Is it possible to make a 3.6X ROI over 24 months in real estate?

Yes.

But obviously, you will need a highly specialized set of development skills like the guys in this thread.https://abs.twimg.com/emoji/v2/... draggable="false" alt="👇" title="Rückhand Zeigefinger nach unten" aria-label="Emoji: Rückhand Zeigefinger nach unten">

Breaking down real estate developments & the capital stack.
North London council granted this particular developer planning permission to construct a 6-storey building.

It will include 2 commercial units on the ground level and 22 residential apartments divided into four 1 beds, eight 2 beds & ten 3 beds.
The development also had a 2-storey underground carpark (29 spaces in total), plus there is a communal rooftop garden for all residents, too.

It& #39;s a ground-up development and the CGI illustration can be seen in the picture attached.
So let& #39;s jump straight to the project financials.

What makes up the gross development value (GDV)?

The revenue comes from...

• 22 residential units @ avg price £954,545
• 2 commercial units @ avg price £875,472
• additional income from car spaces & freehold income
As all 22 units, together with car parks & 2 commercial spaces are sold the total revenue (GDV) will hit ÂŁ23.2m.

Developments have 4 major costs involved in the process, they are:

• site acquisition costs
• construction costs
• finance costs
• sales costs

Breakdown. https://abs.twimg.com/emoji/v2/... draggable="false" alt="👇" title="Rückhand Zeigefinger nach unten" aria-label="Emoji: Rückhand Zeigefinger nach unten">
The development process costs ÂŁ17m, of which ÂŁ9.35m is construction & ÂŁ5.4m is site acquisition (plus other minor costs).

Finance costs are ÂŁ1.9m, while the cost of sales is ÂŁ2.3m including brokers& #39; fees.

The summary of the business plan can be seen in the attached screenshot.
The outcome for this developer, which has a 20-year track record & 15 successful completions since the early 2000s, is a pre-tax profit of ÂŁ4,123,645.

That is a lot of money to make over 24 months!

But the question is how did they achieve a 361% return?
One of the most important parts of these large real estate construction projects is the ability to raise capital from banks, funds & private investors.

In plain English, many parters getting involved means leverage for the developer and profits for all parties involved.
So let& #39;s break down the capital stack.

Senior debt: usually financed by banks, pension & credit funds, or family offices with very deep pockets.

This is the most defensive part of the stack, so expect a lower return for very low risk.

Gross senior exits @ 64.4% of GDV.
Mezzanine debt: financed by credit funds, family offices & HNW investors.

This is an equity/debt hybrid with a mixture of modest downside protection & equity-like returns.

Gross mezz exits @ 81.0% of GDV in this case.

These investment tranches complete the borrowed capital.
The developer also has skin in the game.

They invested over a million £1.1m into the deal — paying for architect designs, planning permission, building permit, option on the site & other out of pocket costs — make their capital stack position a higher risk, very high return.
So in summary, ÂŁ1,140,194 invested plus additional know-how industry skills resulted in a ÂŁ4,123,645 profit or 3.6X equity multiple.

Since our family personally does not have these high-end skills & connections, co-investing alongside sponsors such as these make complete sense.
Therefore, we opt for a more defensive position in the capital stack, which gave us a 24% margin of safety (cushion to absorb losses),

With a fantastic return of 18% p.a., compounded monthly as passive investors.
This ends up becoming close to 39% ROI in 2 years... not as good as 3.6 times our money, which was the developer& #39;s return.

However, we didn& #39;t have to do any work, we were completely passive & we didn& #39;t leverage our investment nor have recourse loans / personal guarantees.
Here is the capital stack illustration for mezzanine debt + the key project figures & numbers, seen in the chart below. https://abs.twimg.com/emoji/v2/... draggable="false" alt="👇" title="Rückhand Zeigefinger nach unten" aria-label="Emoji: Rückhand Zeigefinger nach unten">
I get questions regarding mezzanine debt, real estate capital stack & construction projects we invest in — so I hope this quick thread on has been at least a bit helpful in understanding the basics of development investing.

More questions? Reach out @ https://theatlasinvestor.com/ ">https://theatlasinvestor.com/">...
You can follow @TihoBrkan.
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