work and thought project for newbies. Please join in.

[Rich Weese]

It is always important to be able to analyze properties and potential acquisitions/sales. My belief is most of the profit is made on the buy. I have an opportunity in real life and want to throw it out there. There will be 2 choices on this "assignment" and it'll be a good opportunity for you to do some thinking and "paper trading". I already know what my decision will be, and I'll eventually tell you why. I want you to think for yourself first. Take this as fun.
Scenario- I bought a 64 lot subdivision in So. TX a little over a year ago and have posted the terms on BP.. I made a good deal because I had an exit strategy. I built some 4br rental homes to keep it flowing, AND convinced the City to allow me to gate the 2 entrances and make it a gated community. Values and prices of lots were more than doubled by going gated community with very little cost. I've sold a few lots and built a few presold homes. I just ramped up and have started 4 new Model homes, because the market is really strengthening.
I figured I could completely build it out in 3-5 years. Currently, I can make about 30K per home and that would hopefully increase as the time goes on.(1.5 million at present values GROSS)
Option 2- I just had a very heavy hitter in So. Tx make me a cash offer on all remaining lots. At his offer, I can double my money (600-700K profit) and 1031 to something else. He has a bank in his pocket and likes all the characteristics of this project- City, Schools, proximity to Mexico, price point etc.
Now, those are the choices . What do YOU choose and why. Don't be afraid to respond. Many things could be considered.
1. time value of $$
2. other money making vehicles
3. Etc.
Just jump in with your choice and why. Use all the points you can to back up your selection, kinda like a debate. Rich.

p.s. I'm sitting at a hotel on Ft. Lauderdale Beach and bored for the afternoon, hence the posts!! Tomorrow, back home.

[Rich Weese]

27 views and not one serious thinker? You might gain something from your thought process on this . Rich.

[Vikram C.]

Your post called for response from newbies. Most of us old timers may have decided to abstain. For me, it is quite obvious what I will do but, like you, I will wait to hear from the real newbies before posting my thoughts.

[Steve Babiak]

Rich,

My thought wasn't so serious - but here goes just to break the ice.

Unload, and pump the funds received into more of those transactional funding loans that go into default.

How's that for advice - it'll change your name from "Rich" to "Poor" without a doubt :D

[Rich Weese]

Somehow, we need to get better involvement with newbies. If they'd actually do analysis and "paper trade" on deals like this, it would help them brainstorm, imo. Get them to do some of their own thinking. Rich

[Marc Freislinger]

Rich,

I would do something completely different than what I think you should do.

If I was already financially well off, I'd wait around and take the full value of the investment. It looks like you've already made some great choices to improve the value, and I'd watch it pay off.

Being new in the industry, I'd sell it. Cash in hand beats waiting around for money at this point in my career. That money could be put towards other investments.

[Bill Gulley]

Rich, maybe the numbers are too big with too many properties, even though it's one deal on one hand, it's development on the other, for newbies?

Vikram, haven't you been in RE since Q4 of 09? If you ever said what you did, I missed it, I just guessed at insurance/financial planner, broker/CFP, just guessing....take a shot, what's your opinion?

Steve, I'm with you and can sum it pretty quick, but that take Rich's skills into account as well!

[Sean H.]

I'll take the bait.

If I were in your situation, being 23, I would take the buy out, be happy with the doubling of my profit and look for other investment vehicles to keep the ball rolling.

I know that you are mainly in real estate to pass the time between your trips and build an inheritance for the next generation, and despite being very successful, you do not want to pursue it full-time, hence the reason you retired at age 29. My guess is that you will be content with building a couple of houses a year until it is built out in 3-5 years.

Being politically vocal, my guess is that you are getting ready for inflation. There are two schools of thought on inflation that appear here on BP, one that says real estate tracks inflation and to have leveraged real estate at "normal" prices will protect you in times of inflation. However, you've also mentioned that you buy gold, ETFs, etc to hedge against inflation. It's a tricky path to walk with pluses on both sides of the fence.

[Account Closed]

Ill give it a try as well. Feel free to pick this apart. I dont mind being told that I am wrong as long as I learn from it.

I have read this over a few times and I think I would sell to the developer for the 700k and 1031 that into a larger investment.

This is my reasoning.

Lets say you can build it out in 3 years and get 1.5 million. Then you have to pay capital gains taxes on all of those profits (est. 25% of 1.5 million) leaves you with 1.125 million after 3 years.

If you have a qualified buyer and can sell quickly for 700k you can 1031 that into another investment. Using the 700k as 20% downpayment gives you a investment property worth 3.5 million. Assuming you can find a property that has at least a 10 Cap Rate ( Im sure with your experience this would be no problem) that gives you a NOI of 350k a year. Mortgage on 2.8 million at 6.5% 30 years is $212,376. This gives you a $137,624 a year of cashflow.

