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I made $215,000 on this deal before I even bought it and I'm going to show you how to do that today and walk you through how developers make money on these deals because you don't have to be an expert in commercial real estate to do that exact same [Music] thing up first we have property appreciation buying low and selling high at the heart of real estate investing is the principle of buying low and selling higher than what you paid for it it's not just a catchy phrase it is a fundamental strategy that underpins the success of many developers the idea is simple yep pretty powerful acquire properties at a price below their intrinsic value then sell them when that value has appreciated significantly successful real estate developers have a knack for spotting opportunities where others simply may not they scour the market for properties that are undervalued due to various factors such as neglect poor condition or they just have simply been overlooked these properties can often have hidden potential whether it's a residential home that needs renovation a commercial building in need of modernization or vacant land with unlimited development possibilities by identifying these undervalued properties developers position themselves to make substantial profits developers then roll up their sleeves and execute strategic improvements to enhance a property's appeal and its market value this could involve a range of activities and is known as for forced appreciation forced appreciation is a relatively simple concept to understand all you need to do is increase the net operating income of the property right that is the net cash flow that you are receiving on the asset because based on a cap rate you will be increasing the overall value of the property so there's really only two ways that you can control what the noi is either your income goes up or your expenses go down pretty simple and straightforward so there's two ways you can really go about doing that that's with signing new leases or creating better operations on the property so new leases we're talking you know five 10year deals with new tenants right they're going to be paying higher rents hopefully than what you have been getting with the property so this is either filling current vacancies or you're renewing tenants at a higher rate and if you want to do that you really need to Rena or upgrade the property now when it comes to Renovations I really focus on the assets that tenants are going to pay for so that's typically exterior paint sealing and striping the parking lot maybe you're adding a tenant directory or upgrading the lighting to Led Led lighting not only looks better in the building but it will also save you additional money on your operation side because you're going to be spending less money on utilities and even if you're in a triple that lease where the tenants are responsible for that every dollar that they save each month is another dollar in rent that they could theoretically pay you as the landlord on the better operations side you really want to control your expenses it's very easy for you as a landlord to over time just start to increase items that don't necessarily need to be increased go back and look at your Landscaping contract look at your HVAC contract see if there's any way that you can start cutting expenses out of there you also want to make sure sure that you are streamlining the way that you are handling tenants so better management is one way that you can actually do this because when you are managing the property better and your property management team has strong relationships with your tenants you're going to have less turnover which means fewer months without any rental income therefore increasing your noi unlike waiting for market conditions to naturally increase a property's value like you kind of have to do with residential real estate developers actively take steps to raise it's worth and that's exactly what I did on this property that I showed you earlier in the video before we closed on the property we actually signed a lease that ended up valuing the property at $650,000 while we were under contract to buy it for $435,000 again before we even bought the deal we' already made over $200,000 you can also strategically invest in improvements that you know will result in a higher property value this might mean spending money on upgrades that yield a higher return on invest M your Roi or that align with market demand for incom producing properties increasing rental income through improvements can directly impact its value for example upgrading amenities in a multif family building can justify higher rent rates thus increasing the property's value developers often time their improvements to align with market trends too making upgrades before an area undergoes gentrification or when demand for a particular type of property is high can lead to substantial appreciation for example let's take the first deal that I ever syndicated over off of Travis drive here in Nashville we bought the property for $980,000 and it was mostly vacant and needed a lot of work we spent $230,000 renovating the property and split it up into 17 different spaces within a few months we had signed 17 leases significantly increasing the value of the property and sold it within 16 months for a, 650 almost $450,000 more than what we had put into the property so what's the big takeaway from all this it's pretty straightforward finding those undervalued properties and adding value is the name of the game Real Estate developers aren't just lucky they're smart they pay attention and take advantage of opportunities when they see them they know how to spot potential where others might not see it and they know how to turn that potential Into Cash by adding value so whether it's recognizing the potential in a neglected property executing well-planned Renovations or strategically forcing appreciation successful developers are masters of this process by understanding this principle aspiring investors can unlock the potential of real estate as a wealth building tool now one of the big ways that real estate developers make money is by charging development fees these fees are like golden tickets that developers use to fund their projects and line their pockets along the way so how exactly do developers make money through development fees well it starts with charging fees for managing the entire development process from acquiring the land to overseeing construction and ultimately releasing or selling the finished product developers are like maestros orchestrating a symphony of financial transactions these fees can take many forms such as acquisition fees construction management fees and leasing or sales commissions depending on how the developers business is