Decision to Develop a property that has extra land

4 Replies

Hello,

I have a property in SC that I bought and lived in several years ago, it was a B neighborhood close to a flourishing downtown area and has a very large lot. The house that is on it is a 3/2 and netting a CAP of 7.4% which I am pretty happy with but its also set to one side of the lot leaving about .68 acre of untouched land. When I bought the property for $115k back in 2014 I knew the neighborhood would change over time and lord has it. 2 houses around me were torn down and new builds on the same sqft and style have been built at the tune $290k each, recently sold so the data is solid. This has caused my home value to more than double in less than 5 years and I have actually gotten offers but I know why. The extra lot space that I have sits on a abandoned rail corridor that is in the process of being converted to a bike/walking trail and connected to a network of almost 40 miles of trails which is bringing people to the city from all over. I know this is why developers are buying up houses in this neighborhood and putting up brand new ones.

Ok so onto my question, should I section the lot and build some units on it  and if so what kind make the most sense here?  OR should I build 2 more single family homes and cash out on all 3?  Like I said I have about .68 acre to work with and the lot is zoned RM-1 (in my local municipality this is multifamily).  The strategy I had for this property was always a buy and hold so I am thinking of building either a couple of town homes , a multifamily structure or 2 single family homes on the to be developed trail (with that being a selling point) but eventually cashing out of the entire property going forward.  I see a path here to turn my $115k investment which is now worth about $225k to turn into much more.  

I have never done anything like this so I need a little bit of advice here to make sure I get going on the right track and possibly find a partner to do the development with here on BP.  So discussion started, any advice?

I see this as my ticket to getting some real cash to start a legitimate real estate business going forward with capital to rent to own and flips.  I dont know if I am being overly optimistic here so I need a dose of reality.

Sounds like a solid starting point. Here's some questions I'd like answered if I were you:

1. What's the maximum amount of units you could build on 0.68 acres? Check with the municipality.

2. Are there any incentives available to build bonus units by providing a percentage of them for affordable housing? Check with the municipality.

3. How are the rental comps in the area for Studios, 1BR, 2BR, 3BR and their $/sf.

4. What are the sales comps and $/sf. for those comps

5. How small of parcels could you split that 0.68 acres into? You'll need to check with your municipality

Some additional food for thought:

Lot splits in my area take a lot of time, patience and money

You can finance the construction of an owner-occupied 2-4 units with an FHA loan for as little as 3.5% down but the requirements are kind of onerous.

If you built a triplex next door you wouldn't necessarily need to split the lot if you were looking at a build and hold scenario and you could get owner-occupied construction financing.

Doing 5 or more units on the same parcel puts you into commercial loan territory

You could however potentially split the lot and then build a four-plex next door and stay within residential loan guidelines.

Construction loans in my area typically lend 60-65% loan to cost

You may have enough equity in the house to be able to get that 65% financing without any cash out of pocket.

If you were able to split into 10th of an acre lots you could phase the build out of 6 single family homes: BBRR
Buy, Build, Refinance, Repeat

Good luck!

Thanks for the quick reply.  I'll definitely check with the city on the items you mentioned and report back.

Some additional questions I have after reading your response and thinking about this a bit.

1.  I own the home and the lot but do have a 15 year conventional mortgage on the property.  Can I split the lot if I have a lien on it like that?  

2. I have not had the home/lot appriased yet my value is based on cold offers I have received from other investors and comps with much smaller lots.  Should I have it appraised before or after splitting the lot?

3. Would it be better to try and put a business plan together and pitch to private investors or a bank?  What is the best place to secure financing for a multi-build project like this?

4.  Is there a straightforward way for me to do the numbers on each scenario and weigh which method will yeild the most?  I am leaning towards develop and sell all or some of the properties so I can do some more deals however I do like the income with the nest egg idea too.

Thanks for your help.

1. A lot split will most likely mean you'll have to refinance your existing residence

2. Not sure why you would need an appraisal unless you were looking to sell it. You can find sales comps by looking at SOLD rental comparables in your area. Rental comps are a little harder to get solid numbers for but you can look at sites like craigslist, padmapper and zillow to see what units are being offered for around you.

3.  A prospectus and proforma are always good to have to pitch to both investors and banks alike. With the amount of equity you're saying you have in your home I'm betting you could do a 4 unit deal without outside investment.

4. You should put together proformas for each scenario and look at your ROI, Cash on Cash, and IRR to make your decision.

@Bryan Germann @Account Closed has given you some excellent advice. I have completed two lot splits in the past and have a third property under contract right now. A "simple" split in my county costs about $5000 (most of which is for surveying and plats) and takes around 4 months to complete - so not bad. If you plan to keep all the units for awhile you could skip the split process and expense and just add units if that is allowed. However, design in such a way that they could be split per current setback regulations down the line (separate water & sewer & utilities too). You may be able to find development funds to help with the process and then will probably need to refinance at the back end. Your initial post seems to indicate that you no longer live on site - so FHA financing for up to 4 units won't apply. You will need a conventional investor loan. Getting cash out on the back end will probably require about 25% equity... Take your time. Educate yourself. Put solid plan in place and take it a step at a time - you can do this!