New build profit margin

[Anthony Carpenter]

I am looking at buying a couple of acres to put some home sites on. Another builder just did the same thing. The houses start at 283 what is a profit margin for this type of build?

[Joel Owens]

It will vary by area. Look up Jon Klaus on here and Bryan Hancock. They are doing new home building in Texas.

[Steve K]

I aim for a minimum of 25% on specs built with cash and 18% for anything with debt. The guys doing infill projects are doing much better than that.

[John Blackman]

New construction should yield at least 20% gross margin to make it worth the time. It takes about a year end to end to do a project. Your gross margin number should also be considered your market shock factor. You need to be able to stomach a drop in housing prices up to your gross margin.

In Austin you can do better than 20%, but not always.

[Bryan Hancock]

The question really is what you and/or your investors can tolerate for margins and if the project makes sense given the risks. Developing property is risky and movements in the market can quickly swallow up projects with 10% margins. As John said you want to make sure you have enough cushion to still move inventory and make a profit if the prices move. In Texas there really aren't huge swings in exit numbers like there are in other areas of the country so you can probably tolerate operating on slimmer margins given the risk of market movements.

Having said that you should consider the alternatives for that capital. Why go through the time, expense, brain damage, etc. of doing a development project if you could fetch similar yields doing some bond investments? I'd say 20% or so is probably a good number to make it worth my time. Every person has different needs from their investments though.

[John Noriega]

A quick clarification please.  

In my experience when an RE investor says they want a 20% margin they mean they put in $100K and get out $120K.  The $20K difference is is 20% of the $100K put in.

In standard business the final price at 20 points margin would be $125K.  

Price = Cost/(1-margin)

At $100K invest that's only $5K difference,  but when looking at more expensive projects it makes big difference:  $25K on $500K, $40K on $800K.

For 25 point margin the difference is even larger: $8K on $100K, $41K on $500K, $66K on $800K.

Since I am looking at a project that will be in the $800K+ range I really need to know what the advisors above mean when they quote a margin.

[Jay Hinrichs]

@John Noriega 

  Every market is different across the country.. It really depends on availability of lots and the competition.  IN our Portlandia market...  profits because of intense competition run 10 to 15% of Gross... so 300k house will NET  30 to 45k  all in with all cost associated with the build job.  20% of gross does happen as well on some of the higher priced properties were completion thins out dramatically.  But the risk also goes up.. when markets here belch a little bit the higher end houses can see price reductions that are significant.

Where building makes sense in our market for these margins is for those that can borrow from banks.. If you have an established relationship the market for these loans is 90% of costs so only 10% of equity, rates at 5 to 6.5% ... So when doing a 300k home only 30k is required down so a 10% profit on Gross is a 100% COC return and our market is a 6 to 9 month turn cycle market.. At least it has been in the last 30 months with virtually all new construction selling within 30 days of completion or prior to completion. Those builders that need hard money of course are working on razor thin margins. Its all tied to how well you buy the land..

[Isaac Abeyta]

Has anyone here considered building new houses, duplexes, triplexes, and then holding them to rent out, refi, and roll into another similar project?

Why, or why not?

[Jared S.]

Profit margins, typically, are around 10-15%.  Ex: in my area, you can build a 2000 sq ft house at $100 a sq ft.  That's $200k in construction costs.  Add another $20k for impact fees, other fees, taxes, etc.  Now you're at $220k.  The lot in a decent area, in my area anyway, you're looking at about $80k.  So you're at $300k in total costs already.  This home in my area, being new construction typically sell for around $350k, if you're lucky.  Not much in the way of profit margin.

For a $1M custom build, I have no idea. 

[Jw K.]

20% off the money you put into it or 20% of the sale price?

[Joseph Diandrea]

Originally posted by @Isaac Abeyta:

Has anyone here considered building new houses, duplexes, triplexes, and then holding them to rent out, refi, and roll into another similar project?

Why, or why not?

 Would love some information on this if anyone would be willing!

[Ryan Taylor]

@Isaac Abeyta, @Joseph Diandrea

Hi guys, have you found anything useful about your new-build buy and holds? I'm planning a new duplex build and the numbers aren't fantastic so it's got me on the fence. I was scrolling this conversation to see if there was any conversation that could help me out. 

Here's what I've got going:

I own a 3000 sqft duplex and currently live in one half. I rent the other side for $850/month. I also own the empty lot next door and am planning to build an exact replica of my current duplex on that lot. Ill move into the new duplex so i can get owner/occupant financing... So, the numbers I'm using to plan with are: 

$20,000 already in the deal - price for the lot (0.35acre) (not financed)

$195,000 to build

$850/mo per side ($1700/mo total)

3% maintenance

5% vacancy

7% capex

$770/yr Insurance

1.5% property taxes

~4% Mortgage Rate

~20% down

2% yearly appreciation

Now, my concerns are this. Based on my numbers, I'm seeing about a 6% cash-on-cash return. My total return is above that when considering mortgage pay-down returns and also on appreciation / depreciation numbers. BUT, the big unknown in the appraisal. 

