HELP! Tell me why this won't work...

[Michael Keller]

Recently, a friend and fellow real estate investor approached me with an opportunity. He wants to build 3 to 5 1,000 sqft homes in small towns that are within a 30 minute commute to a mid-size city in Texas. Through a local builder, who is a personal friend, we can purchase the land and construct the homes for approximately $65,000 each. 

Based on my analysis, I believe that the new homes would appraise for at least $95,000 each. These towns predominantly consist of renters -- around 65%. Additionally, the availability of new, quality rentals in these towns is almost non-existent. Based on my analysis, I believe these homes would rent for at least $950/month.

Assuming a 75% LTV on a cash-out re-fi, we would be all in for $750. At a 5.25% APR on a 30 year note, we would cash flow $2,300-$2,900 in the first 5 years. The total ROI would be 472%-555% in the same period. Of course, we could also take 10 year or 15 year note and decrease cash flow in the short term for a higher return after 10 or 15 years.

The only limitations I see are the ability to scale and lack of appreciation. Each town could probably only sustain 3 to 5 homes. Additionally, the homes would likely never see any real appreciation. Nevertheless, if we built 50 homes in 5 years (5 homes in approximately 10 towns), we could have $145,000 in cash flow a year.

Does anyone see any glaring problems that I'm not considering? Why or how would this not work??

[Brian Garrett]

Originally posted by @Michael Keller:

@Brian Garrett I should have clarified that $750 is the all in per property. $95,000 appraised value x .75 = $71,250. With approximately $5,000 in closing costs that is $66,250 from the re-fi. That leaves us with $750 in each property.

The numbers still aren't adding up. If you are $65k "all in" on the land purchase and the construction and you net $66,250 after you refinance then you should still be positive $1,250 per property. Can you bundle them together and refinance them all at once as a portfolio so you only pay closing costs one time instead of on 5 separate refinances?