Tear down - construction - flip

[Tim Blanchard]

Just looked at a property today that we'd really love to buy, tear down and rebuild.

The numbers almost make sense at a high level but I'm more curious about the financing strategy (costs) for such a deal...

We would like to put in an offer at $400k. The ARV looks to be ~$1.2m after about $400-500k in construction costs.

I'm guessing we'd be looking at ~$200k net at the end of it all. Does it seem like a lot of risk for not a lot of reward???

For the financial picture: I'm guessing 100% LTV for construction and 80% LTV for purchase price. If we're making interest only payments on the construction loan at 8.5% for 6 months, that's around $36k in interest. Am I missing something?

[Eric Greenberg]

Do you have experience with ground up construction in that area? Do you know the timelines for permits and such?

To me 6 months seems a little sporty unless you do this all the time. If it were me id double the time and add at-least 20% to your high construction cost as buffers unless you are very confident based on experience.

$400k acquisition + $500k construction + $100k construction buffer (20%) + hold costs for 1 year $36k*2=$72k

Sum = $1,072,000
If you are very confident in the 1.2M ARV thats fine but again we dont know what the market will look like in 6+ months which is a bit scary for a high end flip.

To me thats pretty slim margin with alot of downside for such a heavy lift project.