Myself and a partner have a potential opportunity for a spec build, and I am trying to run numbers for the proposal. I am just hoping to get some feedback. Big picture is to buy an old house in a prestigious neighborhood, tear down, and build new. We have spoken to to builders with in house architects. We have 350K in liquid cash. I also have a 400K HELOC available on a rental property. Going rate build rate is roughly 375-400/SF. Average sales price is roughly $950-1,050/SF. Our plan is to build 4,000SF. Permitting will be 3mo. Construction will be 12-14mo. Sale 3-6mo. This puts us somewhere between 18-27mo pending sale.
Land Acquisition: 1M + 50K in closing costs
Hard Costs:
Demo: 50K
Construction + Architectural Plans (survey, topography, permitting included) = 1.6M + 80K
Pool: 100K
Soft Costs:
Appliance package: 50K
Furnishings: 75K
Landscaping: 20K
Annual Carrying Costs (utilities/property tax/maintenance): 45K
TOTAL: 3,025,000.00
After speaking with two lenders, it seems the best course of action would be to put 20% down on land for 12mo/interest only. Then another 20% down on ~2M for construction.
The interest that we would pay is where I think my math gets sketchy. I figure the interest only payments for land loan would be roughly $2,100/mo. (800K @ 8% for 3mo). Then construction loan pulls and interest over the 12mo of constructions i'm getting roughly $5,400/mo for 12mo of construction. This would be around 71K. We are not worried about this amount and can easily cover out of pocket or longer if construction takes longer.
Sale: At $950SF, the sale would be 3.8M. I am a realtor, so I estimated sales fees to be around 5%, so netting 3.6M. I think it's important to note that the average sale for a SFH is north of 4.5M, so at a sub 4M price point we are bringing a level of "affordability" to the neighborhood so we believe it will sell quickly. Homes under 4M have a good track record of going under contract in under 30 days.
On surface, it seems like turning ~600K on a two year project with an investment of roughly 600K (or even 700 or 800K) would be very lucrative. Even if we were to return 200K, that's still a 15% annualized return, which seems to make pretty good sense to us.
Aside from the obvious delays in materials/construction, any feedback? Even if it took 2 years to build (which the builders have a very good historical track of finishing within 14mo on much larger projects than this, we have funds to cover the carrying costs.
