Had an interesting conversation today with a guy looking at building condos / small lot.
One of the questions he had was what kind of returns a developer can expect.
I’m far from an expert on ground up, but I’ve run the numbers on a lot of projects.
Right now, here’s where I think you end up for smaller projects (say, 5-20 units):
- As a rental: If you know what you’re doing, think you can build into a 6.5-7.5% unlevered yield. That means you buy the land all cash and build all cash and, when it’s done, you get roughly 6.5-7.5% on your money annually. You can improve this number by using a construction loan to build and/or refinancing post stabilization.
- For sale: I have seen several 20% ROI deals. Again, this assumes building all cash. Remember, too, that building for sale projects is more of a 24 month project (since the entitlements take longer to secure than those for rental housing)
Just to clarify, it’s not like deals like this are falling off trees. You have to hunt them, know what you’re looking for, and know how to execute. And, of course, there are all kinds of risks with ground-up construction… the scariest of which is the market moving against you during the project.
Still, if I had a ton of my own money, I think I’d be buying pretty high quality land, building rentals on it, and holding them. Long term, owning high quality, non-rent controlled assets in good parts of LA is probably a winner, even with the relatively high cost of land at the moment.
(Note: This post is not a solicitation for investment nor a guarantee of any kind of performance on any particular deal.)