Once investors vet opportunities and purchase a property, they move on to the development process comprising three major stages — pre-development, construction, and post-development. The process must be completed in this order for the best results.
Each phase exists for a reason. Thus, real estate entrepreneurs should thoroughly understand each part of the process before jumping in. Otherwise, they risk diminishing their returns and increasing the chances of losses.
Phase One: Pre-Development
Pre-development begins with an in-depth analysis of the property. While investors should have already inspected the building before purchasing, they must do so again with an even more critical eye to understand how they can add value.
This stage tends to be the longest part of the real estate development process because it involves planning every move and addressing every issue. That way, investors can ensure they have a solid contingency plan to mitigate problems during the second phase.
Vetting properties involves taking note of many factors, including but not limited to:
- Property zoning
- Local government laws and policies
- Construction design
- Tenant negotiations
- Cost analysis and any redesigns
- Market analysis
- Public input, if necessary
Investors shouldn’t move on to the second phase until they are confident that everything is good to go. If such confidence doesn’t exist, they should keep planning or seek a second opinion from a trusted person or firm.
Phase Two: Construction
Once they’re confident with the plans, investors can begin phase two by giving their construction teams the green light and monitoring them closely.
Some questions to ask and consider while monitoring are as follows:
- Are rules and regulations being followed?
- Are contractors sticking to the budget?
- Are things happening on time?
- Does everything meet building standards?
Regardless of the project type (i.e., new development or renovations), keeping an eye on the occurrences is critical. Substandard work is easier to rectify if it’s noticed as it happens rather than months or years down the line.
Those who aren’t construction experts should consider hiring one to ensure their project runs smoothly. After all, construction is the most expensive phase of the real estate development process, with very little room for error.
Investors should expect to pay their construction teams once milestones are reached. The final payment only occurs when the work is complete, and the building has been inspected.
Phase Three: Post-Development
The final phase of the real estate development process gives investors two choices — sell or lease and manage. Depending on the project type, they may also be able to use it as collateral for a loan on a larger project.
Those with outside investors often decide to lease their developments until they’ve repaid initial investments. This is usually seen with multi-family buildings.
However, developers should understand that asset management begins immediately after construction, making them instantly responsible for repairs, general upkeep, and maintenance.
Those who choose to sell stand a better chance of turning a quick profit and beginning their next project sooner. However, they’ll likely owe larger capital gains taxes.