3 years of cashflow from this investment = $412,872
(Not to mention tax benifits)
Total equity in the property after 3 years = 1.015 million
3 years of appreciation (assuming a minimal 3%/yr) $315,000
Downpayment of $700,000

After a quick review and running these numbers I think that selling now and using a 1031 exchange into a profitable investment property would be the way to go. I also think that rolling your profits into a larger investment property would make for a much more passive investment then building out 50 or so lots. Escpecially since it seems like you enjoy traveling. Also if it took you 5 years to build out all the lots, the 1031 would put you much farther ahead. Just my opinion though.

Brady

[Randall Rose]

I think if you are a cautious investor,then you hold for the payoff.If you are a go getter,then you cash out.
I choose,cash out! I have 3 to 5 years to make up 1 million dollars I walked away from.With 600k I should be able to make 1.5 million in three years,and 3 to 4 million in 5 years.The subdivision is a bird in the hand,but the 600k in the right hands can produce a greater return.

[Vikram C.]

Originally posted by Financexaminer:
Vikram, haven't you been in RE since Q4 of 09? If you ever said what you did, I missed it, I just guessed at insurance/financial planner, broker/CFP, just guessing....take a shot, what's your opinion?

Bill, one good thing about your poor manners is that it allows others to be frank with you as well. As Bryan has mentioned in other posts, you seem to have a penchant for ad hominem attacks. You also seem to have this habit of speaking very generally on topics, just what I would expect from someone who does not have real experience but has probably read some books on RE. I guess that's the difference between a "coach" looking for clients on BP versus a real investor like me.

Regarding my experience, sure I have been in RE for less than a year. But I have been investing for decades and an investment decision does not change its colors much based on industry. I am quite confident that my investment abilities compare favorably to yours. But I guess that's why you invest OPM (other people's money) while I invest my own.

[Scott R.]

Couldn't agree much more with what was said here.. Vikrams comments on Bill included, like Rich said, we need more newbie envolvement not newbie bashing, but back on topic, being in your finances and goals and such, I'd hold off and wait to see the development I envisioned and created, being in my situation I'd sell without a doubt and invest that money in other places, but you don't need that money to invest in other places, and with realestate as a hobbie like you prefer, I'd love to wait and finish creating the development. Scott

[Rich Weese]

WOW!! There are some replies since last night.

Marc- your votes were well deserved. Quick and to the point

Sean H- Only 22 posts, 23 years old and VERY well versed on my background and thought processes. I'm impressed. One small correction, I've never bought ETFS and if I stated so, I was in error. I am a firm believer in potential run-away inflation and will stand by that.

Brady- wow! You need to be on here more often! I tried to vote for your post, but my button is locked. And only 12 posts! Your analysis should be taught to most of the posters on BP, imo.
The only error, which will make it better is the amount is not 700K. The doubling my money is the original 600K plus AND the doubling amount of a little over 600K. So, I'd be taking a 1031 toward a bit over 1.2 to next deal.
I'm impressed with your thought process. What are you doing with it? I had a RE brokerage in Denver in 1979 and lived in Littleton, Bowmar South. It was WAY to cold for me and left after a year. Are you investing there now?

Randall- another newer poster. Great to have your thoughts on this also.

Bill and Vikram- you're both too good for this bantering. I really enjoy you both, but get this crap out of my thread.

It was really nice to see the newbies in this thread. Keep it up and others join in. I'll keep posters from bashing your thoughts. Most have been excellent, imo. Rich

[Bill Gulley]

Originally posted by Vikram C.:

Originally posted by Financexaminer:
Vikram, haven't you been in RE since Q4 of 09? If you ever said what you did, I missed it, I just guessed at insurance/financial planner, broker/CFP, just guessing....take a shot, what's your opinion?

Bill, one good thing about your poor manners is that it allows others to be frank with you as well. As Bryan has mentioned in other posts, you seem to have a penchant for ad hominem attacks. You also seem to have this habit of speaking very generally on topics, just what I would expect from someone who does not have real experience but has probably read some books on RE. I guess that's the difference between a "coach" looking for clients on BP versus a real investor like me.

Regarding my experience, sure I have been in RE for less than a year. But I have been investing for decades and an investment decision does not change its colors much based on industry. I am quite confident that my investment abilities compare favorably to yours. But I guess that's why you invest OPM (other people's money) while I invest my own.

LOL, you need to read my profile, doubt you have done over 1,000 deal as I have with MY MONEY, buying for cash. RE is not wall street when you're buying the dirt my friend. I could write a book on why one should use OPM, but should be obvious.

