Rental, Flip, or New Build?

[Hilary Stalder]

My fiance's dad has a property that is owner financed. His current payment on the property is interest only payments for the next 6 years at which point the loan balloons (he is family friends with the owner and could re-negotiate if needed). This property is in the most desirable area of central Florida and was purchased for at least $75k below market ($300k).

Ultimately, I would love to build new on this lot because I believe overtime this area will only get more and more desirable/expensive (amazing schools, near downtown, near lots of hip restaurants/bars). Currently we don't have enough money to build new and I'm still navigating the world of loans/private money/hard money to make this a possibility in the future. So that leads me to thinking we could rent it for the time being to lower sunk costs. 

The house is in pretty bad shape and we estimate it needs about $40-50k in work to get it in RENTAL shape. The area it's in is very nice so if we wanted to resell it would take closer to $100k for us to maximize the money out (the area can handle it). See below for rental, new build, and renovation analysis and let me know your thoughts...

Rental Analysis: One option is to rent it out while we decide whether to renovate or knock down and build new, we would break even after 6.5 years, this would obviously require re-negotiating the balloon payment timeline. His dad has also offered to split costs with us for a share of profit. Another thought is if we renovate before renting we could rent it out for more ($2400/mon), but reno costs would obviously go up as well. 

Purchase Price: $300k

Mortgage Payment (Interest Only): renegotiating to $500 

Taxes: $375/mon

Ins: $100/mon

Lawn: $100/mon

Vacancy/Repairs/CapEx: $300/mon

Total Monthly Expenses: $1375

Total Monthly Rent after Reno: $2000/mon

Total Monthly Cash Flow: $625

Rehab Budget: $50k

Total Annual Cash Flow: $7500

Cash on Cash ROI: 15%

Build New: The biggest barrier to entry is the size house this neighborhood calls for. There was a 3,150 sf home that sold in the same neighborhood (arguably slightly less desirable part of neighborhood) for $900k in the last 6 months. There are currently 4 other new construction homes on the market in this neighborhood, all around the low 3000 sf, all 4+ bedrooms and all listed around/above $900k. I don't think people are buying real-estate this size/price right now, but in the future I think there will be market in this neighborhood for it. 

Cost to build 3000 sf home: $450k ** I have my GC license and can build this myself, but am finding it hard to figure out the financing side of it. I have built huge commercial buildings through my day job and previously built houses, but I have not built a house with my license. This seems to be an issue to getting started! Who has built their first house themselves?

Cost of land: $300k

Appx Total Cost to build: $750k 

Appx Re-sale value: $900k

Total Profit: $150k 

Major Home Renovation: Long Term Flip OR after renting for a while, tackle a major renovation

(2) houses have sold on the same street in the last 6 months for $219/sf and $294/sf that were nicely renovated with 3 bedrooms (which this house has). If we kept the same SF and did these renovations I would estimate the house could sell for $475k-$500k. The construction costs to get the house to this level would be between $100-150k. 

Cost of house: $300k

Cost of Reno: $150k 

Sale: $475k-$500k

Profit: $25k-50k*

Now, if we spent a LITTLE more and added another bedroom on the house. Those houses are selling in the $600ks. (2 sold in the last 6 months in the low 600s, not new construction). 

Cost of house: $300k

Cost of Reno: $200k

Sale: $600k-$650k

Profit: $100-150k*

*This is an estimate based on me having my real-estate license. Not including taxes. 

The bottom line with this house is there are a TON of options. I need some help coming up with a solution that best makes sense for this house. It's an amazing house in a great location, we would even consider moving in if it would make sense to maximize profit. 

Would love to hear thoughts/ideas!