Simple Advice for Getting into Real Estate Entrepreneurship, Investment & Development

An "ask-me-anything" style discussion with our producer Gretchen an aspiring real estate investor. We cover how to get started in real estate entrepreneurship.

Mar 18, 2024

Have you considered getting into real estate investment and development? It can be intimidating. Our newsletter seeks to provide meaningful advice for people building their business, or those considering getting started in real estate.

Listen in to learn more about how I got started. There is advice on where to start and what are the challenges and opportunities today.

What questions do you have? Send them to me at john@pushthroughmedia.com

Interview w/John Pugh & Gretchen Transcript

00:00:03 John

All right, let's do this. Gretchen and I are going to have a question-and-answer session, and she has prepared some great questions. So let's go for it.

00:00:13 Gretchen

So John, you've been in this business for almost 10 years. So what's the biggest difference you've seen in the market from when you started?

00:00:31 John

Well, there's lots of differences. I think the biggest one is that we're in an environment where it's not exactly clear where interest rates are going to go. So, if you are looking to buy a piece of property, that (directionless interest rates) creates some questions as to what the prospective value might be in five years time. Which is a typical timeline for a project; either a development project, ground-up or a redevelopment project value-add project, which can be a little shorter but, that’s a typical hold period. It's about five years.

So with interest rates having gone up, you know 500+ basis points in the last two years, it really impacts the way that people think about projects. So I think there's a meaningful argument to be made that we are in a much more stable place than we were six months ago. And there's a lot more clarity as to where the economy is going to go in terms of some positive things that have been happening and stabilized values.

And so I think it takes a lot in terms of thinking about where you want to enter a project. Like what type of project do you want to do in terms of whether it be the product type or the location. That's always something you need to think about. But now kind of even more than ever because of the fact that you don't have interest rates just going down and everybody making money on every project.

So I think it's an important thing to be aware of. And those are big things. Construction prices are a lot higher. That has been a result of you know a lot of good times for the development industry which drew in a lot of people to do more projects, which then raised prices right. Basic supply and demand.

That is in addition to some of the effects of COVID-19 and the logistical supply chain issues that were a result of that. So as a result, we've got higher construction costs. We have higher interest rates, so there's challenges in development projects today.

If either you have a really cheap basis on a piece of land, or you are in a position where you've got pretty significant control over your construction costs. I think people are starting to kind of wade back in and think might be a good idea to do a smaller project instead of a really large project today.

But it's an interesting time for sure. Given all the challenges in development and investment.

00:03:17 Gretchen

Well, with all that said, how much capital would you recommend someone have to jump in if they are just getting started in real estate development?

00:03:32 John

Well, that's kind of a tough question. It really depends on where you want to start.

So I started with sort of with let's say negative capital.

I had student loans and I had a lot of experience, but I didn't have a lot of capital. So I did end up borrowing a little bit of money from my 401K. That was how I got started with $25,000 out of my 401K.

If possible, I would want to start at the very least with, $100,000.

Because you know, what are you going to buy? Right?

If you're putting 20% down in cash, then you're probably buying a $500,000 piece of property with $100,000. Which isn't that much today. Depending on your market.

You know you could get something much more significant in a smaller market that is lower growth. But it really just depends if you've got $1,000,000 bucks, then you're in a pretty good place as well. But you know that's a lot to ask, right.

So I think if you can, you can marshall up $50,000-$100,000. I think that's probably a place to start. But I think the other thing to add to that point is like I think that the most important thing to consider is that…

Real estate is a team game.

And you have to understand that you're going to be better off finding people to partner with. Trustworthy people that have similar principles and interests that you have. Because in the end you'll go a lot further and you'll be able to do larger projects.

So you with the $50,000-$100,000 you can do a significant development project, when you have additional investment partners.

And if you don't have capital, you have to find a partner with a meaningful amount of money on their balance sheet. Meaning, many millions of dollars.

So I think it's really just a matter of your ultimate goal, if it's to start buying and doing some smaller projects where you do some improvements to a property and then bring in some good tenants. That is a that's a good way to get started.

And I know a lot of people have started that way. I personally did not start that way, but I think it's a it's a good option if not.

If you really are intent on doing larger projects, you have to have partners and know the business.

If you want to do larger projects you or your family needs to have a significant balance sheet. Or if they don't, then you have to find someone that does.

