Ground Up SFR Spec Home Business

[Marko Zlatic]

All, 

I would love to hear your feedback on a rental business model that was presented to me by 3 other individuals and their respective roles in this project. 

Individual 1 - Experienced Homebuilder

Individual 2 - Investor

Individual 3 - Investor/Property Manager

Their idea is to build spec Single Family Rental Homes with the ultimate goal of building the portfolio to 100 units over time. Individual 2 & 3 would put up the cash for the construction of the home and then dilute their interest by 30% upon completion to the builder who would assume that 30% as an equity partner. He is forgoing his builder fee, leveraging his connections, managing subs, etc. 

The ownership structure of 1 single family home would look like this after the deal is done:

Individual 1 - 30%

Individual 2 - 35%

Individual 3 - 35%

An example of a project they are proposing would be a 3/2 Single Family Ranch with attached garage that would cost roughly $105,000 to build (all in) and would be worth about $130,000 if they wanted to sell it immediately. They are anticipating rents of roughly $1100 for this market. 

Their goal for the investors is to refinance the house as soon as its occupied with a tenant and pull their initial investment out. They would then move on to the next project. Think of it as "planting seeds" of rentals. Rinse and repeat.

What are your thoughts on this model? Thank you in advance for your feedback.

-MZ