First Deal: Play It Safe or Go for Broke?

4 Replies

Long time lurker, first time poster.  Thank you getting me to this point.

About Me:

28 male, married, no kids. 

Income: $65k/ year - Expenses: 24k/ year - Cash to invest: $150k

I'm in negotiations for two potential first deals:

Option 1: Duplex in lower-middle class neighborhood. 

Price: $150k

Income for both units: $2k/mo

Traditional Financing: $37,500 down 

50% rule cashflows $250/mo 

8% ROI

Option 2: Duplex, House, and Studio in upscale downtown (with development potential).

Price: $925,000

Income for 4 units AS IS: $5400

Owner Financing $625k at 6% with 300k down

 A little better than break even as is.  Not cash-flowing with current units. 

Here's where things get interesting:

The area is downtown Sarasota FL.  It's located a few blocks north of main street, and things are expanding rapidly.  Half a mile away is the Ritz Carlton, Hyatt etc.  The waterfront property across the street just sold for 38 million with plans for 3 towers. Embassy suite just bought the land two blocks behind mine.  One block west there's a 55+ senior citizen tower being built.  5 blocks north there is a 750 unit apartment building going in.  Of course a lot more is going on, but you get the idea.

My lots are zoned to build 12 residential units (5 stories), with 2 free retail spaces on ground level.  That's the plan for most of the lots on this particular street.  2 sets of double lots (that I know of) are in the beginning stages of similar plans.  

So assuming I could come up with the extra million (pulling that number out of thin air right now) to develop the land, the numbers are extremely lucrative.  

Numbers If Developed: 

12 units at $1800 per unit - $21,600/mo + $4000/mo for 2 retail spaces. 

Total potential gross income - $25k/ mo

Land Note at 6%: $4600/mo

Taxes and Insurance: $1000/mo (pulling this number out of thin air)

For the development, it would probably be a partnership with an investor, since there isn't a possibility of a loan if the land already has a lien on it. 

But assume it was a construction loan at 7%.  That would be $6600/mo. 

Total potential net - $12,800 a month 

I'm obviously WAY over my head, and I would have to come up with a $150k personal loan for the down payment, and then find an investor for the development.  But I think I have the connections for both.  

The question is...do I play it safe and just collect lower income duplexes one at a time.  Or take advantage of this owner financing deal, find an investor to help me develop the land and potentially end up with nice monthly income and part ownership of a multi-million dollar building downtown?  

If you are new to RE investing, I agree with @Frank R. It is easy to get caught up in the potential profits but, when there is potential to make lots of $, there is usually also potential to lose lots of $.

However......... having said all of that, perhaps you could present the opportunity to whoever you would go to for the development? If it is that lucrative of a deal, maybe he'd cut you in someway. Then you could pursue both options!

Hi @Mike Moyer .

I want to piggyback on what @Patricia Bowler  was saying.  If the conservative deal is a good one (and it seems so from what you've written), pursue it.  You state that you have $150k to invest and that the owner of the more aggressive deal wants $300k down.  You're going to need a personal loan for the purchase and then an investor to complete the development.  Continue to pursue the aggressive deal and if you can make it happen with the ~$100K you have left, then do it.

I wouldn't hold off on a cash flowing opportunity just to hold on to the extra cash hoping that you will get the other deal worked out.  Chances are if you can raise the money to get the more lucrative deal done, you can do it whether you start with $150 or you start with $112.5k.

Joe 

Thanks guys.  Great advice.  I think I'll move forward with the cash-flowing deal and if I can find the 150k, I should have no problem making that 200k.  

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