New construction, what is a good business plan and how to examine an investment

#יםמהשבוי# Dor Goldstein # Post 5#
The first post that dealt with macro described a situation that exists in most of the US, where houses are still sold close to the construction price.
It is possible in concentrated construction in large quantities to reduce costs and reach some kind of profitability, personally I connect more with quality over quantity, mainly because then you can create beautiful things and invest in the small details, compared to work by weight where you have to cut back on every detail because everything is in multiples.
In practice, 10 apartments in an expensive area can cost as much as 100 houses in a cheap area.
To illustrate, in good Brooklyn neighborhoods apartments sell for over $1,500 a foot. In Israeli terms, a 100-meter apartment costs one and a half million plus or minus dollars.
In New York as a metropolis, the prices are high, and the level of difficulty accordingly. There are countless factors that can increase the price, delay, stall, and complicate a project. Entrepreneurs who are not experienced in the specific area will encounter problems and deviate from the plan.
Out of the necessity of those difficulties, the opportunity arises, rental flips and other ventures that require relatively low capital and knowledge, therefore there is high competition.
In new construction, the competition is much lower.
The profit share is usually about 100% of the equity.
The nicest thing in the whole story is that you can influence a certain street or neighborhood, and plant a building there that will remain forever, like a statue or other work of art.
As an investor, projects of this type return the most at a discount and the execution is good, in the two current projects I am currently executing a conservative plan reaches close to 20% annual return.
Volatility is high and projects can be delayed,
An example of a healthy business plan versus an overly optimistic and ambitious plan, I will use two real examples.
In the past, before I entered the field, my father invested with a fund that, for the sake of our story, will be called a registration fund (like to impress) in a project that the fund raised for, please note, the fund raised, it is not the entrepreneur, it earns this way or that, and in the arrangement that the fund used to make, the entrepreneur would also earn this way or so
In practice, for every dollar that would come out of the investor's pocket, only 80 cents would land in the project, the rest would pay all kinds of fees, management, recruitment, etc., etc.
Meaning the project starts with minus 20%.
The first fault is the fund's model, when its profit is in the form of "some kind of false fee" its interest becomes to make as much volume as possible, and not necessarily projects with high chances of success. The phrase moral hazard describes a situation where taking the money does not come with responsibility for the money, in this example, in addition to the fact that there is no responsibility, it is also worth the fund to simply do as much fundraising as possible...
Second failure, the plan was to turn an 8-apartment building into one luxury house and sell it for 21 million dollars...you don't need to understand anything about real estate to know that there are many more potential buyers for 1 million compared to 20m.
Fast forward, the prockit failed, the investors lost everything, the registration fund and the developer earned their commission.
In contrast, in my project that started half a year ago, I raised the capital myself, I put in a 7-digit amount in shekels, so from the beginning it is clear that I have something to lose as an entrepreneur, and it is clear that I believe in the project and the plan.
The program, you built 6 apartments at prices of 1.7m on average, which is normal for the area, does not jump above the average and does not need some billionaire to buy my product, there are ordinary people who buy such apartments all the time.
Low leverage, approximately 60% of the total cost, means that the finished building has less than 40% of the value owed on it, leaving a lot of flexibility if there are delays. The risk of losing equity in real estate is first and foremost leverage.
High leverage together with unplanned expenses and delays may end up in a situation where the debt exceeds the value of the collateral (the asset bought with equity)
A short summary and a sentence worth remembering, "You shouldn't trust people, it's better to trust the situation"
An entrepreneur who puts in respectable equity capital, who knows the task, who takes reasonable leverage and whose business plan does not need "favors from anyone", means that they do not rely on an exceptional approval from the municipality or an exceptional buyer or any exceptional event in order for the plan to succeed.
This is a situation that puts the investment in the right hands, because the entrepreneur must make it work, the numbers tell the story as usual.
This does not mean that mistakes cannot happen, but it does mean that the decision was made based on correct realistic factors and not on feelings or trust in humans which unfortunately tend to disappoint.
It also doesn't mean that there aren't good people in the field, I personally know several entrepreneurs who returned investors more than they owed because they felt they were disappointing or because an investor needed money early from the end of the project, etc.
But, here too the situation plays a role, if the plan is good and the leverage is right then the entrepreneur has the possibility to be "large".
Photos of two buildings under construction in Brooklyn
6 apartments in each

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