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I've been contacted through a friend about a townhome investment package in downtown Richmond of Vancouver, British Columbia.


would someone that has some knowledge/experience in the area be interested in looking at the project summary and offering some feedback?

This is the initial email I recieved:

As discussed, I wanted to share a few details regarding our project in downtown Richmond, 10 minute walk from the Skytrain station. It is our intention to build 24 three bedroom Townhomes in an area that is desperate for affordable family housing. It is also walking distance to parks, shopping, schools, and entertainment. South Street Development (www.southstreet.ca) has a long track record of building similar projects around the Lower Mainland, including Richmond.

The demand for affordable family housing in this area is strong, and the timing of this project is fantastic as single family houses in the area are going for around 2 million. Our proposed townhomes will allow a family to have the necessary space they need at a fraction of the price of a single family home. This development will also give younger families the opportunities to purchase in a vibrant neighbourhood. We anticipate selling the townhomes at a conservative price of $660/sf or between $1-1.2M.

The structure of investment would be via a Limited Partnership with a preferred return of 15% (per annum). As a preferred return the investors will earn their return, from proceeds of sales, prior to South Street receiving any profit. In other words, investors will receive their full return (an estimated 45%) at the end of the project. We expect the duration of the project to last between 3-3.5 years.

We are looking to raise a total of $4M of which South Street will invest $1M. The equity will be used for land purchase, permitting, and construction of the project.

Let me know if you would like further details.

So the plan is to turn $4m into $24-28m worth of town homes in 3 yrs? What am I missing?

Does it seem reasonable that you could build a town home for $170k and then resell it for $1-1.2m?

Does it seem reasonable that a company "with a long track record" of turning this kind of profit would need your investment?

With any kind of history a company willing to put up 1m of their own $ shouldn't have any trouble getting the rest of the $ from a bank at a much better rate.

Why do they need your $?

I'm looking at 16mill in "senior debt" they are accounting for?
They are projecting to sell @ 650-700/square foot? Is that reasonable?



Good points

Why is 170k unreasonable for 1600 ft? Why would they tie up all their money in one project if they can spread it out over multiple projects to lower risk/make more money? Good luck getting a bank to loan you money on projects like these....where I'm from they're EXTREMELY risk adverse and want you to come in with most of the money....

There's a reason for that and the fail rate of projects like these is so high that they would need to charge insane rates to turn a profit without requiring a lot of equity down. Plus the people who have done projects like this before and have a low fail rate are more likely to have other avenues to finance these projects so their applicants are skewed towards failure.

On that note I would ask for track records to verify that they stay in line with their budgets and time frames. Their numbers seem very even I.e. Not true or accurate estimates and I'd imagine their schedule is very difficult to achieve from my experience. They're schedule doesn't really make sense and looks really front heavy as well IMO. Typically this is standard but can be a problem because they are saying they're ahead of schedule and so on and everything's going great then when they get to the backend they run behind schedule start eating into profit with interest/change orders and eventually have a loss. Don't see where they're getting their take of this or how much either so I'd figure out what their angle is and make sure it aligns with your interests (a private equity that only gets a share on profit is more likely to suceed then a developer who gets paid for construction costs no matter what and is incentivized to misslead investors)... looks like they're double dipping with a take as a developer or marketing/sales (incredibly dangerous to invest in) and a share on profits but can't be sure really. all in all doesn't seem worth it from a risk perspective without knowing their track record although their return on capital is in line with what I'd expect for a successful project and they're time frame shorter then I'd expect

Just looked at it again.... looks like projected profit is 4mil+ but investors take is 1.8mill.... definitely not the norm... I don't understand why someone would want to invest like this is a completely unknown business partner... the risk is enormous and the payoff is incredibly limited

It isn't. It is unreasonable to think you're going to spend 170k and turn around and sell it for 1.2M. People spending that kind of $ expect high end features and finishes that can't be done for that price.

They aren't. According to the OP they're putting up 1M while raising an additional 3M.

You're right those banks certainly aren't going to lend you the $ for a project like this.

