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Updated about 6 years ago on . Most recent reply

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8
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Joshua Fann
  • Real Estate Agent
  • Springfield, TN
0
Votes |
8
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Subdivision Development--How Much To Give Investors?

Joshua Fann
  • Real Estate Agent
  • Springfield, TN
Posted

I am a part of a family-run construction and real estate development company. My dad is a Civil Engineer, he and my brother are also contractors, and I am a real estate agent. We currently have the first option to buy 13.4 acres in the middle TN area, a suburb outside of Nashville, for $315,000. The property is zoned R15, so we can fit 38 lots there. The property is fairly level, but it does not have a ton of road frontage. We are going to have to cut a road through it. The after development cost (including road, water, sewer, electric, etc.) is around $18,000-$20,000 per lot, so $684,000-$760,000. We will assume the worst case of $760,000. We will be building houses in the 1500-2000 sq ft range. In our area, new construction is going for $130-$140 /sq ft. It should cost us $105-$110 /sq ft to build, which fits in with our 20% profit rule of thumb. Keep in mind that we can also "pay ourselves" to do all of the engineering, site development, construction, and real estate work. 

Based on what I have shared above, let's say that we profit close to $40,000 per house. Starting in the spring (after site development is done), we plan on building the houses in bundles of 6, with hopes to complete 18 per year. With 38 houses, this comes out to a little over $1.5 Million over 2.5 years. Here is my question:

We are currently talking with an investor for the project. We would split the financing 50/50, plus we found the deal and would do all of the work. I was thinking a 60/40 split in our favor would be very fair to the investor. We might could do the project ourselves, but it would stretch us pretty thin. This person also has strong connections at the bank and could streamline the project financially. What do you all think would be a fair share for the investor? 

Most Popular Reply

User Stats

76
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73
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Sean Davidson
  • Investor
  • Nashville, TN
73
Votes |
76
Posts
Sean Davidson
  • Investor
  • Nashville, TN
Replied

We take 25% of the profits of our townhouse development deals, giving the money 75% of the return. We backed into that number by ensuring that our investors get at least a 33% annual return on their capital based on conservative projections. We always invest alongside our investors, in which case we just get a proportional piece of that 75%. We don't charge any additional development fees or give any preferred returns or waterfalls. Most of our investors prefer the simpler solutions. 

Also, remember that there is no such thing as a standard deal. Whatever two parties agree to is all that matters. That being said, if I was your equity investor, I would want rates and limits for your time to be set in the partnership agreement up front. I would want to ensure that you doing the work saved me money rather than costing me more. You want to be very careful with conflicts of interest when you are paying yourselves out of shared funds. Hope that helps.

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