00:06:23 Gretchen

So we have smaller projects, $50,000- $200,000 to start. So, what is the best product type, you mentioned, multifamily? Is that where you would suggest starting?

00:06:40 John

I think it really depends on the person.

I like multifamily and I like industrial. Those are two products I've worked with.

I know retail is doing well. Certain types of retail and very well located retail, newer retail or buying old dilapidated retail will work.

Malls are interesting, many groups are fixing those up.

So it really it kind of depends on your personality, if you're if you're new to the business and you're learning the business, there is no simple, “Hey do this” and it will work. It's a much more nuanced thing.

It also has to do with how much do you want to deal with tenants.

If you're just starting and if you don't have a large enough project to have a property manager full time, you're going to deal with, a lot of the tenant issues.

So if you have, you know, let's just say a 10-unit multifamily property.

Then you will be getting phone calls in the middle of the night to fix toilets and a lot of people don't like that. I personally don't like that idea.

And so if that's the case, you're probably better off owning, what's referred to as either flex space or contractor garage space. The tenants, they're a business, so you are not going to be dealing with any drama from people's personal lives generally.

And of course, that does happen in business, but generally not. And so that will be a lot easier to deal with. Retail is a similar kind of setup, so anything that's more of a business setup I personally like better. Because it's an easier group to work with if you do larger projects or more than 50 or 60 apartments at a time.

Then you can hire a property manager. People hire property managers for even smaller portfolios. It's just not as cost efficient.

I think it's really just a matter of taste and interest. And I wouldn't say, “Just you do this particular type of product type or project type and you'll have success,” because that's just not realistic.

What matter is what do you want to do? What gets you excited in terms of ownership?

Generally, I think what a person should invest in is driven by their market, and it should be driven by that persons interests.

00:09:29 Gretchen

So OK, that makes that makes a lot of sense. What about the pros and cons of buying new and or rehabbing?

00:09:41 John

Well, if you buy new, your only real upside is going to be in putting in better tenants.

So it really depends on what your strategy is, what your interests are. So if all you want to do is collect cash flow, for example, then buying an existing, well tenanted building at a 5% cap rate. That might do well for you. It's basically like buying a bond.

But, if you're interested in creating more upside for yourself and your investors, then you’re better off looking for projects that are either work in progress, half-full, or half-tenanted type of buildings or buildings that could be improved in terms of the facade or the interiors and then those are good candidates. Those options will give you the ability to create 15 to 20% return on your money on an annualized basis, for you and your investors. Obviously returns can be lower or higher very much depending on the risk reward.

But you know, it comes back to what your main objective is, right?

If your main objective is to maximize how much money you can make, then you know ground-up real estate development is the best option. Because your risk reward ratio is much bigger. You're taking more a lot more risk and you should therefore make a lot more money.

But that is again based on a person's risk profile, what kind of risk tolerance do you have?

So some people are happy to own a piece of real estate and collect the the mailbox money as they call it, and while others are more interested in taking an active approach for larger returns.

00:11:49 Gretchen

And you had mentioned before about having key partners and key investors and people that you trust and share your values for someone just getting started. What are kind of the key relationships that you think you need to have in place to start?

00:12:08 John

Yeah. Well, if you're just getting started, you have to have relationships with a banker. It's always good to know somebody who's a commercial lender because they can tell you what's possible.

Meaning what's likely in terms of getting approvals from their investment committee, and what's the cost of the money as well.

In terms of internal business partners. You need people that complement your skill sets and potentially help you fill out your capital stack. So if you're in a position where you don't have a lot of capital, finding a partner who does matters a lot.

If you are really good at financial analysis, but you're not very good at maybe, going out and finding properties or in developing relationships with owners and with brokers.

Then you probably want to find someone to do that, because that's an important part of our business.

Similarly, if you are an attorney then and you've looked at deals from a legal standpoint many times.

Whether it's land use or transactional, then you might want to find somebody who has experience working with buildings physically. So whether it be in design of the buildings, management of the buildings, financial analysis, all those pieces.

No matter what skillset you have, you can build a team by surrounding yourself with people who know other elements of the development business.

You can learn most of the business along the way.

I wouldn't say you can learn the legal side of the business too easily, but you have to learn some of it at some point.

You can learn a lot of the pieces, but you're better off finding experts that know those pieces inside and out because a it will save you a lot of time and effort.

And there's a lot of risk depending on your strategy when buying real estate and selling real estate.

