• John Frezza

How Much Money do Real Estate Developers Make?

Updated: Oct 12, 2021

That's like asking, "How tall is a staircase?"



Development projects have a lot of factors that influence their potential profitability.


To list a few:

  • Scope

  • Location

  • Prices

  • Timing

  • Interest Rates

  • Financing

  • Equity

  • etc.

Since developers have the vision and take on the risk of paying back the loan, finding land, selling/leasing, etc., they usually see the biggest return.


Now there are developers that are entrepreneurs and work for themselves, then there are developers that work for large companies and have some of the same responsibilities.


Entrepreneurial developers find opportunities and gather resources. These guys build deep teams of experienced professionals, digest as much new information as possible, and negotiate complex topics with the city. They do all of this while nurturing relationships with investors and bankers to ensure future projects always have enough money.


While working for a firm as a development associate, manager, VP, etc., you can earn a salary, bonus, and even receive equity in deals. Real estate development salaries vary widely but if you're curious and looking for a reliable resource, check this out.


A guy new to real estate development with zero experience and a bachelor's degree could start as an analyst making $50,000 - $60,000/yr and quickly work up to over $100,000/yr. The hard part is getting a foot in the door.


The goal is to start your own company.


Being completely transparent, the opportunity to make real money is what originally got me hooked on the idea of being a real estate developer, the entrepreneur kind.


  • It's estimated that 80% of millionaires worldwide created their wealth in real estate.


People are lying if they try to tell you they want to be in development, private equity, or investment banking for the greater good. The biggest difference between development and PE/IB is that the biproduct of our hard work has a positive and lasting impact on the world around us regardless of whether that was the original intention or not.



Justification aside, in this post I'll dip into the nuts and bolts of how much money real estate developers can make with a few different project examples and touch on why real estate provides this opportunity.


Project Example


To keep things simple, I'm not going to run an entire proforma with a hundred assumptions, years of cash flows, and complicated return metrics. If you're interested in a robust proforma that has a lot of bells and whistles, check this out.


My goal is to show how much money a real estate developer could make after a single development project. The simplest way to do that, a profit & loss statement.


A P&L statement is income - expenses resulting in profit.


First lets lay out some basic information about this fictitious development project:


Location: Central TX

Number of Acres: 20

Number of Lots: 80

Land Purchase Price: $400,000

Total Entitlement Costs: $110,000

Total Construction Costs: $1,200,000

Finished Lot Value: $32,500

Closing Cost % of Value: 3.0%

Net Value Finished Lots: $2,522,000

Equity: 50%

Avg. Interest Rate: 8.0%


Here is a P&L using the above numbers:


Income

Gross Sales Revenue 2,600,000

- Selling Costs (78,000)

Total Income 2,522,000


Expenses

Land Purchase Cost 400,000

Entitlement Cost 110,000

Construction Cost 1,200,000

Financing Costs 12,480

Total Project Costs 1,722,480


Net Project Profit 799,520


The 80 lots in this project were "sold" over a pretty aggressive span of 8 months. Given the current shortage of residential inventory it could be argued this is conservative, especially in Central Texas.


At 50% equity and project costs of about $1,710,000, the developer would need to come up with $910,000. That does not necessarily mean the developer has to invest $910,000 of his own money.


The beautiful thing about development is how creative you can get when structuring deals. The developer could structure it to where he invests 10% of project costs, or $91,000. Then raise the remaining 40% or $364,000, from investors. The "capital stack" would look something like this.



The only problems with having less skin in the game are receiving less profit once the lots are sold and getting investors on board. If a developer had only 10% equity but found the deal and managed the entire project, they could expect a profit split of 20%-40% depending on their experience and how effectively they could negotiate.


Investors like to see when developers have their own money on the line. Some developers that are starting out will joint venture with others that have money.


But say you had 10% equity in the above project, negotiated a 30% flat profit, and the deal made $800,000. You would have earned $240,000 before taxes for a $91,000 investment. Not bad....



Also, this is a very modest project.


10X, 20X, even 50X this and the numbers get interesting.


Considerations


Before embarking on a project developers will usually run a proforma. The bigger the project, the more complex and robust the proforma typically gets.


But there are some factors that can't be quantified.


Never underestimate your gut feeling.

There's a reason why large investment and development companies usually hold some variation of a "gut check" meeting before kicking off a project. More on this here.


Trusting your gut does not mean fearing uncertainty and backing out because "it's risky".


Driving your car to work is risky.


Every project has some level of risk and it's important to know your tolerance. Being self aware will help you make better decisions short and long term.


Conclusion


Real estate developers make as much money as they want.



If developers work extremely hard to develop several projects over a short period of time and catch an incredible streak of luck where the market booms, they can sip Mai Thai's on their favorite beach counting grains of sand until the end of time.


Large paydays offer the added opportunity to reinvest earnings creating sources of passive income. more on investment properties here.


Most developers have portfolios managed by 3rd party companies that generate enough to either develop more land or buy more property.


The bottom line, developing real estate can be very hard, but very worth it.


Why are you interesting in becoming a developer?


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