On seizing opportunities:
10y ago, I had an itch to work as a cook. And I wanted to work in the best restaurant that would take me.
I applied to 10 different restaurants. One responded, telling me I could stage (ie. work for free) once a week.
I jumped.
1/x
How Real Estate Developers Make Money:
Merchant builders are real estate developers whom build properties for tenants like Chipotle or Starbucks then sell the property upon completion of construction.
This strategy optimizes compounding of capital when compared to holding for cash flow, which I breakdown below.
Corporate backed net lease properties are typically built to a 6.5-8% yield on cost and on average there is 100-150 basis points of profit spread.
For example (and in English), if a developer builds to an 8% yield on $150K in rent this means it cost $1,875,000 to build. ($150K/.08)
When they got "150 basis points of spread", this means they sold at a 6.5% cap which is $2,307,692 ($150K/.065).
Sale Price of $2,307,692 - $1,875,000 cost = $432,692 profit.
Assuming a 25% down payment for the construction loan that equates to $468,750.
$432,692 profit / $468,750 down payment = 92% return on capital.
In reality, construction costs typically come in higher and exit values are softening which tightens these spreads in the real world - plenty of risks.
With debt at ~7%, cash on cash for holding a property tends to be in the 5-6.5% range so by selling the asset the developer is able to get a multiple on the cash flow they would receive up front - the crux of the strategy is buying, building, then selling to redeploy that larger chunk of capital into the next project.
In summary, a developer can hold at a ~6-7% cash flow return or sell and get a return on equity of 92% in this example.
When doing a ground lease (leasing just the land), the calculus of selling vs. holding is even more favorable because there is no depreciation write off so every dollar you receive is subject to ordinary income tax of 37-52% depending on where they live.
Holding for cash flow and depreciation benefits has plenty of merits, but the buy, build then redeploy capital model yields optimal compounded returns.
Quick Thursday afternoon update from Dutch Bros Coffee. We are giving away free drinks at :
The Florida Mall
8001 S. Orange Blossom Trail
Orlando FL
We are here from 12-6 today. Come say hi
@dudewithacigar@DutchBros@SKECHERSUSA@Crocs Looking forward to it! Just saw the one in Orlando hit the market, set for 24 completion as well.
I predict they will crush it in FL.
@StudentRentPro @shaunisspatial FWIW- it was an 8bed room/3bathroom. It just got knocked down after a 50 year run.
I can still smell the booze that was soaked into the floors.
@StudentRentPro @shaunisspatial Graduated in 2018, but there are sooo many old offices that were converted to mini frat houses. We had “ The White House” which was this exactly.
I remember on dads wknd, one of the dads came in the WH, “no fkn way. I partied here in the 70s. I can’t believe it’s still standin”