Investor · Philadelphia, PA · Member since 2016 · 4 posts · 3 votes
I own a lot that I paid $41,000 for and can sell it for $95,000. Or I can build a house on it that will cost me all in $250,000 and sell it for $400,000. If I add the cost of the lot to my building costs , the number is $291,000 yielding a profit of $109,000 vs a profit of $54,000. Adding in 5% for the carrying costs , its about $10,000 more to build..so the difference in profit is $99,000 to build and sell vs. $54,000 to sell the land. What analysis would you use to decide the best approach? Thanks
@David W. If your not an experienced developer or have built homes in the past, I would sell and take the easy money. Building a house isn't easy or quick.
I own a lot that I paid $41,000 for and can sell it for $95,000. Or I can build a house on it that will cost me all in $250,000 and sell it for $400,000. If I add the cost of the lot to my building costs , the number is $291,000 yielding a profit of $109,000 vs a profit of $54,000. Adding in 5% for the carrying costs , its about $10,000 more to build..so the difference in profit is $99,000 to build and sell vs. $54,000 to sell the land. What analysis would you use to decide the best approach? Thanks
You have to look at the time value of money. It will likely take you 8 to 10 months to get the house built and sold and the money in the bank if the price holds up versus selling the lot taking the profit and the basis and reinvesting again in something else.
@David W. If your not an experienced developer or have built homes in the past, I would sell and take the easy money. Building a house isn't easy or quick.
You take the $95k unless you find an experienced home builder will pay you enough more when they sell their home on your land to justify waiting to get paid, say $125k? You don’t want to be building anything, just give them 12-18 months max to pay you for your land.
Thanks to all of your replies. I appreciate your time and energy in helping me to figure this out. I have actually built one house, a triplex, using a great builder and it really wasn't a bad experience. In this case however, I would be building a single family house, and so I do see everyone's point, that its best to make the quick profit, and reinvest, instead of going through a whole year of building and walking away with not substantially more. Thanks again for your help.
It's really up to your risk appetite and your desired rate of return. I would list out a cash flow projection, i.e. initial investment in addition to what have already paid for the land, in order to get a construction loan, and additional out of pocket expenses during the development, and final net sales proceeds. If the construction lender does not require any cash in addition to the land equity, then the initial cash investment would be 54K (as if you sacrifices the profit) and net sales proceeds is 99K. For two years, IRR is about 35%.
I think low interest rates will stay for a while and the housing market should be stable. Plus you built house before so you are comfortable about the process. I think 35% IRR is justifiable for the risk I am seeing with limited info provided. I am sure you have done your homework about the market, budget,etc...Good luck!