Real Estate Investing Adventures

We were nearing completion on the property and still hadn’t received an offer. This had us worried. The monthly carrying costs were approaching $11,000 per month! This was the highest priced lake home ever done on speculation on this lake. It was time to re-evaluate the asking price of $2.375 million dollars. If we had to “fire sale” this thing to get out from under the carry costs, what was the minimum we could take and still break even?

Real Estate Financial Model

Here’s a link to the spreadsheet we used to actually evaluate both the pricing rational, the cost to us every month it didn’t sell and profit and IRR when it sold. Obviously from this we can also calculate our break even point. We assumed we would sell this place at an 8% discount to list or $2.185 million. The small box in the upper right of the spreadsheet runs through our customer analysis. With this analysis, we tried to put ourselves in the customer’s shoes when they were trying to decide whether to buy our property or build themselves.

Lot                                           $650,000

House Cost                              $290/SF

SF of House                             4,300

House Price                              $1,247,000

Architect Fee                            $55,000

Dock                                        $40,000

Club Membership                     $45,000

Lot and Construction Price       $2,037,000

Carry Costs                              $70,000

Aggravation Factor                   $85,000

Price If They Build                    $2,192,000

Our lot had appreciated significantly since we first purchased it. The house cost per SF was determined by interviewing a number of builders. This cost had also gone up since we first contracted the construction. The aggravation factor was determined by calculating what a construction management firm would charge to manage the construction using 5% of construction costs.

Our $2.375 million list with a $2.185 million minimum acceptable price was in the range according to our numbers. We now just needed to find someone who liked our design and was in the market for a $2+ million lake home. Every month that went by without a sale was costing us an additional $11,000 out of our pockets.

Real Estate Development Returns 

The middle part of the sheet shows the before and after tax returns and the return on investment (ROI) and internal rate of return (IRR). These returns are phenomenal because of the low equity position required by the banks. The real way to evaluate this investment is to decide if a before tax return of $200,000 to $250,000 was worth all the effort and the risk taken. I will share my thoughts on this at the end of this series.