I was not trying to attack you, sorry you felt that way, just that you apparently are a newbie in RE, regardless of your background in financial markets and wanted to see what you thought! Do you have any idea what all is involved in developing a subdivision? I do, again, sorry, let's just keep trucking along and I'll try to use kid-gloves approaching the light weights from now on...sorry. Bill

PS. Rich, had I seen your comment before I began this I'd probably just pass, on comment sorry. I think this is a great opportunity for everyone's .02 worth.

[Mark Updegraff]

Originally posted by Rich Weese:

Scenario- I bought a 64 lot subdivision in So. TX a little over a year ago and have posted the terms on BP.. I made a good deal because I had an exit strategy. I built some 4br rental homes to keep it flowing, AND convinced the City to allow me to gate the 2 entrances and make it a gated community. Values and prices of lots were more than doubled by going gated community with very little cost. I've sold a few lots and built a few presold homes. I just ramped up and have started 4 new Model homes, because the market is really strengthening.
I figured I could completely build it out in 3-5 years. Currently, I can make about 30K per home and that would hopefully increase as the time goes on.(1.5 million at present values GROSS)
Option 2- I just had a very heavy hitter in So. Tx make me a cash offer on all remaining lots. At his offer, I can double my money (600-700K profit) and 1031 to something else. He has a bank in his pocket and likes all the characteristics of this project- City, Schools, proximity to Mexico, price point etc.

Super Newb here! Taking a stab into the unknown...

I'm going to write this before reading the subsequent posts.

rates compounded annually

Option 1: Hold / Develop / Sell
1,500,000 Gross profit in today's dollars.
5 years assuming the housing market follows a 2% inflation rate: 1,656,121. (A)

5 years Assuming the housing market rises at 2% over inflation (4%): 1,824,979 (B)

5 years assuming the housing market rises at 8% (very optimistic): 2,204,000 (C)

Option 2: Immediate sell and 1031 exchange the money into a different vehicle
700,000 Gross profit in today's dollars.
Invested at 8% (modest) return, 5 years: 1,028,529

Rate needed to match Option 1 A: 18.8%
Rate needed to match Option 1 B: 21.1%
Rate needed to match Option 1 C: 25.8%

So, I guess if I was an old fart I would opt for option 1. Being a young buck I would opt for option 2 and BEAT the 25.8% optimistic outlook.

:cool:

[Account Closed]

Rich, Thanks for the encouragement, I appreciate it.

I have done some investing, although I still consider myself pretty much a newbie since I am only 25. I bought my first rental, a sfh when I was 20 and in college. Since then I have flipped 4 houses and still hold 2 as rentals back in North Dakota where I am from.

Since I graduated college I have been working part time to pay the bills, and studying everything I can about commercial real estate. I bought my first apartment building (12-units) in April in Minnesota.

Since then my wife received a great job offer here in Denver (we always wanted to leave North Dakota, way too cold) and we have been living here for about a month. Now I am just trying to prettty much start over down here in Denver, networking all I can, going to REIC and every seminar I can find to try to pick up where I left off in North Dakota, and Minnesota.

So any other investors out there from the Denver are, if you have suggestions for investing clubs, seminars, meetings, etc... I would love to hear about them. Or if anyone would like to meet in person I would be more then happy to buy you lunch and discuss real estate.

Also I wish I would of found this website a few years ago. It has great information and would of saved me a ton of money on Amazon ordering all the "guru" books.

I appreciate all of you guys spending your time posting on here, helping newbies like myself get started and now that I am not so afraid of sounding stupid on here, I look forward to getting into some discussions and debates with you. Thanks guys.

Brady

[Chris T.]

At this point in my career cash is king. So, I would cash out then re-invest it over and over again assuming the same time frame of the aforementioned buy and hold strategy.
As they say, "A bird in hand is better then two in a bush."

My strategy would be geared more towards rapid growth in the early stages to build up a large cash reserve, and operating capital so that I could more effectively manage a larger portfolio long term in the future that would be more of a slow and steady growth strategy.

However, if I were you, I would consider taking the offer and developing another near-identical project, sell it, and repeat.

[Mark Robinson]

I will tell you my thoughts on this. I would take the cash offer from the heavy hitter and 1031 it to other property(ies) in the same area since it seems to be up and coming. This will give you the benefits of the 1031 and allow you to stay in the area and continue to take advantage of the strengthening market.
You have a motivated buyer who probably can close quickly and without problems. There are always going to be opportunities and if you can double your money sooner and get into other properties to make other profits it makes sense to me.
Where I have no knowledge is is in the building of homes and what the time and costs are associated with them. You have the subdivision flowing with the rentals and you have added value by gating the community but I think there is more risk involved with building. Let the heavy hitter assume the risk.
Hope to get some constructive criticism from this. Mark

[Eli Rozansky]

Rich,

I wouldn't call myself an expert, but I would take the money now. I don't know what kind of deals you are able to reinvest your money into, but sitting on that much land in today's market could be dangerous. Although there are signs of the market strengthening, it is still volatile and I would not want to building 40+ more homes just to run into the risk of them sitting for multiple years. With 600k, you should be able to make whatever you would from the development somewhere else in the same amount of time for possibly less risk.

