Finance, Build and Sell Texas: Worth the Risk and Reward?

Question

Hello fellow BP Friends. I wanted to run a deal by you and see what your opinions are on the upside as well as one question I have about the taxes.

Description of the Deal

A friend who just did this same deal introduced me to a builder in San Antonio who is building aprox 2400 Sq/ft 4 bedroom 3 bath houses on the 35 between San Antonio and Austin where a lot of people are moving.

I buy the lot and get a construction loan. He builds the house in 4 months and at the end we sell the house and split the net profits 50/50

He can build the houses start to finish in 4 months and typically they are sold before they are done being built. Last home sold for $331k before Commissions

Total investment ($50k)

$45k LOT

$5k Origination Fee for $226k Construction Loan (6% construction Loan. Variable after 1 Year)

($2500 interest fees on the loan but this can be covered by the loan)

Risks

Economy takes a $&*#& and I'm stuck with a rental with a variable rate, but could refinance and get a 30 year fixed loan.

Sell the house at cost  - $270k and make $0

Reward

Average Profit between $40-55k

My Profit - $20-27.5K (Minus income tax @35%)

$13k-18k after taxes.

Questions

What are peoples opinions about this deal?

Is this a good deal?

Any thoughts about tax shelters to protect the tax bill?

Numbers. (Closing costs are Wrong on the Doc Below. Should be $5,000)

Betty Cruz · Answer

@Adam London  Is your construction loan supporting the entire project? If so, I'm not following where the builder is at any risk.

Dean Weltman · Answer

@Adam London I think that at $90/ft on a house in that price range, he's already paying himself to GC - I doubt that's a wholesale cost, hence, you're getting less than half the profit and he doesn't sound like he's on the hook, at all, financially. Look at the worse case scenario and then see if you still like the deal.

I built a spec house that took a YEAR longer to sell than expected, AND it was over-budget...

Ultimately, it's up to you if it's worth it. Certainly, looking just at your cash-on-cash or ROI it's probably a good deal, as long as you don't mind the additional risk and tying up your name on a note...

Kris Wong · Answer

I would not take that risk for that little profit. And no way he gets it done in 4 months. We have an environment we're trades literally don't show up to your job because someone else offered them a little more that day. Building in this area is getting as difficult as finding a good deal in this area.

Kris Wong · Answer

You are correct that it will be taxed as normal income.

Adam London · Answer

@Betty Cruz Yes my loan would support the entire project. The builder is responsible for insuring the house up to a 5 year warranty but said that he guarantees the up to 10 years.   Thats good feedback though.  The builder is subbing out all the building costs. He mentioned that he builds for between "$85-90 a foot but a builder like DR horton builds the same product for $75 a foot because of there volume."

@Dean

@Dean Weltman Sharing equal risk you mean taking out a loan together? I guess I see it as he's dong the project management and earning his 50% that way and I'm just providing the money.

@kris

@Kris Wong He just did a 4 mont turn around with my friend but maybe I should build in an extra month of cushion. Either way the mortgage would only be about $625 extra for that extra month.

My Thoughts: I have a salary right now and don't need extra income, I actually need more write-offs/losses. Paying a 40% tax bill on this makes it even less attractive as from what I understand I'd have to take this income as pure income. Does anyone know any different? I think I"ll find a multi unit instead as it may not have the quick cash in my pockets its better long term.

Adam London · Answer

@Thomas S. The Margin would be $40-55k but the 13-18 would be my 50% split after taxes.

I was talking about this deal with a friend who mentioned that since I currently have a salary, I should be looking for more tax shelters vs more income. I do agree but while I wait for the market to cool down, I figured I'd take the opportunity to make some more cash for future investment.

Thomas S. · Answer

$13 - $18K is a very tight profit margin. Not much room for things to go bad. If your confident and the effort on your part is very little it may be worth your time.

Finance, Build and Sell Texas: Worth the Risk and Reward?

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