Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected]
Question from James in TX: Hello Brian, my brother and I inherited a 40-acre piece of property recently. It’s a flat piece of property less than a mile outside of a small town with a population of about 12,000 people. Many more people live in the surrounding area on acreage or at least large lots that have been individually developed. We don’t have a use for the 40-acres now or in the future. However, we would like to maximize the value. We’ve watched the population of the area grow for the past 15 years. We think there might be good money to be made by developing the acreage into a residential development with large lots (1/2 acre each). We know that we have a lot to learn before taking on this venture and that we’ll need to raise money. To get started, we just want an answer to a basic question. How do real estate developers make money? Thanks in advance.
Answer: Hello James. In short, property developers make their money by maximizing the value of the land they are working with. You’ve stated that your goal is doing this by developing residential houses, so I assume you know that the property is zoned for this. Otherwise, you need to start by looking into whether the zoning can be changed. Many rural areas limit how small you can subdivide property along with having “use” restrictions. A successful developer doesn’t try to fit a square peg into a round hole. That means not trying to develop something that has too many unknown variables. It’s a step-by-step process that when followed correctly will result in a handsome profit.
With that said, a 40-acre development would be considered a moderate project in areas with a larger population but is a large project according to the way you describe the surrounding area. Because you will have to bring in other investors, I suggest you begin by engaging a real estate attorney to decide how to structure the business. It could be you and your brother operating a business entity such as an LLC that takes the largest risk. Since you already own the land, that should serve as your primary investment in the project and satisfy other investors who will insist that you have skin in the game.
Most investors still won’t put money in the deal until zoning laws are aligned with the project and permits are available. This requires you, as the developer, to …….