Those same banks would be very happy to lend an experienced developer "with a long track record of building similar projects" the $.

If they actually have "a long track record" they would have no trouble whatsoever raising money from previous investors or banks. There would be no need for soliciting randoms thru their friends via email.

This structure is typical of a development project. If you look at the Proforma you will see that the $4M they are asking for is for the equity portion of the project. (similar to downpayment) They are financing the other 80% at bank rates. This arrangement is very, very common on large development projects.

Typical equity stack is 70-80% traditional bank financing in 1st position. The remaining equity is usually made up of LP's, EB5 money or similar. Most of the time the developer might have 5-10% of their own money at the very top and the most junior. (AKA first money to lose).

The 20% equity portion is paid a higher interest rate because they are junior to the bank construction financing. But when you "blend" the rates of financing its pretty reasonable. 4% rate for 80% of the money and 15% rate for 20% equals a blended rate of financing of 6.2% for the whole project. (.04*80+.15*20)=6.2.

Yes and No. First of all the land is costing $231 sq ft for each TH. The hard construction costs are ~$110 sq ft. The soft construction costs are about $78 sq ft. So the construction costs are actually ~$188 sq ft plus land. Total cost per sq ft before cost of capital is $419.

Selling at $600 sq ft means a gross profit of $181 sq ft or about 30%. These numbers are pretty typical in development.

Of course net profit is going to be much lower after financing and selling costs.

Giddy,
Nice breakdown of the project.

Fwiw my response was based only on what was in the op before he released additional details.

This sure makes it look a lot more like a no than a yes.

What are some good value real estate newsletters to subscribe to? The Bigger Pockets one seems too focused on beginners.

If you were buying a property in a great area, but it had a house in disrepair, would you fix it or tear down and rebuild? If the remodel costs around the same as a tear down, what other criteria is there for making that decision?

Upkeep/resell value.

If they are reasonably close, a full teardown is a way way way better idea.

Thanks. If you were doing a teardown, would you consider modular construction for the new dwelling? Besides the time saved and the quality control, are there any other benefits to going modular?

I find this highly unlikely that remodel cost = build new cost. As someone who has remodeled hundreds and homes including complete gut jobs and also built homes from the ground up a remodel is always cheaper. The closest I ever came on a project to the remodel being close to new construction for similar size house was about 75% remodel to new cost.

Now there are many advantages of new construction over remodeling in which the extra cost is well worth it. Sometimes an old house is just too functionally obsolete even if everything is made new. (Low ceilings, strange house placement on lot etc)

Thanks for the feedback. You're pretty close to the numbers. I'm trying to avoid getting hosed, any insights you have to offer are appeciated.

The existing home has settled pretty badly on one side (sloping lot). The basement has to be dugout (homes in the area have finished basements). The main floor is tilted due to settling, and the Bedrooms/baths are undersized. The kitchen is so narrow you can touch both walls at the same time. New electrical/plumbing is needed, and the entire roof needs to be replaced. Needs a garage (homes in the area have 2-car min). List goes on...

I was told that when they come to dig the basement, they can address the settling issue at the same time to save a few bucks. Other than that, remodeling this is essentially rebuilding everything from the ground up.

It's essentially ~$200k for the remodel or ~$250k for a modular. If they both turn out beautiful, how much more can I get back for the new factor?

When calculating yield, does one ever look at the price they paid? Or do they only look at the current price of the market?

I was having a discussion with a friend today. He bought a property at around 300k some years ago and it is now worth 1.2m. He is only getting a 3.6% yield on the rent he is getting (43,200). When I mentioned the percent, he said 'buy what about what I bought it for?'. Surely one must look at the current value and opportunity cost?

This discussion basically stemmed from the fact that he has many properties and I was talking to him about property versus indexing. Say you get a 7% return in the market, that return is compounded. If you get say 5% on rental property, the property price also appreciates. Does this all level out? Does the market have a way of somehow pricing in the risk for any extra return on one? We are in London UK, which is probably the most resilient hosing market in the world (will see what happens with Brexit) where investors could have and did make a fortune.

