Real Estate Investing Adventures

Actual Second Financial Model

Our previous post discussed  that we would need to develop a second model that more accurately described this real estate investment after we had received a revised design and more accurate contractor pricing. Our initial model was flat out wrong. Our bankers were willing to finance the increased investment. Was the risk worth the reward? Here’s our revised model for our development:

We would purchase the land in June and start construction in August. Construction would take 14 months and it would take 6 months to sell the property.

Land Price (Actual):      $463,721

Down Payment:            $25,000

Loan Amount:               $438,721

Closing Costs:              $6,580

Interest Rate:                5% (interest only)

Total Land Upfront Costs = $31,580

Home Size (Actual):                  4,164 SF

Construction Cost (Actual):       $249.22/SF

Total Home Cost (Actual)         $1,037,750

Architectural Costs (Actual):    $35,000

Dock & Rip-Rap (Actual):          $40,000

Future Changes (Est.):               $32,000

Down Payment:                        $0

Loan Amount:                           $1,144,750

Closing Costs:                            $16,200

Interest Rate:                            5% (interest only)

Total House Upfront Costs = $16,200

Total Upfront Costs = $47,780

Sale Price of Home:                              $2,300,000

Less Real Estate Commission:             <$138,000>

Less Land Loan Payoff:                        <$438,721>

Less Home Loan Payoff:                       <$1,144,750>

Less Total Cash and Interest:                <$130,572>

Less Equity Payback:                            <$47,781>

Profit:                                                         $400,176

I have attached a spreadsheet for those of you who want to download the actual sheet we used to develop this model. Again, a lot has been learned since then and our models have become much more inclusive. The spreadsheet is provided for educational purposes only. I take no responsibility for its use by others. (Don’t you hate that our society has become so litigious that we have to rely on disclaimers.)

The Real Estate Model Investment Decision

So what would you do? The key to this entire model is the assumption that we can sell this place for $2,300,000. The highest priced home sold on this lake to date that was done on spec was sold for $1.7 million. This was a 35% increase in the highest home sold to date. Big decision here. My partner and I were both jointly and severally liable for the loans. Again, what would you do?

My next post will walk through our decision and the reasoning behind it.