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My First Deal

 

I mentioned how I was looking at Duplexes and finding a “house hack” as some say where you live in one side and rent out the other. It turns out my first deal is a land development deal.

I purchased a .25 acre lot in an older neighborhood a block off the Caloosahatchee river in an area of town that was developed in the 1950s & 1960s. The lot had a home on it previously that was demolished in 2008 after a fire.

I purchased the lot paying cash for $9,200 and a few hundred in closing costs. I have found a builder to put up a single family 3bed 2bath 2car garage at about 1,700 sqft. – 1,400 sqft. heated and cooled. (The builder charges per sqft. of the total foot print of the house. Real estate agents and MLS properties list houses by the price per sqft. of the heated and cooled portion. – an important distinction for new construction).

Impact fees (charged for developing raw land) are credited back to the builder on a previously built upon lot (laws are different everywhere) which saves me $7,500-$6,000 in the total contract. It appears the total cost to build will be about $160,000 for tile throughout, granite, & stainless steel appliances. I have found a lender who will do a construction loan for a non-owner occupied at a reasonable rate that requires 20% down.

I am in the process of working out the details of the contract with the builder and the underwriting process with the lender. Total build time should be about 9 months after contract is executed.

Comps are going for about $125 per sqft. for renovated but older properties built in the 1950s/1960s. Real estate agent believes it can sell for $205,000 or $147 per sqft. (I don’t currently think it is worth that much). The rents on the property will conservatively be around $1,400 per month and my plan is to hold the property as an income producing property.

Calculating ROI

With a new home there should be less major maintenance than an older property and with a mortgage of $775 per month, taxes & insurance at $350 per month, maintenance & CapEx (capital expenditure – paying for big fixes like an AC unit or roof) $150 per month. It should cash flow about $125 per month at that conservative rental estimate, which is a measly 3.75% cash on cash return assuming I have $40,000 invested in the deal.

On the upside it could realistically rent for closer to $1,600 in which case my cash flow is $325 per month or a 9.75% annual return.

Let me know your thoughts or if you see an error in my math/logic please point it out!

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