Yes, exactly, with a caveat that one should account for the tax amounts payable.

E.g. as far as I understand the British tax system, your friend would pay the capital gains at the 28% rate on the sale but is paying the income tax at the 40% or even 45% marginal rate on the rental income. So the value of his property adjusted for the CGT is £1.2M - (£900K * 28%) ~ £950K, whereas his post-tax rental income is £43200 * (100% - 40%) ~ £26K, so the adjusted yearly ROI of the property is 26/950 ~ 2.7%.

Such a low yield is no surprise because London is prestigious and is in a housing bubble. The prices are highly volatile and speculative, whereas the rent rates are more or less proportional to the average salary even in the short run, as people can spend only so much out of their income on the rent.

Looking at the 100-year history of US housing prices, a blogger has observed that the appreciation of RE has barely beat the inflation over this period. So the expected total return on a rental is less than 7% in the very long run (5% from the rent + 1% from the inflation + <1% from the extra appreciation), though in the short term, it's subject to high variance and may be bigger if you're good at predicting price movements and picking properties that are likely to appreciate the most.

The return on a rental is compounded too if you immediately reinvest the profit elsewhere, which is however hard to do if you only invest in RE; if you hold a mix of RE and index funds, it's not a big issue as the rental income can be immediately reinvested into the funds, whereas money can be withdrawn from the funds when you find a good opportunity to buy a new property with it.
_______________________________

I'm yet to read the first 2178 posts of the thread (i.e. the posts from the times when spex was here).

For now, is there anyone still around who is good at investing into RE at the 'foundation stage' of 'equity construction' (i.e. the starting stage of the construction of a mass-multi-family building when the sale is at a 20-30% lower price in order to attract early bird investors and use the revenue from these early purchases to fund part of the construction works) with the intention to rent the property out when it's ready? It's like buying a futures contract for a flat that's due in 2020 (maybe even a few months or years late if the developer runs into financial issues ).

The reason why I'm considering doing this is not the speculation on the local housing prices in general (which, I believe, are following the inflation in the long run, as written above) but the opportunity to benefit from the improvement of the infrastructure of the neighbourhood (the prices are believed to jump up by ~15% in the low income housing segment once decent public transport appears in the area), which is supposed to compensate for the lack of rental income in the first 2-3 years, the cap rate of renting out being 5-6%. (Assume that the dev is participating in a governmental housing project so the only question is not whether the house will ever be ready, but when it will happen, and the dev is quite solvent so a delay is unlikely unless a big financial crisis happens.)

The problem is that I have no insider info on this market - the pending resolutions of the city council (regarding the development of the infrastructure) become known to RE developers earlier than to the public (and are made in collaboration with the market-leading devs), and the devs readily pitch the positive sides of such municipal plans (which might not come true) while hiding the negative facts when they sell those '3-year futures'. So I'm afraid those plans are priced in and pitched too optimistically.

Is there a way to get an extra yearly profit by being an 'early bird investor' (as opposed to just buy-and-rent-out), or should I give up on it and focus on houses that are ready for renting out, even though it means that I won't be able to buy for cheap in current suburban villages that are scheduled to be urbanised in the coming years? (Alas, mortgage is out of question either way.)

One more Q: provided that I'm considering buying extra RE in the future, is there a better way to hedge against a possible rise in its price than investing most or part of the money that I'm saving up into the stock of a publicly listed developer and selling the stock just before the RE purchase (I'll likely end up buying RE from this same dev, who is holding 14% of the local market in diverse locations, and alas no other dev is listed publicly)? In other words, is the price for a dev's stock correlated highly enough with the prices for its newly built properties?

Of course, I can try to dig up historical data and calculate the correlation coefficient myself, but I thought that some of you might have experience buying developers' stocks and have a ready answer.

First, I want to thank Spex and others who have contributed a wealth of valuable information to this thread. I've read at least the first 100 pages of this thread, as well as a couple of the recommended books on real estate investing, and have decided to start the process on purchasing a multi-family in which I would owner occupy one unit.

