice job benzo and thanks for the write up
7% prefferred return? How can you be sure that this doesn’t change? Sounds pretty risky.
i didnt think ud need an lp. just thoguht it was ur money and land levered with a bank loan combined with their labor.
| need and want LP. It reduces my risk and the upside is greater.
If I were to build say in Texas…7% would be too risky for me because the construction costs may be cheaper but the decrease in costs would not be enough to compensate for the drop in sales $/SF.
in NYC and surrounding areas though it works quite well because the housing prices are insanely high here.
I only do 1 project per year and only been doing this for a few years so i am still learning a lot.
the key to having LP is to find the sweetspot for you where you have the greatest returns given assumptions and likely scenarios by “giving up” preferred returns to the LPs…but what the LPs receive is really a bread crumb…
for example, LPs may get say 5% preferred return but your model may suggest that they take 20% of the financial risks…That to me is free money.
Just use your financial modeling skills and numbers to your advantage. For LPs, they make 7% preferred plus potential for more by just wiring the money…
This is how all other hedge funds, PE, LBO, real estate funds work…Use other people’s money…Look at Tishman’s failed Suy-Cooper Village plan…They contributed less than 1% of equity…99% of equity was LP…LTV was around 80%. SO, Tishman invested 0.2% of total project costs but they were to make 90% of the profits after hitting a hurdle rate…The project failed but Tishman came out unscathed because after all they only invested 0.2% equity of total project. Talk about leverage haha.
I don’t own a house so I can’t AirBNB and my car is currently unsuitable for Uber or Lyft. Real estate stuff sounds a little sketchy, I don’t want to risk going to jail. I used to do HVAC (basically air-conditioning mechanic), so I know about the trades. I made a ton of money doing that. Plumber is a long hard road and I don’t have the bandwith right now.
Cool, I started looking around and found that I can get a job at Target pretty easily and they don’t mind if I do part time, which is sweet.
I underwrite a lot of construction loans that infinitybenzo is describing… it really is a straight forward process. As long as you can find 1) the right property/piece of land and 2) a builder that you can trust.
It ends up being more of a 80/20 profit split depending on how much of the down-payment the GC puts up.
Can you provide links you specifically use? I want to read up more on this.
here’s an example of a crowdstreet deal with a dude’s analysis:
Update: I have a background in HVAC, but I lost my license and am not allowed to practice anymore. Since I’m familiar with trades, I went to trade school (superior to college, IMO, unless you STEM) and became a master apprentice in electrical plumbing. I do part-time work for a big hourly rate (more than most here can make). All in all, things are working out well. Thanks to everyone for their input!
Thread went completely off the rails…
I still like this one: