I've been trying to do some pro-formas on developing some warehouse properties into apartments/lofts and cannot figure out how to make a profit on them if they are rented out, without waiting 10-20 years for ROI. Has anyone been successful doing this, or is it better to sell each unit or the whole building once the project is complete?
who cares why they are looking into those markets? that's their business. help or get out of the way, ya smug turd.
Jefferson - have you been through this process before? As you may already know, It doesn't have to be black and white, in terms of sale vs rent.
My office generally sells a portion of our spaces to recoup initial costs and keeps a portion of apartments for rentals.
It varies project by project but ultimately comes down to demand and sq ft construction costs. we are also engaged in multiple levels of development projects. from co
who are you targeting and what neighborhoods are you looking at? Each of those locations have great variation in terms of regional identity and will ultimately impact your designs and sales/rental rates.
we engage in everything from urban acupuncture - residential and retail design build to massive developments, including malls, office parks and master planned communities.
even on the most organized and promising projects, things can change at the last minute....
I don't do conversions, but I've done office buildings, apartments, and townhouses as new construction.
Not every deal pencils out. In fact, most of them don't, and I dump them in the pro forma/feasibility stage because they won't generate adequate cash flows to support the investment. That's what you're finding out now, and that's what feasibility is for. My advice is: if a prospective deal doesn't pencil, first look for a way to rebalance the equation by adding value and/or restructuring costs to generate the necessary cash flows and IRR. If that doesn't work, pass. Move on to the next one. I probably look at 30 different projects before I say "yes" to one and move forward with it. Even then, I always structure the deal so I have an exit strategy at every significant milestone in the process.
I would just follow-up on gwharton's comment by saying too often architects look at buildings rather than investments. Just because you have a gorgeous old building does not mean it exists in a market to support its redevelopment. We come up against this all the time in Detroit where we have an incredible historic building stock, but virtually no market in all, but a handful of areas. As gwharton said, if it doesn't pencil out, move on to the next opportunity.
Honestly, the best way to learn the development business is to put some money on the line and go do it yourself. If you want a bit of background to know the obvious things to do and avoid, buy a few introductory how-to books on RE development from ULI and study them in detail. Segal makes so much money from teaching seminars that he can't really say that, but it's true. It what he did, and it's what I did. It's the same sort of thing as how the old saying goes: "trading one pork-belly futures contract is worth a year at Harvard Business School."
If you don't have an arch license yet, keep your internship and try to qualify for it as quickly as possible. Then, if you want another credential or training to bolster a career as design-developer, go take a bunch of appraisal classes and try to get a RE Appraisal certificate. Or maybe get a Real Estate License (that's easier than appraisal certification anyway).
If really aren't comfortable just going ahead and doing it, then look for a commercial real estate certificate program that focuses on investment and development. The University of Washington has a pretty decent one, and it's cheaper and shorter than going for an MBA in finance or real estate.
But really, the best way to get experience in real estate development is to develop real estate. It's complicated and risky, but it's not hard.
Are any of you guys interested in buying the Jonathan Segal seminar videos and documents from me? I bought the online membership for $495 and downloaded all of the content and now I'm selling it for $75 if anyone is interested. It ircks me that he is making so much off of this content - but it really is hard information to find so I'm trying to make it easier/cheaper to obtain.
Spackle. It's a huge noobie mistake to invest outside your own geographic limits. So if you want to tell someone that on their first project they should invest 1000 miles away then go for it. That was the reason I was asking about which markets he was looking at. His post also wreaked of "I've never done this before" and I was trying to get more information out of him prior to blasting my mouth off. So for what it's worth, go fuck yourself.
Jefferson. It appears that you are lacking education and experience. I don't know what your captial situation is, but look for a partner that has as much of those three elements, Cash, Education and experience developing. The right mentor will help you achieve your goals way faster than you can (cut them in for a share or work for them on one of their projects) The wrong mentor will take all your money. Be careful.
Thank you for the advice. I appreciate it. I am trying to learn. Would you all recommend (those who are experienced) look to invest one's own money on a first project (and team up with a few other investors) or stay on the sideline for that, and look to get investors for the project. Also, when you do pro-formas for different projects, do you look at the property with a typology in mind, or do you test each to see what makes sense for that property (ie. look at 30 properties with residential in mind, or evaluate retail vs residential vs office, etc, for each site?)
