Barriers to Entry in Real Estate Development? Real or Perceived?
Real estate development can be a very lucrative business, but it has some barriers to entry. In my personal experience, the main barriers were my lack of knowledge and experience.
The rest of the barriers were ones that could be overcome. Development is a capital-intensive business, and it requires significant capital to get started. The biggest barrier to entry for someone with actual knowledge and experience is typically the need for equity to put into the deal, a strong balance sheet to secure a loan, and sufficient liquidity. Banks usually require a net worth equal to the size of the loan, with 10% of the loan amount being liquid as reserves.
However, these barriers can be overcome by forming partnerships. In partnerships, other individuals or entities provide the necessary equity and balance sheet, opening the doors to real estate development opportunities that would otherwise be closed.
It's important to remember that in order to succeed in real estate development, you may need to be willing to split the pie or not eat at all. By forming partnerships, you can access the capital and resources needed to bring projects to fruition.
We were able to overcome the capital barriers by forming partnerships with different wealthy individuals, family offices and sometimes syndicating deals among many smaller investors.
There is plenty of capital out there looking for a home; the key is being able to present yourself and the deal as being worthy of that hard-earned capital. Be worthy by gaining experience by starting small and going bigger or by working for a large developer and then going off on your own. Learn to find deals, form partnerships, then execute. The barriers to entry are real but not insurmountable. You decide which level you choose to play on, whether consciously or not.
Everyone has the "want" to play at a high level, but not everyone has the perseverance to put in the years of hard effort working on yourself to get the skills and the mindset to play at the highest level.