What would you do with 250k of private money at 7.5% to develop?

Question

I'm looking to partner on my first development project in a town outside of Jackson, WY. I just moved here last year and it is very expensive to do anything in Jackson. I started off as a buy and hold investor and bought 2 multi- families, one single family, and a partnership on a commercial warehouse. Since I moved to Jackson I've been looking for new opportunities within real estate. With doing research, networking and talking to realtors there is a demand for new construction for single family homes in the 300k price range. I found a partner who's a architect and has experience as a general contractor on a couple large jobs. He has a possible loan from his grandfather and I have 250k lined up from a private lender at 7.5%. Looking for advice on how to get this project started to be the most efficient with time and money. Our rough numbers right now are building cost at 130 sqft and selling it for 175ish sqft. We're looking at building a 1700sqft, single level, open floor plan, ranch style home. Is 30k a safe number for our profit margin? Also, if he gets a large enough loan we would consider building two at the same time to cut down on material cost.

Derik Kaiser · Answer

You say nothing about the absorption rate of $300K homes. Without complete interpretation of the market, you could choose a price point that has a reason others are not building in. Even if you find there is a need and a reasonable absorption rate that meets your needs, there are many other things to consider - like making sure you build what the market wants. Too many home builders pigeon-hole buyers into designs they are comfortable with and not consumers. Make sure you are making decisions based on data and not opinions.

Tip: You don't have to tie up your money buying the lot or lots.

Greg Croft · Answer

130 a square foot sounds like it may be reasonable. An hour away in Idaho Falls spec home builders that are throwing homes up are doing about 100 per square foot. Due to the cost of labor there I have seen and heard of alot of modular/manufactured homes going into the area. I know it doesn't sound the most appealing but I would also look at that as an option (they aren't all ugly) and at least crunch the numbers.

If you decide to venture to this side of the Tetons let me know :)

Good luck!

If you decide to venture to this side of the Tetons let me know :)

Good luck!

Bill S. · Answer

@Levi Caron I lived near Jackson for a few years. Very pretty place.

You asked if making $30K was enough margin on a new build. That is only about 10%. Lots can go wrong and eat that 10% very fast. I don't think most experienced developers would do it for less than 20% profit. At 10% you better make sure you have everything accounted for. Just forgetting the real estate agent commission would cut your profits by more than half. What about tap fees?

Really your plan is to fund a general contractor who will do the work. The way I have seen folks do this successfully is to be the general contractor. All you need is a phone, transportation and experience. My guess is the general would be making at least 20% on your project.

Levi Caron · Answer

Jeremy, the town is very small right now and the land we are looking at has already been subdivided and ready to build on. I would say the town has been overlooked and has a low inventory of houses in the 300k price range for young families. I do believe I have good resources to get the project started. I know one builder who wants to build a apartment complex for more employee housing and have them commute to Jackson, Also. enterprise car rental is looking to start a van pool to help with the commute.

Jeremy Pace · Answer

@Levi Caron There are several ways to make money developing real estate. You can buy raw land, get all the subdividing work done. You can buy subdivided land to sell to builders. You can buy from builders and sell to retail buyers.

What you are talking about is building on a developed lot and then selling to a retail buyer.

What you are proposing could be referred to as putting all your eggs in one basket. You have enough money to buy one lot and build on it, and then sell it. Do you have the resources and connections to get the land, build the house and sell it before a development company does the same thing with 20 houses?

What would you do with 250k of private money at 7.5% to develop?

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