Please critique this new construction deal....

[Lauren Thomas]

Hello BP Community!

We’re seeking your expertise to critique a new construction deal we’re considering. If you’re open to it, take your gloves off and let us have it….’no holds barred’….PLEASE.

About Us:

We’re remote investors with a great team in place in the market we’re investing. We’re still relatively new buy and hold investors (i.e., ~1.5 years) with a 4-plex, a duplex, and two multi-family zoned lots. We’re actively looking to grow our portfolio in our targeted market focusing on buy and hold small multi-family. One project we’re strongly considering is building a tri-plex on one of the multi-family lots we currently own. We’re a bit apprehensive due to what some are calling “transitory inflation’ and we’re asking ourselves….”is now the time to build?”…among other pertinent questions. Here is an overview of the deal….

100K View of THE DEAL:

We own a multi-family lot valued at ~$45K

We’ve completed a tri-plex design and current day construction cost is ~$373K

I’ve studied and am comfortable with the economic outlook of the market we’re investing (e.g., population YoY growth, unemployment, median income growth, business anchors, etc.)

Our intent is to be long term buy and hold investors

Phase 1: Construction

Construction time is ~12-13 months

We’ll fund construction with a commercial loan @ 4.99 fixed for 20-yrs w/ 25% down (~67K after closing costs / 3-4 draws during construction at interest only)

Additional carrying costs include insurance, property tax, etc. (~$200 - $400 monthly)

Current net cash flow from existing REI will cover construction time related carrying costs

Phase 2: Post Construction / Tennant Occupied

Rent the three units for $1200 each unit / $3600 total (our team feels we could yield ~$1300 – $1400 per unit present day. (we’re being conservative @ $1200 for analysis purposes)

Refinance to 30-year conventional after 6-months of tenant occupation (our conventional lender tells us they require the 6-month duration)

- Pending fed action / outlook, we're using for analysis purposes 1-point and 4.5% for a ~18-month out forecast on conventional refinance investment property rates. Our current 30-year REI conventional loans are between 3.625 – 3.875.

Aside from traditional debt coverage (i.e., PITI), we will save each month for CAPEX / MAINT. / VAC. as recommended in the BP calculator.

Long term buy / hold strategy

After Refinance Analysis: (includes CAPEX/MAINT/VAC)

NOI = $29,592 COC = 15.9% Cap Rate = 8.03%

Gross Rent = $3600 month    Expenses = $2710  (includes reserves)

Monthly Net Cash Flow = $889   5-YR Annualized = 22.53%

BP Community Questions:

Is there a more appropriate analysis tool I can use for long term buy / hold new construction? Currently using the BP rental calculator. I looked at the BRRR calculator however was unsuccessful fitting this scenario in. (i.e., to more accurately account for construction carrying costs)

For after construction analysis, do you agree / disagree with my assumptions on refinance rates? (what’s your crystal ball say?)

What is your thought about building now despite the inflationary costs impacting new construction present day? (e.g., lumber, garage doors, labor, etc.) Do you believe these increases are in fact ‘transitory’ given the present-day supply chain bottlenecks? Would you wait for inflation to normalize? (e.g., our builder estimates this project would have been ~$37K - ~$55K less 2H 2020)

Any other critiques / advise?

A sincere THANK YOU for taking the time to read and potentially reply. THANK YOU!!!!

Thanks,

Chad and Lauren Thomas