Help! Should I do this deal?

Question

Hello Everyone!

Need help with the below opportunity I have, any advice would be appreciated! Would you all do it?

Very Distressed home needing to be demo, and wanting to build a duplex ground up. Here are the numbers:

$70K - purchase price

$30K - demo

$240K - Cost to build 2,550 total sq ft ($94/sq ft)

$80K - Available to put as my D.P.

$1,100/Unit - Avg. Rental Income in area

My loan would be roughly be $1,850/month, so I would cashflow about $350/month.

This is a family members home, and want to keep the property rather than sell it to someone else.

I appreciate any feedback! Thanks!

Nathan Gesner · Answer

I agree with the others. You need to educate yourself on how to analyze deals and determine good cashflow. This isn't it.

I would also be very surprised to see you build something for $94 sq.ft. I'd bet dollars to donuts you're looking at $150 or more.

Drew Sygit · Answer

$340k investment to get $2200 rents?

Run it through the BiggerPockets Calculators for your RI, cash-on-cash, etc.

Account Closed · Answer

@Abe Macias what is the stabilized value for the project? The other commenter are certainly correct the cash flow analysis is not attractive--as you framed it above, but there may be value creation available from the build and in the land zoning.

For example, if the stabilized value of the duplex is, say, $460,000 and your total project cost ends up being $360,000, your gross developer profit would be $100,000.

For gross rents, again $2,200 ($1,100 x 2) would be a negative cash flow when subtracting $104 for vacant and assuming a 30% expense ratio with 80% leverage @ 4% interest and 30 year amortization, but have your checked the zoning? Is it possible to construct multiple structures or construct a 4 unit?

Another point in gross rents, I would double check the trends on rent increases in the market over the past three months 12 months and three years. Because inflation is so high and if, as you say, the local market is supply constrained then the rent increases in the local market could be fairly substantial. For example a 10% increase year over year on $2200 would be $220 extra dollars annually. Since it would take 12 to 36 months to build the property anyway you might be able to get a lender to finance based off of the pro forma value of the after completed duplex at a substantial rent premium to whatever your underwriting today.

As mentioned about $96 psf cost to build seems wildly low considering the market supply issues on materials and inflated demand do to low cost of capital and now congressional fiscal stimulus and tax programs.

Lastly, since you own the parcel next-door you might be able to get a blanket commercial mortgage finance them together based off of the income-based valuation that might be a scenario that is worth modeling out.

Best of luck sir.

Nathan Gesner · Answer

Building costs in my area were $125/sq.ft. three years ago and now are closer to $250. Prices around the country have essentially doubled, so your GC doesn't seem to be keeping up with the market.

The property doesn't cashflow even at $94/sq.ft. so I would walk away.

Abe Macias · Answer

@Nathan G. Thanks for looking into this one Nathan! $94/sq ft was quoted to me by my GC. In the area I had built a duplex 4 yrs ago for $80/ sq ft, but prices have gone up now. Market rents are about 95 cents per sq ft so I can raise rents to $1225, but would like to stay right under. Would you suggest just moving away from this opportunity? I was trying to keep the property in the family, and I own the duplex next door. I manage also my rentals as well to save that 10% fee.

Theresa Harris · Answer

As you want to keep it in the family, your emotions are going to play a role in it and that's fine, but then it about more than the numbers.

How much would it be worth once you are done?  From a rental investment standpoint, no the numbers don't look good.  If the after reno value is above $330K, then you could make money that way down the road.

Abe Macias · Answer

@Jon K. Thanks for looking into it Jon! I’ve been trying my hardest on this specific property to see how I can save it. I own the lot next to it that I built the duplex from the ground up, but was an empty lot before. This specific property has the house that needs to be torn down, so eating $100k just for the lot. It’d be nice to own two duplexes next to each other, and keep the property in the family. I don’t know what else I could do? Rentals go quick in that area, and I would be managing the property myself.

Jon K. · Answer

Your cash flow would not be $350/month because that does not take into account maintenance, vacancies, property management or capital expenses. I suspect once you add those numbers into the equation you're break-even at best, negative at worst. At a glance this doesn't look like a good deal.

Help! Should I do this deal?

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