The Segal videos are pretty good. There's 4 hours of solid information. Also included is a 177 page PDF with legal documents, spreadsheets and pro formas from his projects. He basically divulges his entire business model which is very valuable because most developers consider their knowledge and experience to be proprietary information and thus are unwilling to teach and mentor newer guys. Segal's model is particularly pertinent right now because apartment development has become so much more profitable as rents are rising. (he only builds apartments, not condos)
He goes over building prototypes that can be built inexpensively with high efficiency ratios. $75 is a bargain for all of this info. Check out the website: http://www.architectasdeveloper.com
Hi awkeytect - I will download the videos and email them to you or provide an FTP, whichever you prefer. Gmail now allows large files to be emailed, so we could transfer them via email easily. Segal has the videos as streaming only, but there is a hack for downloading them. I won't provide the login because in the FAQ it says that if multiple computers are detected logging into the website the user account will be shut down.
You can just pay me via paypal. Is there some way to private message on here?
So if I have no investment money, but see some properties with great potential from analysis, how do I find investors? Do I put together a package with data and a concept design for the property and pitch to other developers or find investors? How does one make something like this take off?
Contact your local neighborhood 'friendly' city planner first.
The planning office can make or break your investment potential— I frequently run into businesses who wanted to transition from lease-to-ownership and rush into buying a commercial property without realizing that all the future plans they had for it were not even possible from the beginning.
If it's an enterprise, special or "strategic" zone overlay district, chances are your planning office might have ways of helping you finance your project through zero-interest loans, grants, perks from the Small Business Administration and HUD initiatives. It could be anywhere from a few thousand dollars for a facade restoration grant to hundreds of thousands of dollars in terms of loans from an economic development urban renewal fund.
if you are really interested in breaking into the development business, start small and local - and network like hell. best bet is to partner with a small builder who is interested in flipping a few properties. do a few of these to get your feet wet, to learn how to make money at it (be prepared to lose money) and then you can start trying to bring in investors for something bigger. You need to experience buying and selling property - and the best way to do this is to start small.
you will lose your shirt if you try to start out big - and I'm certain most savvy big-ticket investors won't partner with someone who has no experience.
onyx_one : would love to look into this Segal seminar contents.. do you have a contact or could you turn your PM on?
Back to some comments on this thread... It seems like some must have plenty of cash lying around to jump in and try something they've never done before, while I can barely feed myself and lead a comfortable life working in this profession. xD some have it real good
awkeytect, nanookofthenorth, and accesskb : are you guys still interested in the Segal seminar videos and documents? Sorry I disappeared for awhile. Offer is still in the table for $75 though.
there are several ways to show a return on a conversion project like you mention. You should consider two ways of disposition: Individual unit sale, or selling the asset as an income producing investment.
The 20 year window you are looking at is not looking at it correctly because it seems that you did not consider leveraging the project once its competed and rented out. In a rental property, you have both appreciation of the asset and a valuation based on NOI. Generally, most markets value income property between 6-8% capitalization rate (NOI divided by 6%). That would give you the value you have generated in your project. So if that value covers paying your construction loan and equity, plus profit, then you have a deal that is feasable. The rest is a matter of payback based on risk that you are offering your investors. For example, if the value =paying back the loan, equity, and only 10% profit free and clear, then its too low and too risky as we all know projects are always late and over budget. But if the profit is 40% or higher then you are in the range of returns most RE investors are looking for. Rental developments tend to just cover and you realize your profit only when the valuation is high enough that you sell or you can leverage money out of it while still being able to service the debt. The other way of looking at it is the return on equity. Here, investors are looking for a return on equity on a leveraged basis around 50-100%. Un leveraged, at least a 10-15% return. There are more complexities to this, but you get the idea. I would not waste my money on a course. Talk to people and get to know the business. If the project is good enough, investors will find it and banks will finance it. Remember though, that unless you are the equity investor, you as developer need to work out how you will get paid. My recommendation starting out is to assume you will charge a development fee between 2-5% on the total project cost. Small deals don't make sense to try to work out profit splits, etc, at least at first because the residual amount you will be able to negotiate will be minimal. So I think its best that you get the best fee you can for the first deals. Remember, that you are still as a developer providing a service. Which then comes to the subject of how to value your architectural work. Note that many banks will discount your fees since you are architect developer. That means that they will obligate you to pay your design fee out of equity and will not finance it. Since Development fees are usually paid during construction, the banks have no problem funding that fee. So the architect in you needs to essentially work on spec until the project returns the equity.
