The Real Estate Development Process: Risks & Rewards

With a housing market short on supply, rising valuations, and investment opportunities made more accessible than ever through equity crowdfunding platforms, it is crucial for investors to consider the associated risks and rewards.  To do this, investors must first gain a basic understanding of the real estate development process.

The Intricacies of Real Estate Development: Navigating Risks for Potential Gains

Developing real estate often entails a process that spans years, with a series of steps taken along the way.  Due to the complexity of this process, risks are plentiful, and it is not uncommon to encounter unforeseen hurdles along the way.  This makes it crucial for anyone considering getting involved to have a thorough, in-depth understanding of how to navigate the developmental stages in order to one day secure those sought-after, hearty returns on investment (ROI).

Understanding Risks through Project Types and Phases

It is important to note that not all projects expose an investor to the same level of risk.  This is largely dictated by a project's stage (the earlier in the developmental process, the higher the risk) and nature (commercial vs. residential).

Key Phases in Real Estate Development

1. Early Stage: Pre-Development

This foundational phase is the riskiest, given the multitude of unknowns still at play.  Tasks during this phase involve:

• Market research and feasibility analysis
• Land procurement or option rights securing
• Environmental checks
• Drafting site and building plans
• Arranging construction funds

It's worth noting that acquiring construction finance from traditional sources is stringent, and if a developer manages it, many significant challenges have likely been addressed.  Arguably, the largest hurdle within the pre-developmental state is obtaining both building and land permits within the jurisdiction.

2. Middle Stage: Construction

At the heart of the project, this phase involves transforming blueprints into tangible structures. With pre-development tasks settled, the risks recede but don't entirely vanish. Activities include:

• Actual construction
• Marketing initiatives
• Accessing construction finance
• Pre-leasing activities
• Securing permanent financing
• Engaging property management

During this phase, funding generally stems from the project sponsor, external investors, and short-term construction loans. The culmination of this stage is marked by the certificate of occupancy, which signifies a building's readiness for operations.

3. Final Stage: Operation

As the inaugural phase of a building's functional life, this stage revolves around tenant acquisition. Tasks during this phase encompass:

• Continuous marketing and leasing efforts
• Identifying potential buyers
• Deciding on holding strategies
• Intensifying property management
• Achieving stabilization

At this juncture, the typical financing modes are construction or short-term “bridge” financing until the project attains stabilization. Once stabilized, developers can access long-term financing options. Depending on pre-leasing volumes achieved during construction, this can be deemed the phase with the lowest risk, hence offering the least returns.

Though this overview gives a sense of the evolving risk dynamics in development projects, it's pivotal to note that buying or refinancing existing buildings carries similar risks. Factors like the credibility and expertise of the sponsor, prevailing economic scenarios, and market dynamics play critical roles across the board.

While developing real estate may present investors with a plethora of potential risks, these can be greatly diminished or avoided completely by simply gaining an understanding of the process as a whole and approaching it in a structured manner.  If done correctly, the resulting ROIs often make such initiatives quite lucrative and enticing for round 2.

Now that you have learned a little bit more about what the real estate development process entails, take the time to peruse and consider a growing list of real estate investment opportunities being made accessible across equity platforms such as the following.

1. Fundrise

Fundrise is a U.S.-based platform that allows individual investors to invest in commercial real estate projects, including built-to-rent housing. The platform is known for its eREITs (electronic Real Estate Investment Trusts), which are diversified portfolios of real estate projects.

Founded in 2012 by Ben Miller and his brother Dan Miller, the company sought to democratize real estate investment by providing an alternative to traditional investment methods. Instead of relying on Real Estate Investment Trusts (REITs) or direct property ownership, Fundrise offers eREITs and eFunds, which are specially designed investment vehicles that pool money from multiple investors to invest in real estate.

The platform gives ordinary investors the opportunity to access real estate deals with relatively low minimum investments, often starting at just $500. With its tech-driven approach, Fundrise aims to provide transparency, diversification, and ease of use, allowing users to track their investments, view project updates, and receive dividends through the online dashboard. Over the years, Fundrise has grown significantly in popularity, catering to a broad spectrum of investors looking for a more hands-off approach to real estate investing. Its innovative model and user-friendly interface have positioned Fundrise as a leading player in the real estate crowdfunding industry.

2. RealtyMogul

RealtyMogul is another prominent U.S. platform offering crowdfunded real estate investment opportunities. The platform allows both accredited and non-accredited investors to invest in a variety of commercial real estate ventures.

Launched in 2013 by Jilliene Helman and Justin Hughes, RealtyMogul aimed to provide individual investors with access to institutional-quality real estate deals, which were previously mostly reserved for large institutions or high-net-worth individuals. The platform offers a mix of investment vehicles, including private placements, Real Estate Investment Trusts (REITs), and 1031 exchanges.

With a tech-centric approach, RealtyMogul emphasizes transparency and thorough vetting of deals. Users can choose specific properties to invest in or opt for diversification through the company's curated portfolios. By merging technology with real estate expertise, RealtyMogul has become a key contender in real estate crowdfunding, catering to both novice and seasoned investors.

3. CrowdStreet

CrowdStreet connects investors with institutional-quality commercial real estate investments. Its platform is more geared toward offering a wide range of real estate investment types, often including Build-to-Rent (BTR) opportunities.

This platform was founded in 2013 by Tore Steen and Darren Powderly.  Unlike some competitors, CrowdStreet's primary focus is on individual accredited investors and their unique needs. The platform provides direct investment in individual properties, allowing investors to pick and choose specific deals that align with their investment goals. One of CrowdStreet's distinguishing features is its marketplace, where a variety of real estate sponsors list their offerings, enabling investors to diversify their portfolios across property types, geographic locations, and investment strategies. By providing tools, educational resources, and a streamlined investment process, CrowdStreet has established itself as a leading platform in the real estate crowdfunding domain, enabling a broader audience to engage in commercial real estate investing.