First new construction and simultaneous short term rental
Posting my first new construction, and simultaneous short term rental. I’m hoping I can help show people that zero down investing is very much possible with the right deal and the right people. This was a deal where we purchased one lot that was big enough and had the right zoning in place to build two houses.
How I found it:
The best way to explain how I found this deal was just being part of the conversation. Being involved in the RE world and talking to as many people as possible. I asked a local investor in Nashville to meet with me over lunch because I had seen he was doing well and I wanted to get some advice on finding deals/etc. He had told me about this new construction project he had under contract and he was looking for financing. He agreed to make me a 50% partner if I was able to provide the financing for the project. He had found this deal through a direct mail campaign. My partner on the deal was @Devan Mcclish the star of BP podcast-show 180. If you haven’t already listened to the show, get a pen and paper and go take notes.
Take away: NETWORK, NETWORK, NETWORK. The more people you know in the small RE world, the more deals, money and support you will be able to find. Meet 2 new people/week and meet 1 you already know so that they always keep you in mind.
How we financed it:
I knew someone with the ability to finance the purchase of the lot. The lot purchase is usually the “hard” part when it comes to financing new construction. The word “hard” is in quotation marks because when you have a good deal financing should not be an issue. The construction loan is easier as banks will finance 100% of that. We met my private investor out at his country club on a Sunday afternoon and pitched him the idea. He is an investor himself so he fully understood the project as well as the numbers. He had agreed to give us the purchase price of the lot which was $160,000 plus $40,000 in working capital to float the deal. His terms were a 7% interest rate, payable monthly and 5% of the gross sales price of the final purchase price, and his investment would be secured by a second lien position to the bank’s 1st lien with the new construction loan.
My wife and I secured a new construction loan with a local bank at a 5% variable interest rate. The total amount we were approved for was $460,000. We had budgeted building both houses for $420,000 (Our contractor had other plans-more to come on that)
Take away: If you are struggling to finance a deal it’s because you have a bad deal. Finding money is one of the easiest things to do when you have a good deal
How the project went:
After the 2 months it takes to get through the Cities red tape we were off to the races. Started the demo on the existing house at the end of August 2016 and got our certificate of use and occupancy in the middle of April 2017.
We were on budget until 75% of the project was complete. From there, our contractor decided to start back-filling invoices to push the total cost to his total bid price. He told us before we started that he could build the houses for about $110/foot but made the bid $117/foot in order to have a buffer on our loan with the bank. After back-filling invoices he came in $130 under “budget”. I didn’t know any better and I should have been asking more questions. Lesson learned.
The timeline for the project was probably about 2 months behind schedule. Once we finished drywall I felt as if the project just stopped. In the end the houses were built really well and passed my personal inspection. If your name is going to be on something you should make sure you are putting out a good product!
When we were about 3 months from finishing my partner asked me if I was interested in making one of the houses into an AirBnb. I immediately agreed as I wanted cash flow. My only stipulation was that my investor gets paid what we promised. Taking care of your investors’ money should always be a top priority, so I met with my investor and let him know what we wanted to do and if he was okay with it. I told him we would pay him 5% of full asking price and he had no issues with our plan.
We found a bank that would give us an 80% LTV on the refinance. Standard 20 year commercial loan with a 5 year ARM.
Take away: Don’t just take your contractors word for anything. Verify everything they say and if you don’t know or aren’t sure ask someone with experience for their opinion. Always be a good steward of your investors’ money and do whatever it takes to pay them back what you promised.
Numbers:
Construction
- Lot purchase: $160,000
- Closing costs: $2,834
- Bank loan closing costs: $7,381
- Interest to bank: $11,000
- Interest to private investor: $12,387
- Construction cost: $447,383
- AirBnb furnishing: $25,000
In conclusion, we used 100% of the bank loan and 100% of working capital, and I had to float some money on my credit cards.
Refinance:
- Appraised value of new home: $395,000
- 80% LTV=$316,000
- Paid 1st lien to for $230,000
- Paid 2nd lien to private investor for $80,000 in principal plus 5% of full asking= $19,995 ($399,900*5%) He agreed to take the rest of the principal when we sell the second house which was $120,000
- 316k-230k-100k=-14k
We made up the difference with a line of credit
Second house is under contract and is set to close in about 30 days. I can’t say how much it’s under contract for but when we close we will pay all the bank debt, my private investor’s loan plus his 5% profit on the sales price.
AirBnb monthly profit:
- Revenue: $5000-$15000/month
- Expenses: $4500-$6000/month including debt service
While we didn’t put anything in our pockets from this deal, we now own a home valued at $395k, generating positive cash flow and have $0 in the deal.
ROI=Infinite
Let me know if you have questions about any of the above, and remember in the words of Gary Vanerchuk: “Skills are cheap, passion is priceless!”