To summarize Maestro, if you are serious about doing development, you need to immediately learn how to apply the concepts of Net Present Value, Hurdle Rates, and Internal Rates of Return to determine whether or not any development investment makes sense over a given time period. This a basic thing prospective developers need to know. Does your project generate a positive NPV during the investment period given the cost of money and risk (combined into the hurdle rate)? What's its IRR? What will your cash-on-cash return be? If you can show positive NPV at a realistic hurdle rate, a decent cash-on-cash return for investors and yourself, and a sensible IRR, you will have no trouble at all finding money to make the project happen. It will be knocking down your door to participate.
Also, since your fees as architect come out of equity, figure out how to use your fees AS equity. This will simplify your life considerably so long as you can forego the direct cash flow (i.e. extend your own float during design and construction, then pay yourself on takedown of permanent financing).
Any savy architect-developers on here?
I've been trying to do some pro-formas on developing some warehouse properties into apartments/lofts and cannot figure out how to make a profit on them if they are rented out, without waiting 10-20 years for ROI. Has anyone been successful doing this, or is it better to sell each unit or the whole building once the project is complete?
depends on the market - where are they located?
I'm currently looking at San Fran, Oakland, San Jose, Denver
why are you looking at those markets?
In San Diego
Jonathan Segal
https://www.architectasdeveloper.com/
who cares why they are looking into those markets? that's their business. help or get out of the way, ya smug turd.
Jefferson - have you been through this process before? As you may already know, It doesn't have to be black and white, in terms of sale vs rent.
My office generally sells a portion of our spaces to recoup initial costs and keeps a portion of apartments for rentals.
It varies project by project but ultimately comes down to demand and sq ft construction costs. we are also engaged in multiple levels of development projects. from co
who are you targeting and what neighborhoods are you looking at? Each of those locations have great variation in terms of regional identity and will ultimately impact your designs and sales/rental rates.
to finish my incomplete thought from before.
we engage in everything from urban acupuncture - residential and retail design build to massive developments, including malls, office parks and master planned communities.
even on the most organized and promising projects, things can change at the last minute....
that is all.
I don't do conversions, but I've done office buildings, apartments, and townhouses as new construction.
Not every deal pencils out. In fact, most of them don't, and I dump them in the pro forma/feasibility stage because they won't generate adequate cash flows to support the investment. That's what you're finding out now, and that's what feasibility is for. My advice is: if a prospective deal doesn't pencil, first look for a way to rebalance the equation by adding value and/or restructuring costs to generate the necessary cash flows and IRR. If that doesn't work, pass. Move on to the next one. I probably look at 30 different projects before I say "yes" to one and move forward with it. Even then, I always structure the deal so I have an exit strategy at every significant milestone in the process.
I would just follow-up on gwharton's comment by saying too often architects look at buildings rather than investments. Just because you have a gorgeous old building does not mean it exists in a market to support its redevelopment. We come up against this all the time in Detroit where we have an incredible historic building stock, but virtually no market in all, but a handful of areas. As gwharton said, if it doesn't pencil out, move on to the next opportunity.
are any of you guys located in Los Angeles?
or know of any firms that are architects/developers?
Would love to try to intern for a firm/someone who does this kind of work
batman,
Honestly, the best way to learn the development business is to put some money on the line and go do it yourself. If you want a bit of background to know the obvious things to do and avoid, buy a few introductory how-to books on RE development from ULI and study them in detail. Segal makes so much money from teaching seminars that he can't really say that, but it's true. It what he did, and it's what I did. It's the same sort of thing as how the old saying goes: "trading one pork-belly futures contract is worth a year at Harvard Business School."
If you don't have an arch license yet, keep your internship and try to qualify for it as quickly as possible. Then, if you want another credential or training to bolster a career as design-developer, go take a bunch of appraisal classes and try to get a RE Appraisal certificate. Or maybe get a Real Estate License (that's easier than appraisal certification anyway).