I've been referred to a realtor with property investing experience, who got me in touch with a loan officer. After providing some personal information and having my credit pulled as part of the pre-approval process, I received a fee sheet today and wanted to make sure these out of pocket expenses seem standard to all of you.

Numbers are based on a 3.5% FHA loan for a purchase price of $100k (multi-family properties can easily be obtained for this in my area).

Interest Rate: 3.75%
Processing Fee: $475
Underwriting Fee: $675
Appraisal Fee: $400
Flood Certification Fee: $18.00
Up-Front Mortgage Insurance: $1688
Appraisal Re-Inspection Fee: $100
Title- Settlement Fee: $550
Title- Courier Fee: $60
Lender's Title Insurance: $671
Title Examination Fee: $75
Title Continuation Fee: $100
Owner's Title Insurance: $197
Mortgage Recording Charge: $350
Mortgage Recording Charge (It is on here twice?): $750
Hazard Insurance Reserves $60x2 mos.: $120
County Property Tax Reserves (she estimated) $300x12 mos.: $3600
Daily Interest Charges $10.09 x 15 days: $151.35
Hazard Insurance Premium $60x12 mos.: $720
General Counsel Fee: $500


Comes to:

Est. Prepaid Items/Reserves: $4591.35
Est. Closing Costs: $4921
PMI, MIP, Funding Fee $1688.75

Total Estimated Funds at closing: $13,012.35

Total Mortgage Payment (counting hazard insurance, taxes, PMI): P & I of $454.73 +403.86= $858.59



Everything I've read suggested closing costs would be a smaller percentage of the purchase price than this. Wasn't sure if that is due to most regions having higher housing prices, or if I'm potentially being taken advantage of. The girl did say they allow up to 6% in seller's concessions towards closing costs, which would be rolled into the loan (?), bump my payment up $30, and knock me down to about $7,500 out of pocket.



Any opinions appreciated. Thanks for taking the time to read.

I could be wrong, but if the fees don't really vary with price then obviously the more expensive the asset the smaller a percentage all the fees will be.

You are buying well below the national average.

That being said, jesus-what a scam all that BS is huh?

I would shop around rather than just going with whomever your agent referred you to. Lender's do have the power to waive many if not all of those fees. You can negotiate these things.

Looking at buying a vacation rental property in Orlando, Florida that I would personally use for about 2 weeks of the year, and more if necessary (my parents live about 20 minutes from where I am looking).

It is through a company with a significant timeshare base, and they will rent out the place for me for a 20% cut, I have to do nothing except pay the mortgage/tax/insurance. Many of the people staying there will be using timeshare points, and the company also advertises on the usual booking websites. The property has great ratings across the various sites. Visiting it, it seems like a good value for the price at the room rate, and it is ~6 miles to Disney. Everything on that end appears to kosher.

I've seen two owner statements, one that encompassed calendar year 2015 and a different owner that encompassed calendar year 2016 (no preference is given to renting out an owner's unit, all random), and it would appear that my expenses would be covered including mortgage, with about $4k extra assuming I stay there 0 days of the year. I've gone through the expense statement fairly thoroughly (utilities, cleaning fees, people breaking stuff, people taking towels, HOA, etc. etc.), and this does appear to be as straight forward as that.

The fully-furnished unit is likely to be around $200k including closing costs, meaning $40k down. It is the "show unit" which means it is gently used (I've been through it twice), so it's a lower price, and I'll try to negotiate it down even further. So anyway, that could theoretically be a 10% return with 0 days stayed, and then of course a few thousand of principal payment. Seems like there's enough wiggle room in there to be okay with it, yeah? I'm not looking for massive profit generation, if I could make $1k a year, pay down $3k in principal, stay there for 2 weeks, I'd be extremely happy.

