Great Developments Follow Demand.
Before looking at projected returns, start with a more fundamental question:
Why should this property exist?
Experienced developers look at the market they're trying to serve.
Who will live there?
What kind of housing do they need?
Why this location?
And what problem is the development trying to solve?
Whether you're considering one rental property or a larger development, understanding the future resident is an important part of understanding the investment.
START WITH DEMAND
You're Investing in the Partnership—Not an Apartment.
Private real estate development is different from buying a rental property yourself.
Investors typically participate through a partnership.
The General Partner (GP) is generally responsible for executing the business plan—from development and financing through construction, leasing and operations.
Limited Partners (LPs) contribute investment capital but generally aren't responsible for the project's day-to-day management.
Think business—not building.
UNDERSTAND THE PARTNERSHIP
Development Requires Capital.
Long before residents move into a building, money is already being spent.
Depending on the project, development costs can include:
- Land
- Architecture
- Engineering
- Environmental studies
- Consultants
- Municipal fees
- Permits
- Legal costs
- Financing
- Construction
Private investor capital may provide part of the funding required to move a development from an idea toward a completed property.
UNDERSTAND WHERE THE MONEY GOES
An Investment Evolves Through Different Stages.
A typical development may move through:
- Opportunity
- ↓
- Design & Planning
- ↓
- Capital Raise
- ↓
- Approvals
- ↓
- Construction
- ↓
- Lease-Up
- ↓
- Income-Producing Property
The risks, capital requirements and objectives can change as the project progresses.
Understanding where a project is in that journey is an important part of evaluating the opportunity.
UNDERSTAND THE DEVELOPMENT JOURNEY
What Happens to Your Capital Over Time?
This is one of the concepts that changed the way I think about private real estate investing.
Depending on how a partnership is structured, once construction is completed and a property becomes operational, it may transition from construction financing to longer-term financing.
In some structures, that may allow a portion of an investor's original capital to be returned.
That doesn't necessarily represent profit.
It's the investor's original capital coming back.
If capital is returned, an investor may then have the ability to deploy that money elsewhere while their interest in the original partnership continues according to the partnership agreement.
That's the concept of capital recycling.
UNDERSTAND THE CAPITAL LIFECYCLE
