Advice- potential Investment opportunity-New construction rentals

Real Estate Deal Analysis & Advice
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Advice- potential Investment opportunity-New construction rentals

Michael Richardson
Sacramento, CA · Member since 2015 · 5 posts · 0 votes

Hi everyone,

I'm fairly new to BP (still haven't put a picture up :) ) and have been scanning through the forums over the past couple of months, as well as listening to the podcasts. I am looking for some advice on a potential investment opportunity that has come up. I was talking to my best friend about wanting to invest in real estate and he mentions that he has been trying to figure out what to do for a few years now, about a residential lot his family owns in Chico, CA. He recently talked with a contractor to get some ideas on what to do with it and the contractor told him that the lot is zoned for 3 homes and that he could put three, three story triplexes (9 total units) each with 2 beds and 1 bath, and a designated parking area. He gave him an estimate of between $500K - $600K. We believe we could get between $900-$1000 a month for each unit. The lot is right in the middle of residential areas near Chico State and just a few blocks from popular college bars and hang outs. I would definitely like to partner with him on this as I think it would be a great investment and we would have no problem keeping it rented out. I have a good chunk of capital to contribute equal to the value of the land to essentially become equal partners in the deal. Not sure he has much capital to invest so the rest of the funds would have to be through loans.

I would like to hear some advice on this investment as well as other ideas on what to do with this lot. How should we go about getting the rest of the funds needed? What are other things I should take into consideration before deciding to partner up in this deal?  This would be the first real estate investment for both of us.

Thank you for any help.

-Mike

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  • Steve Haight
    Las Vegas, NV · Member since 2014 · 732 posts · 137 votes
    10y

    @Michael Richardson

    Welcome to BP,

    I know the first thing is always getting the highest and best use of the property in question. How you structure your partnership is an LLC with an operating agreement in place. If the deal pencils you should be able to find a construction loan, bridge loan, ext to build. What role you have needs to be defined, does your partner own the property now, have a contract on it, or is it just out there on the MLS. When you say the family owns does that mean he has no real control over it or could he acquire it for a certain price?

    More details are required to really give you some specific answers. 

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  • Michael Richardson
    OP
    Sacramento, CA · Member since 2015 · 5 posts · 0 votes
    10y

    @Steve Haight

    Thank you for your reply. So the land is actually owned by my friends mom, but she has pretty much given it to him to do what he wants with it. She doesn't care to deal with it due to her age and her health. We would obviously need to put this in writing and get it in his name officially so there would be no issues as far as that goes. He is not sure exactly how much it is worth, but it was estimated to be worth between $150K-$200K. The fact that he already owns the land is obviously the main reason why we are discussing this deal. How do you suggest we define our roles? If we decided to go forward with this, we would both be equally involved in all the decision making.  I guess my biggest concerns are with how the loans for this would work. It would obviously be hard to make payments on a loan until the construction is complete and the units are rented. Since I've never dealt with getting a loan of this magnitude, is there ways to structure them so that you can defer payments until after completion? Should we consider trying to get a private money lender?

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  • Steve Haight
    Las Vegas, NV · Member since 2014 · 732 posts · 137 votes
    10y

    @Michael Richardson

    Wow okay, well first we do not want to see you end up enemies over this deal as as you mentioned you are best friends.  Just so you know I am on BP to pay it forward as I like to help new investors  in real estate investing as I have been doing this for years.  You are fireing lots of questions and they are all good questions you ask but it tells me this is all new to you. If you would like any further help best to talk to me on the phone my toll free number is in my bio, be happy to chat as I am not good on these threads for long.

    Cheers,

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  • Steve Haight
    Las Vegas, NV · Member since 2014 · 732 posts · 137 votes
    10y

    @Michael Richardson

    Re read your email. You say he does not own the property but then again you say he does!! Fist things first he needs to have this property in his control not his mothers control, if she is a don"t wanter get her to sign off NOW!. You need to get this into escrow ASAP, it seems you may have something here and you need to protect whatever interests you are trying to acquire here!  

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  • Michael Richardson
    OP
    Sacramento, CA · Member since 2015 · 5 posts · 0 votes
    10y

    @Steve Haight

    Yeah right now we're just going over ideas and trying to get a feel for everything before making anything official. But if we were to go forward with this project, the first thing we would do is get it transferred into his name. Thank's for your help.

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  • Steve Haight
    Las Vegas, NV · Member since 2014 · 732 posts · 137 votes
    10y

    @Michael Richardson

    Not his name an LLC and there should be no going over ideas unless I read this wrong she is donating the property?

    Anyway good luck guys,

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  • Michael Richardson
    OP
    Sacramento, CA · Member since 2015 · 5 posts · 0 votes
    10y

    Update: 

    The triplexes would be three two story triplexes with 3 bed/2 bath unit in them.

    0Reply
  • Mario P.
    Ontario · Member since 2015 · 19 posts · 15 votes
    10y
    Hi Michael Richardson Speaking only to the financing side of your project, the lender may lend conventionally up to 75% of completed project value and 85% of project costs (may be more or less depending on the city/state/country, etc). In your case, being that this will be your (and your partner's) first project, the lender may want to mitigate any risks regarding your inexperience and thus may choose to lend you less. In your case, you should prepare for the lender to only offer to fund 60-65% of completed project value. During construction, your financing costs will be interest only, for which the required funds will be drawn out of an interest reserve built into the loan. Prior to receiving a commitment from your construction lender, they will most likely require you to obtain take-out term financing to repay the construction loan once construction is complete. Keep in mind that the term lender may require 1.2-1.3 times debt service coverage once the building is stabilized. Therefore, you will need enough proceeds from your term mortgage to fully repay the construction loan and maintain a stabilized 1.3 (say) debt service coverage. As a note: completed project value will be calculated by applying cap rate to a stabilized NOI for the property. If I wasn't clear or you have further questions, feel free to ask.
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  • Wes Brand
    Investor · San Francisco, CA · Member since 2016 · 314 posts · 153 votes
    10y

    Don't make the mistake of thinking you have to do something with the land. If you wouldn't buy the lot on the market at 150-200k and put a building on it, you shouldn't do it. 

    The alternative is your friend puts the lot on the market now, sells for 150-200k, then takes that money and uses it as a down payment/capital to invest in a more profitable location. 

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  • Chris Herbert
    Property Manager · Chico, CA · Member since 2011 · 41 posts · 30 votes
    10y

    Hi Michael, just a quick note, depending on where the property is located I think you may be able to get substantially higher rents than $900-$1000 per unit. Reach out with more details if you would like to discuss further.

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