Home: Message List - What is an acceptable return on a small residential real estate project?

Re: What is an acceptable return on a small residential real estate project?

slavaret — Mon, 31 Dec 2007 19:43:36 GMT

Well, it's single family 3 bedroom / 2 bathroom homes but since the lot is too small to be subdivided they have to be a condo with an association. Pretty standard in SoCal.

Re: What is an acceptable return on a small residential real estate project?

LUCKIEST — Mon, 31 Dec 2007 19:40:25 GMT

Wishing you all a very Happy New Year.

Have a blast in 2008
LUCKIEST

Re: What is an acceptable return on a small residential real estate project?

mainstreetifs — Mon, 31 Dec 2007 19:31:42 GMT

Tough situation, I don't think anybody can accurately estimate the return based on the selling price assumption 2 years down the road in this RE cycle. It is even trickier for any project including condo's/townhomes/duplexes,etc.

Re: What is an acceptable return on a small residential real estate project?

slavaret — Sat, 29 Dec 2007 18:12:02 GMT

Thank you. That's what I was looking for.

Of course, the problem with our situation is that the seller has 2 houses on a lot adjacent to our HOA and the HOA would like to buy him out to annex the lot/houses to the HOA. Looks like we will be able to build 2-3 more houses on the lot (it's too small to be divided so it has to be a single condo project with single familiy residences), which is what we'll have to do to stay in the black (we'll lose $$ if we try to flip in this market). We can't just sit on the 2 houses and wait for a better market because the rent will be way below the mortgage payments - so we'll have to build right away. With the building permit approval process of up to 18 months in Calif, we are 2 years away from being able to sell. So the other issue is: how to estaimate the return based on the selling price assumption 2 years down the road?

Re: What is an acceptable return on a small residential real estate project?

mainstreetifs — Sat, 29 Dec 2007 17:39:28 GMT

I work with several developers/spec homebuiliders that won't start a project unless there is a 25% return... they will just let the land sit.

My main advice would be to really shop for a quality general contractor and take several (5,6,7) bids. A lot of GC's and sub contractors are begging for work so you should be able to get some very competitive bids. I know of several GC's (none in So Cal unfortunately) that are just trying to break even and keep their guys working until the housing market rebounds.

Re: What is an acceptable return on a small residential real estate project?

CorpCons08 — Sat, 08 Dec 2007 01:57:05 GMT

Never say always...
Again, watch Flip That House.

CorpCons08

Re: What is an acceptable return on a small residential real estate project?

LUCKIEST — Sat, 08 Dec 2007 00:48:21 GMT

Now you have told us a lot more and I can input your answer into my Crystal Ball.
Another great illustrated answer by Lighthouse.
To answer your question "is there profit in the transaction?"
In real estate there has alway been PROFITS. Right now the market is soft, BUT the right people
are still making MONEY. A Building Plan, Quality workmanship and good raw products should
make this a profit in the transaction. Timing is also important. The faster you sell, the greater the return.
Thanks for sharing, Again good luck, LUCKIEST

Re: What is an acceptable return on a small residential real estate project?

CorpCons08 — Fri, 07 Dec 2007 23:30:48 GMT

I concur with Lighthouse. Being a frequent watcher of Flip That House, I would suggest hiring professionals to help you out here. Do not try to do any of this on your own if you are not experienced.

Re: What is an acceptable return on a small residential real estate project?

Lighthouse24 — Fri, 07 Dec 2007 22:14:16 GMT

So this is like an investment club type venture?

It sounds like you could use initial input from three sources: a bank or mortgage company appraiser, a realtor, and a general contractor. An appraiser can examine the two existing houses and the house plans for the two vacant lots to estimate how much your future buyer(s) could borrow to purchase the homes from you. A realtor can provide market information for the area, and with the appraisal, establish an reasonable estimated selling price for the property, and tell you how long it will take to sell once you have completed your improvements and listed it. The general contractor will be able to tell you how much it will cost to repair/upgrade the existing houses and to build two new houses on the vacant lots based on the plans.

Next, you might want to estimate how much time this deal will take on the part of all the investors -- to set up an effective way to administer the money, decide how and when it will be spent, facilitate the various discussions and disagreement that may arise (and there will be many), directly oversee work on the project, etc. For at least one person, this will probably involve a considerable amount of time.

Once you know all that, you could ask: 1) How much would the investors make if they just left the same amount of money where it is now for that same length of time (instead of using it to buy and improve this property)? 2) What much money would all the investors make if they took the collective amount of personal time it will take to manage this deal and used it to work at something else instead?

The return is obviously unacceptable if the sum of those two amounts is more than you could sell the property for when improvements are complete. A few years ago, I'd have expected 6 to 8 percent above that as an investor, and once did as well as a 17 percent return on one project -- but I would not expect that kind of return today on most residential properties. But then, I don't know your neighborhood, and you do.

Good luck!

Re: What is an acceptable return on a small residential real estate project?

slavaret — Fri, 07 Dec 2007 20:13:35 GMT

You are right - it is outside of my area of expertise. That is why I am asking.

The HOA where I live is looking to buy the 2 houses from the neighbor, annex the lot to the accociation, build 2 more, and sell all for a profit. We obviously know the area best and feel we can raise $$ from the members who would feel comfortable investing so close to home - literally, but the question is: is there profit in the transaction?