Feel free to respond, I'm new to BP and the industry.

[Don Hines]

I vote for option #2. Simple reason.... I have been in a similar situation with a business that I could have sold and lost out because I was greedy and wanted to wait to make more. That was 25 years ago. I have basically been on somebody else's payroll since it went bust. It has already been said "a bird in the hand....".
Don

[Rich Weese]

Additional great replies. I love the newer members sticking their necks out with their thoughts. Lots of good new blood on here.

Mark- great logic.

Brady- you'll be indtructing the masses before long. I had an investment company in Denver in the late 70s.

Chris- very good reply and great suggestions!

Mark-welcome to BP! Love to see newbies on here.

Eli- I only build as new homes are sold. The rental homes were to prime the pump. No real risk on project since all lots and all but 1 home is free and clear. (I needed to generate some credit for fico!!)

Eli and Brady should get together- both in Denver. I appreciate the new replies from new posters. As long as this continues, I'll hold off on my reply. Thanks for using this work and thought project. Rich

[Sammy Johnson]

i would go with one as hobby and do lil at time cause economy will get better and real estate and gated community got to go way up the first house i bought @20 was worth 42k and 6 yrs later when sold it was worth 89k and just the person i am when i got back from Iraq went to visit guys i grew up with and the same house now is worth 170k now @18 yrs

[Gus Betelu]

Rich,

I'll dedicate my first post to your thread since I found it very interesting. In answering your post, i beleive it is most important to view what "you" should do.

You wrote "I am a firm believer in potential run-away inflation and will stand by that." By reading this to me the answer is obvious, you should sell and invest the profits in Gold and Silver.

I love RE but the #1 investment in a high or hyper inflationary economy is by far these 2 commodities.

I hope nobody minds me mentioning something besides RE but you asked everyone to pitch in and one thing I know is Gold and Silver.

BTW, I also beleive in this scenario and are betting on it as well. Thanks for the opportunity, and good luck!!!

[Account Closed]

While I'm not new to investing and analysis, I am new developing. So, I'll give my two cents.

First consideration would be the time value of money. Money today is worth more than money in the future.

Assuming you have built out 4 lots. 60 lot times 30K estimated profit per home sold is a future value of 1.8 million in 3-5 years. For this example I will use 4 years. You’re estimating a PV of 1.5 million which if you sold these homes evenly over the course of 4 years would mean your assuming an approx 8% rate. (A discount factor of .8333 with annuity like receipts of 450,000 per year for 4 years)

Option 1 can yield 1.5 mill in today’s dollars.

Option 2, Let’s say you get 650K and 1031 into a new property, can leverage you into a similar investment nearby that could potentially yield 4 times the return assuming about a 25% leverage on a similar subdivision.

[Vikram C.]

Charles, a couple of comments regarding your analysis:

1. The discount rate that an investor should use should be the opportunity cost of his capital with a similar level of risk. Since Rich can probably invest the proceeds of a sale at a much higher rate of return than 8%, he should use that higher return in calculating the PV.

2. The leverage assumptions should also be similar across both the options. One would assume that if Rich wanted to extract cash out of this project, he could do so by using leverage now. Therefore we should assume equal leverage for both scenarios. (Perhaps Rich can let us know if, for some reason, he is able to use leverage for future projects but not on this one.)

[Vikram C.]

Here's what I will do assuming that I was in Rich's position.

1. Rich has said that he could get a profit of about $650K right now. I do not know how much he has invested in it, but let's say that the gross proceeds of a current sale will be 1 million dollars. The alternative is, let us say, $1.6 million in 3 years including some appreciation. (But not sure what Rich meant when he said this is "gross".)

2. Given the alternative between $1 million today and $1.6 million in 3 years, it is a no-brainer for me. I know I can invest the $1 million and make it more than $2 million in 3 years so I would never trade that for $1.6 million in 3 years. In other words, I would take the money as most of the other posts have suggested. In addition, if the $1.6 million is subject to taxes, it would make the argument even more compelling.

3. Another thing to consider is Rich's value-creation. Rich has already added most of the value to the property by getting it approved as a gated community. At this point, what remains is just execution, which I suspect underutilizes Rich's value-creation skills. If I had those skills, I would get the cash and deploy it somewhere else where I can use my skills to create similarly great value.