Don’t Break this Cardinal Rule of Development
We’re supposed to love what we do. “Follow your passion,” they say! Passion and love for the craft are what drives us in whatever we pursue. If you’re on this site, it’s a no-brainer to say you’ve got some love for real estate. Yet this passion, when misaligned with our fundamentals and intuition, can take us down a wrong path in a heartbeat.
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Not too long ago a colleague of mine was tipped off to the acquisition of an exciting historic rehabilitation development. The old structure is located in an “up and coming” neighborhood with excellent access to transit, amenities, local shopping, and dining. You know when your favorite broker tells you this place is “up and coming” before all the others start saying it’s “up and coming”?! That’s what this felt like.
The neighborhood felt fresh, young, and ripe for new development and revitalization. Everything, and I mean everything, looked great at first glance—the neighborhood, the vibrancy in the air, the back of the envelope pro forma—it was all fitting together nicely.
I was getting more and more excited about the project as we jumped into the market research, schematic design, and initial due diligence. “Wow, is this going to be an amazing project or what!” we’d say! I could visualize exactly how important this development was to the street-scape and the surrounding neighborhood. If we hit a home run with this project, it’d be something special! It could spur on a wave of development that the neighborhood could be proud of.
There Was One Problem…
The numbers, when digging deeper, just weren’t adding up! The more the modeling got more specific, the more it just wasn’t penciling out. Well maybe we can negotiate the acquisition price down substantially, and maybe we can put in a much lower grade finish level in the units, and maybe our already conservative cash flow projections are too conservative. What if we take away amenity space and turn it into an additional unit.
These are all viable options and part of the process. However, if you see yourself asking these same questions and they start coming one after the other… STOP and give yourself a reality check!
I had to have a strong heart to heart with myself over the project because I was loving it too much. Yet, I was loving everything about it BUT the aspects that needed to be in place for it all to happen correctly—the numbers. So I sat myself down, poured a cup of generous cup of coffee and said “Kyle, I know you are loving this project like it’s your first born child, but seriously, don’t don’t don’t break this cardinal rule.”
And what is this cardinal rule, you ask?!
It’s easy: Real estate development should only be treated like a simple box. Have passion for the art and craft of building. But don’t let your passion cloud your logic. So with this box you only do three things. You 1) put money into it, 2) manage and operate it, and 3) get money out of it.
This lesson was the absolute very first thing a mentor told me when I first got interested in developing real estate. Seriously, it really was the absolute first thing he said to me. And I’ll never forget it because I could tell he had the conviction that only comes with experience when he said it. His point: never forget the rule. It’ll keep your logic sound when you start to face the difficult decisions.
It has stuck with me and kept me sane when I start to deviate from my numbers. It’s extremely easy to fall in love with a potential project (like I did). And why not? Real estate development is awesome! You have the opportunity to build something special that could drastically improve the surroundings of a given area…how cool is that!? But given that real estate investing, acquisitions, and development are large business ventures, they have to be treated as such.
I’m still picking through my model and looking over our architectural renderings. But the more I look back at the situation and get all excited about the possibilities, the more I’m reminded of that simple, yet powerful cardinal rule of real estate investing and development. You 1) put money into it, 2) manage and operate it, and 3) get money out of it.
Photo: seyed mostafa zamani