The duplex I currently own, I paid $192,000 for it (total - land and improvements). I purchased this in March of 2017. So, I have this sinking feeling that my new build won't appraise for the $215,000 that I'll have in it. If that's the case, I won't be able to use the $20,000 i spent on the land as equity in the loan. They'll loan me 80% of what its appraised for. So, I'm afraid I'll have to cough up 20% of $195,000 ($39,000) on top of the $20k i've already spent... This drives down my cash on cash return.. 

Based on all that, plus unknowns like building time, overruns, initial vacancy, I'm not sure this will be a good deal or worth my time. 

There are some pros though:

 - It's right next door to my current property. So when I eventually leave these duplexes, my two properties will be easy to get to. 

 - Both properties are on the nicer side for my area, so it'll attract, i hope, nice tenants. 

 - It'll keep the ball rolling for me, as I have a plan to do 1 property acquisition per year for the next few years before ramping up to multiple per year. Though, i guess i could go find something to buy that may prove better than spending the time and money on the duplex.. 

All in all, i feel like posting this is actually me coming to terms that it's not a good idea, but I wanted to get this out there. Have you guys found anything useful for building to buy and hold that may help? 

Ryan

[Spencer Faust]

developing land the right way will take a tremendous amount of mental power if you're deciding to developing the land for an investment venture to gain a Rate Of Return (ROR) on your investment and structure your deal to accommodate a healthy percentage in leverage to minimize risk.. you'll need to really really focus and forming a business plan before anybody touches a hammer.. we need to analyze a lot of different variables before we can accurately determine if the investment is worth the time.. focus on the type of property you would like to build first.. if your devolping for an investment you need to research your areas demographic real estate "situs" the situs is the hottest location in your area for buying and selling of homes and in each hot location theres always a certain style property that sells the most weather its a 2 bedroom 1 bath or a 3 bedroom 2 bath regardless you need to analize your areas demographic and once your determined the property type you need to get an engineer to draw up foot prints so you can present the floor plans to a contrusction compnay and rememebr this is an investment to so any way we can minize our expiences will ultimatly grow our profit so you need to get bids from several companys and you need to ask them their estimated time of completion becase that can affect profit to... when you have our cost to build the home you need to perform a residul land method approach for determining the maximum purchase price of the last.. we can determine this by minusing the market value of the home from the cost of construction devided by the percentage you want to see if profit from just the last and home alone but when we determine the value of the home we will use the Net Operating Income Approach so we can determine the capilization rate if your planning on renting out the propeorty for a monthy net profit for first you need to determine the average time it takes to get a tenant (usually one month) so be aware youll have to pay all the projected expenses for a month so for the valuation we need to take all the property expense like homeowners insurance, property mangament fees, utilites, property taxes cost cost, ect (not including cost of construction) the based off your market you need to determine the prices to rent that home monethly then minus the gross income accumlated from monthy rent and minus that value with the projected cost to find your Net profit. one the net profit has been calculated you need to determine the averge capitlization rate for your areas income generating properties but keep in mind this cap is just for the purpose of determing property value.. ultimatly your levering way more on your investment due to lowercost in obtaing the asset but youve called a broker and recieved your areas average capitalization rate or your personal desire capitlization rate you simply devide the net profit for the year and devide that value by the cost of construction that will give you a percantage of the profits your going to be yeilding per months in net profit just on the building alone then we need to determine the actual value of the home will be considering the average cap rate 7% for example you would multiple the net income for the year and multiply that value to the 7% to get the value of the home. one you have the value of the home you minus the cost of contruction to calculate the MMP of the land it self.. for example with a cap rate of 7% the building would then be valued at 500,000.00 then we need to minus the estimated cost of construction 200,000.00 wich leaves us with 300,000.00 but if you are planning on selling the propeorty right off the bat you need to apprais the home through a CMA approah to get buyers point of view price and not an investors point of view but if your do sell the house after construction you need to deduct the desired percentace of profit you would like to yeild of your investment so for example we determined the home value is 500,000.00 and the land ls valued 300,000.00 totalling 800,000.00 - 300,000.00 for the land aquisition - 200,000.00 for construction cost will net you a margin of 300,000.00 or keep the propeorty and rent it out for a very large cap rate and make yeild on and extrely high leveraged deal and build wealth through appreciating and equity then possible sell the home after youve built up the operations and minimized expense and maximized your profit resulting an inflation of value based of NOI then you have create appreciate through propeorty operation or maybe through market growth.. if can also determine YoY market growth allowing you to calculate future rental rates and the calculating a new NOI resulting in the new property value.. determing growth in the value is a good step to take when holding onto an investment property..

[Al Rivera]

This is all great information.  Currently I live in what I call a "livable teardown".  The house is 77 years old, 1050 sq/ft, block and beam with 100% brick veneer, needs about $55,000 in additional improvements and has foundation problems (rear of house sits 7 inches lower than the front).  Rather than fix the house, my goal was to build two townhouses on the lot, sell one, pay off the loan, live in one for "free" and have a few dollars left over to invest in more property.  I've not started looking for a builder yet because I need to get a few more financial things in order, however, I've seen some of the costs of building in my area ($125-$150 sq/ft).  I don't want a fancy house or too large (2500 sq/ft is fine).  What would be the best approach to build two townhouses?  With an investor or fund the whole thing?  Thanks.