You want to make sure that you have the right insights, nothing else.

So whether that's on your internal team or external team.

So you can either have that person on your team or they can be your land use attorney or your transactional attorney. Those are two important parts of the puzzle.

Typically you want to know an architect, so that if you have to make improvements or additions they can give you initial feedback. And they can provide you an initial design, so you can then get some initial pricing on from a contractor.

And other important relationship is the contractor. This could be someone who's smaller, who is just kind of starting out, who's building their business.

So they might be a commercial contractor. They might be a single family home contractor or one that builds, builds towers downtown.

It really depends on what you're trying to do and what you're trying to build.

For example, there are contractors that specialize in tenant improvements.Meaning fit outs for offices or industrial fit outs or so.

There are all different types of relationships you have to have.

Example of one of our development team’s from a previous project. This is from a presentation we provided to a local municipality during the approvals process.

The Development Team

So the team should have somebody who knows legal, somebody who knows the finance side, somebody who understands the design, somebody that understands construction, and of course a banker.

Five types of knowledge your development team members need.

Finance
Design
Construction
Legal
Approvals Management

There are the roles you need to fill out for your team. A lot of it can be filled with consultants. Actually the majority of these roles can be development team consultants.

Then you have to determine what do you want to have in house?

So in-house expertise can save you money and time, but it also costs you in terms of the amount of money you make on the back end.

So every time you include someone in a partnership another person owns a percentage of the general partnership.

With each additional GP member, you end up making a significant amount less money. So you have to really think about whether or not you want to have somebody involved.

So those are the pieces of a development team you need to have.

00:16:40 Gretchen

So you've got your team in place, they've got your capital, you sort of have assessed what type of project do you want to start with? Is there a way that you can sort of dip your toe into development?

Without fully committing to see if this is something that would be right for you.

00:17:10 John

I've never thought about that.

There's no real dipping your toe-in. But I would say this if you feel strongly about a project and a piece of property and you’re not sure whether you want to do the project or not.

I think the answer to your question, the first answer is two ways, right.

First answer is if you're not serious about doing this, you're not going to be able to build a team around yourself.

A proper team that's going to support you to figure out a project.

So you have to be committed to building a team.

Once you've done that, you don't have to necessarily commit to a project or a property, but you should write an offer to the seller in the form of an LOI (Letter of Intent).

You first you write a Letter of Intent, which spells out the deal terms, and in that you can indicate that you intend to close based upon receipt of permits.

You can also give yourself a due diligence period. We always give ourselves a due diligence (DD) period.

We typically ask for 60 to 90 days and then we have on top of that, if you're doing a development project, we would typically go and ask for closing contingent upon all of receipt of all of our approvals.

So that gives you a couple of options. The DD-Period gives you time before you have to fully commit to closing.

This allows you to figure out if you have all the capital in-place before you have to commit to the project. You are figuring out, can you do the project?

Does your analysis work? You should know back of the envelope analysis before you write the LOI. This tells you whether it works or not.

But then you can dive deeper into the pro forma, get a little bit more pricing, a little bit more detail during the DD period.

We really figure out whether the deal works and whether we want to commit fully to the deal. And then, once you've created that analysis, you have a very clear picture of where the project will likely go.

Then after the due diligence period, you typically have to commit to what's called going hard on the money. Meaning you put up a deposit of say, $100,000.

At the end of due diligence, many times that $100,000 goes hard, meaning it's committed to the Seller. That's an indication to the Seller that you the Buyer are committed to buying the property.

So those are some options and then when you get into closing contingent on permits, there's a lot of different things that can be done.

They are extensions that can be asked for in terms of the purchase and sale agreement. There are a lot of different angles, but those are the most important.

«END OF INTERVIEW TRANSCRIPT»

We hope you enjoyed this overview of getting started in real estate investment and development! There is a lot more to cover in terms of details on the DD-Period, the Purchase & Sale Agreement, design and construction considerations, etc. Tune in for more in upcoming posts.

Cheers, John

What we are reading:

It is officially tournament time! The annual March Madness is finally here for all us basketball fans. The brackets are set and we have until tomorrow to get our final picks in.

Who do you think will win? My pick is UConn. I have a soft spot in my heart for the Big East. Haha.

On to NBA news…Who cares it’s March Madness baby! No one is watching the NBA right now. For the next 2 weeks it will all be about college basketball. Cheers and good luck with your bracket(s)!