Looking for a way to finance Agricultural Land

[Bryan Buckingham]

New to the forum. I currently own only one home with ADU 60% equity. Ive been seeing many deals for vacant agricultural land. Full transparency, Im a builder and will build several homes on this lot in the future. Problem is, the cost of these lots are over 2 million. The ag land itself has a cash rent value that is likely negligible but the homes I build will all cashflow by over $1000 each if I can make this deal work. Please help me understand how I can afford this parcel. It would be lifechanging for my cashflow 5 years down the road. I can only pull up about 400k before maxing out our families DTI. Purchase price likely $2M. Seller will not carry a note. Ive asked.

[Henry Clark]

Land development is a high cost endeavor, or you need to own the land.  Plus doing a housing development in our economy is dangerous.  You're in Hawaii, I may be way off, but your land values are tied heavily to the Japanese investment market.  Evaluate that, even if you never sell to a Japanese investor.  Let's say you want to go down this route still:

Change the numbers to boots on the ground figures.

a.  Lot cost $2mm.

b.  Acres??  4 acres, again give us more info.

c.  Number of houses per acre, 4 per acre or 16 in total.

d.  All in cost of 16 houses, 2,000 square feet per, $230 per sqft= $7,360,000

e.  Infrastructure costs.  Say grading, roads, electric, water, sewer, engineering,etc.  $400,000

f.  Total costs $9,800,000

g.  Interest during construction and selling process. Let's take 1/2 of the above $9,800,000 at 6%.  $4,900,000 at 6%= $294,000 interest per year for 2 years.  $588,000.

h.  Total development cost of $9,800,000 plus $588,000= $10,388,000.  

i.  Let's assume no sales commission, you broker the sales.  If not add on another 7%.

j.  Since you mention cash flowing $1,000 per month, this assumes you are going to hold the properties and rent them????  Not sale them.

k.  Cash flow $1,000 per month is this before or after P/I payments and property tax/insurance/maintenance set aside and occupancy at 90%?

l.  16 houses cash flowing $1,000 per month= $16,000 before income taxes???, etc.  back out occupancy.

m.  Collateral, if the bank required you to put down 25%, then 25% of $10,388,000= Say $2,600,000  do you have that?

n.  Let's say you had the $2,600,000 to put down, now you have a mortgage loan of 7,800,000 at 6%.  What is the P/I on this?  Is it factored into your $1,000 per month cash flow?

o.  Most developments take a while to sell out.  Realize the market has been crazy with unbuilt houses selling, but does your family risk tolerance accept the risk of your development taking 5 years to get built and sold out?

Change all of the above numbers and come back and ask your question again.

[Bryan Buckingham]

Henry,

Much appreciated response. Details are important and ill give one specific property of interest at this time. Its 18 acres and has only 5 main house rights with one guest house rights. There is already a 3 unit "single family home" in need of rehab on the property. Im a builder that just wrapped up my first Hawaii build last month. My all in cost is $110 per sq ft because I do all of the labor that the government allows. I considered building 4 house hack type homes around 3000 sq ft each. There cost $325,000 each approximately. Each rents for nearly $5000 for the 2 units combined. Some additional details to consider. Legal fees to divide cost around 150k but division is only required if I plan to sell off any of the vacant divided lots or homes. Also roads and power already exist but there would be an additional 100k for water meters. 

 My first consideration was to sell off 3 lots and a flip in order to get one large lot free, but I could not find a way to finance a parcel and simultaneously divide it and sell off some of the lots and the rehabbed flip. This is the only pathway that makes much sense to me but I cant seem to figure a way to finance this type of complex deal. 

Another pathway could be to build one home on cash and rehab the fixer upper. However this would eat all of the cash reserves I have for the down payment so creative financing seems unlikely. Those rents could possibly get me into a DSCR loan at that point and then I could choose to continue the buildout or at that point divide and selloff vacant lots using partial release.

This is all an exercise in figuring out how to finance a project of this magnitude as I know its extremely unlikely. The one thing I do have going for me is my vertical integration. I built my last home on my own from the ground up excluding plumbing and electrical which is why I can build a home for half the price of other contractors. Also I'm a real estate sales agent and hope to save on commissions that way. I am very new to all this so any insight in your experiences is greatly appreciated. I know very little about financing and also developing. Unfortunately in Hawaii this is as small of a development project as you can find on the market so this is starting small here. My first project was a simple buildable lot and build, I guess I'm looking for the next step and maybe I should first continue doing what worked for me the first time. Thanks in advance. 

[Henry Clark]

Your first is to calculate your impact if this fails and what it means to you. 

Second is time. The more you do the longer it will take.  Interest will kill you. You might be saving on cost but losing on interest

part of this has to be interest only financing.  So you have to have a plan with your finance group

Don’t know your market but I would think everything you have has to be for sale at once.  You don’t know what will sell first.  You need cash flow if if you don’t get as much profit

you need to presale off possible. Get with other builders or developers and presale some lots.  Or to investors. Check out syndications. 

Figure what 9% interest does to your project. 

Hawaii to me is a resort market. If tourism backs offf what happens to your project

it’s my understanding it is hard or impossible to do Airbnb’s in Hawaii. Develop a model that circumvents that, then through syndication bring in investors. 

[Bryan Buckingham]

Thanks for the advice. There is a lot there for me to get started. My first instinct is to build another home to raise more funding before jumping into a development deal like this. 9% rates would derail the project most likely and they are a real possibility by the time of completion. I have a lot to learn of syndicates as well. Thanks again for aiming me in the right direction.