Thread by @TihoBrkan

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.👇

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's a ground-up development and the CGI illustration can be seen in the picture attached.

So let'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 £23.2m.

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

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

Breakdown. 👇

The development process costs £17m, of which £9.35m is construction & £5.4m is site acquisition (plus other minor costs).

Finance costs are £1.9m, while the cost of sales is £2.3m including brokers' 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 £4,123,645.

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'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, £1,140,194 invested plus additional know-how industry skills resulted in a £4,123,645 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's return.

However, we didn't have to do any work, we were completely passive & we didn'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. 👇

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 @ theatlasinvestor.com