Making 95% Returns by Developing New Homes
Making 95% Returns by Developing New Homes
In March of 2021, my project manager and I partnered to do a build-and-sell project in a fast-growing area where the land was still cheap. It was the first project he did as the owner, and I was excited for him to see the results. I knew he would come out on the other end as a better investor and richer man.
Although we use the same system for all our projects, every construction project differs. In our case, we had unique challenges, but we used several strategies to help us navigate the process.
Find
We identified a new area of Volusia county where the home prices were high, and the land was cheap. Many builders shied away from the neighborhood because many lots have a wetlands classification (which makes construction a nightmare). We made sure to do our due diligence and bought a property that was not in a wetlands zone.
Fund
We decided to pool the initial capital from our pockets to purchase the lot and start the construction process. In total, we raised $60,000.
Initial capital allocation:
Lot Purchase: $25,000
Engineering and Permitting: $5,000
Foundation: $20,000
Masonry: $10,000
Add Value
The first step in the construction process is the engineering and permitting stage, which refers to gathering the documents required for permit approval.
Survey
Site Plan
Septic Permit
Well Permit
After a few revisions, we submitted these to the county, which approved our permit.
Loan
Once the permit was approved, we applied for a construction loan with our lender for $165,000. In construction, loans work differently than in traditional real estate. In traditional real estate, you get your loan in a lump sum. In construction, you request draws as you finish the work. The draw structure acts as a safety net for the lender to ensure the jobs get finished.
A draw refers to a portion of the loan. So if I take out a $165,000 loan, I may request the amount of money needed as we progress through the construction process. The lender will ask for a scope of work to outline how much money you will need for each construction activity. A scope of work is essentially an estimate of costs related to the different construction activities and materials.
Below are the draws that we requested:
After masonry installation: $65,000
When framing inspection passed: $50,000
Upon driveway concrete pouring $50,000
Sale and Profit
We put the house on the market right before the final inspections. Listing it before completion allowed us to sell the home right when we finished, so we wouldn't have to pay another month of interest. The complete project ended up taking 15 months due to supply shortages.
Final Numbers
Total Project Cost (Construction + Land): $225,319.81
Cost of Financing: $16,000
Sales Price: $319,900.00
Closing Costs: $21,395.02
Total Profit(Sale - Project cost - Financing cost - Closing costs): $57,185.17
Initial Capital (Gap funds): $60,000
ROI(Initial capital divided by Profit): 95%