How much do land developers and home builders make on an average project?
The profit resulting from land development and housing construction is hard to predict due to the many associated risks and the scale of upfront investment required. In general, profits tend to be lower than most people believe, and can be significantly less than other industries.
Due to the variation on type of project, location, scale, construction costs and market conditions, a specific profit margin percentage can be difficult to provide.
But a useful rule of thumb when calculating the profit margin on a project is to look at what profit projections are typically required by a major bank looking to finance the construction of a project.
- For high-rise residential for sale, this is approximately 8-13%
- For single-family homes, this is approximately 7-12%
Profit is not guaranteed because builders and developers take on considerable financial risk investing large amounts of their own money in future projects that can take a decade or more to come to market.
For comparison, different industry sectors in Canada have varying levels of return on investment – ranging from the high end with telecommunications and financial institutions (which can be 30% or higher) to the low end with fast-turning retail and food service (which can be as low as 2-4%). And while other industries can turn around a return on investment in days and months (think 30–90 days), the average number of years to complete a high-rise development in the GTA is 10 years, and a low-rise is 11 years on average. So the time horizon to realize this return is significantly longer for development than other industries with comparable margins. Put another way, the rates of return for development and housing are moderate compared to the risk and very long time horizons.
Industrial & Commercial Development
Industrial and commercial developers and builders deliver space for new and expanding work spaces, warehouses and distribution facilities, retail spaces and office buildings. Unlike their residential counterparts, commercial builders typically retain ownership and look to lease spaces in these buildings rather than sell them. This model aims to provide stable cash flows over a long period of time to generate returns on investment.