All Forum Posts by: Rogers Smith

@Clint Galliano please upload some pics as you move forward.

At a stand still. Doors and windows on a two week hold. Crap! Considering moving forward with rough ins, and simply wait on the framing punch.

@William Hiday funny you mentioned financing, I met with the owner of the lots (where I want to do my "build and hold" strategy), and the stumbling block may be a question of financing. In order to accrete  his return he would like to stay involved after selling the lots. Specifically, he wants to provide the financing the the houses (rather than my bank), in exchange for half the profits.

I've seen this type of arrangement on larger projects, but it may not make sense on smaller houses. With the limited profit on such small-scale projects, the math simply may not work. Still working on this one.

@Michael P., forgive my ignorance but what do you mean by "4/5 total combined units" in terms of the town houses? Townhouses (my understanding as meaning more than one floor) have not really entered my radar, as the lots available in my market are pretty generous square footage-wise.

But I have contemplated some duplexes on a set of lots I'm eyeing. My challenge is that they are zoned SFR right now.

@Kenya Teague Thank you. Yes, spec homes are truly fulfilling. You get to pick out everything, from the floor plan to the color of the door knobs. Actually, my wife picks most of the things requiring a sense of taste, I simply get the houses built, but you get the picture. I am also building a custom house at the moment, but it's not nearly as enjoyable, having to answer to the owner and all. Nevertheless, as a general rule for lot prices in my market, the rule of thumb is the lot accounting for 1/5th the total cost of the house. The lot price for this house was $62,000, so I am well withing the rule of thumb.

@Nick Kutschke is the project filed under the GC's permit? If this is the case, he may have to release his permit before you are able to engage another GC. At least that is how it goes here.

Thanks @DG A., but I gave up flying a long time ago. You certainly have a tiger by the tail building a spec in California. A lot of money can be made, but a lot can also be lost with the inversion of a single stock option. Good luck!

@DG A. That's an interesting concept. I went to the website you mentioned and it shows a video blacking in a house in 12 days. The framing process will normally take us 4-5 weeks. But the pricing seems a bit high, especially for my market. My framing and blacking in runs around $30,000. The 2500 square foot plan I reviewed from caprecut was over $100,000. I must be missing something.

Next spec. Awaiting windows and exterior doors. This subdivision Spring Haven outside of Madisonville, Louisiana has been doing quite well for me. Sales and prices have increased impressively over the last 12 months.

@David Zheng your question about 3x Net Income or other rule of thumb multiple raises an interesting point, at least for us numbers geeks. In real estate, a common capitalization rate is 10% (as discussed ad nauseam on these boards), which equates to a 10x multiplier. After all, the multiplier is simply the reciprocal of the capitalization rate.

In small to middle-market business valuations, a rule of thumb multiplier is 5x, or a cap rate of 20%. Keep in mind, a higher cap rate reflects higher risk. Considering the capitalization is simply the percent return an investment must generate to attract investment capital. Real estate investments are considered lower in risk than small business investments, hence the 10x vs, 5x multiplier.

Which circles around to my point of interest. If you build the perfect management systems, hire rock star managers, divorce yourself from operations and build the perfect self-sustaining business, you've created a small business that can sell for 5x cash flow. Yet, if the real estate may garner a multiple that is closer to 10x...why bother.

Yes, capital structure (debt and equity financing) of the company come into play, but that's another discussion for another day.