How do you get started as a Small Developer? Here are 3 Options:
Over the past 5 years we have trained and coached lots of folks looking to do their first development project. I always press rookie developers to Start Small. Start with a modest project that you can handle as a side hustle to your current day job or income source. Renovate a house. Do a HouseHack so that you can liver rent free. Maybe convert your garage to an Accessory Dwelling Unit to rent out. At that scale your mistakes will not be life threatening and you can move through the entire arc of a project from concept through permitting, budgeting, financing, construction and leasing. But what happens after you get your freshman project completed and you decide that you want to make small scale incremental development your main gig?
Other folks may recommend that you go to work for an established development outfit. Most small and medium sized developers contract out almost all of the help they need, so the idea that you could go to work for a developer and learn the business typically means that you will end up applying to work for a larger outfit. In my view that’s not a great idea if the business you want to learn is small scale incremental development. A large development shop is a good place to learn how to do larger scale projects, probably within a narrow specialty. Some of those skills and network connections can be applied to work at the neighborhood scale, but large scale development really is a parallel system from incremental neighborhood scale work.
It is important to cultivate a local cohort of other small developers to collaborate with. These are not your competitors in the typical sense. It will be very helpful if you can learn how to treat each other as colleagues and resources. regardless which of the options below works for you, it is important to find your people and hold each other accountable.
1.) The Side Hustle.
Continue to take on modest scale projects as a side hustle while maintaining a day job to build and hold to increase your passive income cash flow to a point where you can quit your day job. This process can be accelerated by reducing your domestic overhead and completing a 2-4 unit project that allows you to live rent free.
2.) The larger scale, mostly fee deal.
Find a project with large enough to replace you day job income with an acquisition fee of 3% on the purchase and a developer fee of 5% of budgeted hard costs. Once you have the property under control and the pro forma worked out, find a capital partner with a balance sheet the bank finds acceptable to guaranty the construction loan. You propose a split of the cash flow that is reasonable to compensate your capital partner for putting their capital and their guaranty at risk. These are typically an agreed percentage of the cash flow after operating expense and debt service, including any cash out refinance or net sale proceeds. For a developer without much of a track record you should propose a 25% to 40% share of the cash flow, but make sure the Capital partner is likely to see an IRR of at least 20% over the holding period. The typical hold period is 7 to 10 years. That is a 2 year construction loan refinanced with a 5 year commercial loan or two.
3.) Supplement development work with design and consulting work.
Planning and urban design work isYou will also be out and about able to find potential projects and investors within your sphere of operations, the local area you are focused upon.
If you already have your own consultancy, send out a letter at the end of a quarter advising your current clients that you are reducing the amount of time you will be devoting to consulting engagements and raising your hourly rate at the end of the quarter to allow for the time needed for your own development projects. Raise your rates by 50%.
This will have the effect of firing the bottom 20-25% of your clients and reinforcing the relationship with your better clients. It will also open the door to conversations about the kind of development projects you are pursuing. Your response should be along the lines of, we have several projects under active consideration , but it is too early for us to be taking on capital partners. (translation: I am looking around for a good project, but I don't have any property under control yet and I don't have a package to put in front of a potential investor).