structured and here's the kicker developers can generate income from these fees even if they're not investing their own Capital into the project even if they're not even a partner in the project talk about a win-win now you might be wondering how do developers determine the amount of these fees well it all boils down to the size and scope of the project for smaller projects developers typically charge around 8 to 10% of the total Construction and design costs but for larger projects these fees tend to fall within the 3 to 5% range it's important that developers effectively communicate the value of these fees to their investors and their Partners it's not just about the numbers it's about showcasing the expertise and value that developers bring to the table after all good developers don't just build buildings they build relationships and create opportunities for Success all right let's break down ancillary revenue streams these are all about the additional income streams that developers can tap into to boost their bottom line we're talking about parking fees vending machines laundry facilities storage units you name it take parking fees for example imagine you're developing a mixed use property with a spacious parking lot by charging tenants or visitors for parking you're not only providing in a valuable service but also generating a steady stream of income it's like turning empty asphalt into cash but it doesn't stop there either developers can get creative with ancillary revenue streams from installing vending machines and common areas to offering on-site laundry facilities or even renting out storage units these little add-ons can add up to big bucks and significantly boost the overall profitability of the project by maximizing the value of every Square in of property you're not just creating forced Equity you're creating new OPP opportunities to pad your pockets and drive profits through the roof all right let's talk about profit sharing this is an exciting way that developers make money by getting a piece of the pie from the success of their projects here's how it works developers participate in a share of the profits generated by the development project pretty simple right this can be structured in various ways but it often involves receiving a percentage of the net operating income or sale proceeds so when the project turns a profit developers get to cash in on their their hard work and their Vision the first project that I ever did before I had any experience was a profit sharing project I bound the deal put it together ran it through all of the entitlements engineering construction Etc and didn't have to put any money into it but I got 10% profit share pretty great deal if you ask me now we're on to equity ownership owning a stake in the development process and cashing in on its longterm success we're talking about earning a slice of the rental income appreciation and potential sale profits that is actually backed by equity in the deal because developers could also be third-party fee developers they don't necessarily need to be a partner in the project for them to be the developer on it so picture this you're a developer with a stake and a condominium building and as tenants move in and start paying rent you're earning a share of that income but here's where it gets really exciting as the property appreciates in value over time so does your Equity stake when the time comes to sell the building that's when you get to cash in on those projects for example this office building that I'm in right now we bought in 2019 at 40% occupancy that means it was 60% vacant today it's at 100% occupancy and the value of the property has more than doubled meaning that My Equity stake in the property hasn't just doubled right because our debt is fixed most of the doubling has been just additional equity in the property so my stake has probably tripled or quadrupled since 2019 but here's the key successful Equity ownership requires strategic Partnerships and a Keen Eye for Opportunity by aligning yourself with the right partners and investing in projects with strong growth potential you're setting yourself up for long-term success make sure that you are doing everything you can to investigate those partners and make sure they are the right ones the last way real estate developers make money that we will discuss is through financing strategies real estate developers are masters of the money game using creative techniques to squeeze every last drop of profit out of their projects if you're already doing the project you might as well make more money on it right from seller finance ing to tax credits to opportunity zones there's no shortage of tricks up their sleeves take seller financing for example instead of relying solely on traditional lenders Savvy developers negotiate deals with property sellers to finance a portion of the purchase price this not only reduces The Upfront costs that you have to come out of pocket for but it also allows developers to stretch their dollars further and maximize those returns developers can also leverage tax credits and opportunity zones to generate additional profits by tapping into these incentives developers can offset project costs reduce tax liabilities and unlock new sources of financing that wouldn't really be available otherwise now let's talk about the Strategic use of debt and Equity by carefully balancing these two financing sources developers can optimize their capital structure and boost project profitability it's all about finding the right mix of financing to fuel growth and drive returns all right and there you have it that is how real estate developers make money we've covered it all from appreciation to rental income forced Equity to fees and everything in between but here's the thing successful developers know that relying on just one income stream isn't enough that's why diversifying your Revenue sources and staying adaptable to market conditions is key to your long-term success whether it's through strategic Partnerships creative financing or Innovative Revenue generating strategies the possibilities are endless so don't be afraid to think outside of the box and explore new opportunities to maximize your profits and if you're hungry for more real estate insights and want to dive even deeper into these strategies be sure to check out my course with in-depth lessons and real world case studies it's the perfect resource for taking your real estate game to the next level it's called The Beginner's Guide to commercial real estate investing it's got every lesson that you will need to learn how to do this properly the step-by-step investment blueprint all of the downloads and resources underwriting spreadsheets checklist you name it it's there check it out in the description below we'll see you guys in the next one