If really aren't comfortable just going ahead and doing it, then look for a commercial real estate certificate program that focuses on investment and development. The University of Washington has a pretty decent one, and it's cheaper and shorter than going for an MBA in finance or real estate.
But really, the best way to get experience in real estate development is to develop real estate. It's complicated and risky, but it's not hard.
Lots to digest. Thank you. I haven't done this before and am hoping teaming up with someone who has in the SF area. Still, I have lots to learn.
Honestly, the best way to learn the development business is to put some money on the line and go do it yourself.
right - because recent grads have no outstanding student loans, good credit, and a sizable amount of cash laying around.
Are any of you guys interested in buying the Jonathan Segal seminar videos and documents from me? I bought the online membership for $495 and downloaded all of the content and now I'm selling it for $75 if anyone is interested. It ircks me that he is making so much off of this content - but it really is hard information to find so I'm trying to make it easier/cheaper to obtain.
Spackle. It's a huge noobie mistake to invest outside your own geographic limits. So if you want to tell someone that on their first project they should invest 1000 miles away then go for it. That was the reason I was asking about which markets he was looking at. His post also wreaked of "I've never done this before" and I was trying to get more information out of him prior to blasting my mouth off. So for what it's worth, go fuck yourself.
Jefferson. It appears that you are lacking education and experience. I don't know what your captial situation is, but look for a partner that has as much of those three elements, Cash, Education and experience developing. The right mentor will help you achieve your goals way faster than you can (cut them in for a share or work for them on one of their projects) The wrong mentor will take all your money. Be careful.
Thank you for the advice. I appreciate it. I am trying to learn. Would you all recommend (those who are experienced) look to invest one's own money on a first project (and team up with a few other investors) or stay on the sideline for that, and look to get investors for the project. Also, when you do pro-formas for different projects, do you look at the property with a typology in mind, or do you test each to see what makes sense for that property (ie. look at 30 properties with residential in mind, or evaluate retail vs residential vs office, etc, for each site?)
Are those Segal vids really that good?
The Segal videos are pretty good. There's 4 hours of solid information. Also included is a 177 page PDF with legal documents, spreadsheets and pro formas from his projects. He basically divulges his entire business model which is very valuable because most developers consider their knowledge and experience to be proprietary information and thus are unwilling to teach and mentor newer guys. Segal's model is particularly pertinent right now because apartment development has become so much more profitable as rents are rising. (he only builds apartments, not condos)
He goes over building prototypes that can be built inexpensively with high efficiency ratios. $75 is a bargain for all of this info. Check out the website: http://www.architectasdeveloper.com
Are you interested?
onyx_one -
I'm interested. Would you be providing your login as well so that one might access the videos?
Hi awkeytect - I will download the videos and email them to you or provide an FTP, whichever you prefer. Gmail now allows large files to be emailed, so we could transfer them via email easily. Segal has the videos as streaming only, but there is a hack for downloading them. I won't provide the login because in the FAQ it says that if multiple computers are detected logging into the website the user account will be shut down.
You can just pay me via paypal. Is there some way to private message on here?
So if I have no investment money, but see some properties with great potential from analysis, how do I find investors? Do I put together a package with data and a concept design for the property and pitch to other developers or find investors? How does one make something like this take off?
Contact your local neighborhood 'friendly' city planner first.
The planning office can make or break your investment potential— I frequently run into businesses who wanted to transition from lease-to-ownership and rush into buying a commercial property without realizing that all the future plans they had for it were not even possible from the beginning.
If it's an enterprise, special or "strategic" zone overlay district, chances are your planning office might have ways of helping you finance your project through zero-interest loans, grants, perks from the Small Business Administration and HUD initiatives. It could be anywhere from a few thousand dollars for a facade restoration grant to hundreds of thousands of dollars in terms of loans from an economic development urban renewal fund.
Jefferson - The Segal seminar thoroughly answers every one of your questions. $75 and it's yours...