Income ~$40,000 (~70% occupancy)

20% Fee $8,000
Cleaning $5000
Replacement $1500
Utilities $4800
Other $1000
HOA + Taxes + Mortgage + Insurance $1312 * 12 = $15,744

Net $4k (this is based on two statements for comparable units, both of which I could take pictures of, but not keep)

So then there's the risk factor...quick summary: the company owns two properties in Orlando, and both were purchased around 2008 while being partially completed by previous companies. They built a ton of new units (both properties have ~400 units, one with 60% by them and another with 80% by them), built clubhouses, pools, etc. Basically tried as much as possible to turn it into their property. But there are people within the community that own and are not part of their rental program (using brokers or AirBnB/VRBO etc.), and some that own and live there year round.

The property where I am looking, it does not appear to be any sort of worry from that angle, looks like just one foreclosure, and driving through, none of the units appear to be any sort of eyesore or anything...there is an HOA. I guess the trend towards residential could slowly degrade the resort over time. But, this is a $200k purchase not a $500k, and the distance to Disney is fixed...so there's not as much room for a collapse in prices? What worries me is perhaps the resale value, because there are some units for sale in the 160-190k area that are at least semi-comparable to my own. The thing about those properties is that they are not in the rental program, and they can never be in the company's rental program (although the company will occasionally buy a property, convert it into a rental unit, and resell them).

I also went through the county records for all the comparable units near my own (28 of 'em), and (1) the price I would be paying looks to be a good one and (2) only 3 of these 28 have been re-sold after someone purchased them from the company, and some of these go back a few years, so this would I guess imply that this is not some money-losing operation that people want to dump in a year or two.

Anyway, any thoughts appreciated. Feel like I understand all of the aspects of this, and feeling fairly comfortable with going through with the purchase in a few days, barring any hiccups.

[QUOTE=XcellentLaydown;51524750]First, I want to thank Spex and others who have contributed a wealth of valuable information to this thread. I've read at least the first 100 pages of this thread, as well as a couple of the recommended books on real estate investing, and have decided to start the process on purchasing a multi-family in which I would owner occupy one unit.

I've been referred to a realtor with property investing experience, who got me in touch with a loan officer. After providing some personal information and having my credit pulled as part of the pre-approval process, I received a fee sheet today and wanted to make sure these out of pocket expenses seem standard to all of you.

Numbers are based on a 3.5% FHA loan for a purchase price of $100k (multi-family properties can easily be obtained for this in my area).

Interest Rate: 3.75%
Processing Fee: $475
Underwriting Fee: $675
Appraisal Fee: $400
Flood Certification Fee: $18.00
Up-Front Mortgage Insurance: $1688
Appraisal Re-Inspection Fee: $100
Title- Settlement Fee: $550
Title- Courier Fee: $60
Lender's Title Insurance: $671
Title Examination Fee: $75
Title Continuation Fee: $100
Owner's Title Insurance: $197
Mortgage Recording Charge: $350
Mortgage Recording Charge (It is on here twice?): $750
Hazard Insurance Reserves $60x2 mos.: $120
County Property Tax Reserves (she estimated) $300x12 mos.: $3600
Daily Interest Charges $10.09 x 15 days: $151.35
Hazard Insurance Premium $60x12 mos.: $720
General Counsel Fee: $500


Comes to:

Est. Prepaid Items/Reserves: $4591.35
Est. Closing Costs: $4921
PMI, MIP, Funding Fee $1688.75

those closing costs are horrific. MIP, prepaid items are not going to change, but I would expect to pay 0-1 points to the lender, and probably 400-800 for title work, and 4-500 for appraisal.

domer,

You aren't including deferred expenses. That property will prob cost you a few thousand a year. Properties actually depreciate as well long term. (~1.4% a year)

Just invest the 40k in the stock market and take the ~6% return and go on vacation.

Not following you...can you elaborate on the deferred expenses, and how it will end up costing me a few thousand a year?

As to depreciation, I'm assuming depreciation can offset any profits for tax purposes. And any losses are a tax deduction, so I'm not too worried about it. As long as I am around break even, give or take a few thousand, I'm cool with it. I simply don't want to make a big financial blunder. I'm already heavily invested in risk-bearing instruments.