Hey onyx_one -
not sure the private message exists anymore. I created an email address for this purpose - you can contact me at awkeytect@gmail.com
@jefferson:
if you are really interested in breaking into the development business, start small and local - and network like hell. best bet is to partner with a small builder who is interested in flipping a few properties. do a few of these to get your feet wet, to learn how to make money at it (be prepared to lose money) and then you can start trying to bring in investors for something bigger. You need to experience buying and selling property - and the best way to do this is to start small.
you will lose your shirt if you try to start out big - and I'm certain most savvy big-ticket investors won't partner with someone who has no experience.
good advice, thank you. I am looking to do smaller projects - definitely not jumping in the deep end.
onyx_one, you still got the Segal seminars?
anyone have any books you can recommend?
onyx_one : would love to look into this Segal seminar contents.. do you have a contact or could you turn your PM on?
Back to some comments on this thread... It seems like some must have plenty of cash lying around to jump in and try something they've never done before, while I can barely feed myself and lead a comfortable life working in this profession. xD some have it real good
Here is a good interview with Segal. He goes over the basics on how to get started.
http://www.businessofarchitecture.com/interviews/architect-as-developer-taking-control-of-design-and-getting-paid-for-it-with-jonathan-segal-faia/
awkeytect, nanookofthenorth, and accesskb : are you guys still interested in the Segal seminar videos and documents? Sorry I disappeared for awhile. Offer is still in the table for $75 though.
sure - how do we get in contact with you?
there are several ways to show a return on a conversion project like you mention. You should consider two ways of disposition: Individual unit sale, or selling the asset as an income producing investment.
The 20 year window you are looking at is not looking at it correctly because it seems that you did not consider leveraging the project once its competed and rented out. In a rental property, you have both appreciation of the asset and a valuation based on NOI. Generally, most markets value income property between 6-8% capitalization rate (NOI divided by 6%). That would give you the value you have generated in your project. So if that value covers paying your construction loan and equity, plus profit, then you have a deal that is feasable. The rest is a matter of payback based on risk that you are offering your investors. For example, if the value =paying back the loan, equity, and only 10% profit free and clear, then its too low and too risky as we all know projects are always late and over budget. But if the profit is 40% or higher then you are in the range of returns most RE investors are looking for. Rental developments tend to just cover and you realize your profit only when the valuation is high enough that you sell or you can leverage money out of it while still being able to service the debt. The other way of looking at it is the return on equity. Here, investors are looking for a return on equity on a leveraged basis around 50-100%. Un leveraged, at least a 10-15% return. There are more complexities to this, but you get the idea. I would not waste my money on a course. Talk to people and get to know the business. If the project is good enough, investors will find it and banks will finance it. Remember though, that unless you are the equity investor, you as developer need to work out how you will get paid. My recommendation starting out is to assume you will charge a development fee between 2-5% on the total project cost. Small deals don't make sense to try to work out profit splits, etc, at least at first because the residual amount you will be able to negotiate will be minimal. So I think its best that you get the best fee you can for the first deals. Remember, that you are still as a developer providing a service. Which then comes to the subject of how to value your architectural work. Note that many banks will discount your fees since you are architect developer. That means that they will obligate you to pay your design fee out of equity and will not finance it. Since Development fees are usually paid during construction, the banks have no problem funding that fee. So the architect in you needs to essentially work on spec until the project returns the equity.
Uhm, no one is concerned about paying for pirated materials?
If it was the usual pirate mentality of "information should be free", I'd be more understanding, but trying to turn a buck on it? Slimy.
Hey, guys, I've got a cracked copy of revit to sell. $250 and I'll hook you up.
You have to be able to unload your project in seven years or you loosing money!
To summarize Maestro, if you are serious about doing development, you need to immediately learn how to apply the concepts of Net Present Value, Hurdle Rates, and Internal Rates of Return to determine whether or not any development investment makes sense over a given time period. This a basic thing prospective developers need to know. Does your project generate a positive NPV during the investment period given the cost of money and risk (combined into the hurdle rate)? What's its IRR? What will your cash-on-cash return be? If you can show positive NPV at a realistic hurdle rate, a decent cash-on-cash return for investors and yourself, and a sensible IRR, you will have no trouble at all finding money to make the project happen. It will be knocking down your door to participate.
Also, since your fees as architect come out of equity, figure out how to use your fees AS equity. This will simplify your life considerably so long as you can forego the direct cash flow (i.e. extend your own float during design and construction, then pay yourself on takedown of permanent financing).
nanookofthenorth: contact me at onyx.archinect@gmail.com about the seminar videos.
manamana,
I'll pay for Revit. Give me your contact info
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