How would you dice this?

[yveskleinsky]

I am going to fast forward a bit here to the meat of it all:

I am stuck in the mud that some call math, lol. That, and I'm now on cold medicine (got sick RIGHT after I posted about not getting a flu shot --no joke. So bear with me here please.)

I am trying to figure out how to structure a somewhat small scale commercial project that has a potentially great ROI. I have already found the land and the owner is willing to owner finance it with great terms. (17 unzoned acres, with a house, for $285k, at 6%; 10% down over 25 years with a balloon in 10. The land is beautiful--breathtaking really, and is already a tourist draw.)

I have experience with cabin rentals and have a handyman who is familiar with putting these cabins up and getting them hooked to utilities.

All-in-all, I would like to put up about 15 cabins on this land.

To make this happen, I could:

1. Finance the whole thing on credit cards/loans and own the whole project 100%. If I were to finance the whole thing, then I would need about $48k a year income to cover all the payments on the loans I'd need. I'd prefer to have at least $48k liquid in the bank as a reserve just in case--or at least half of it, as I do anticipate income coming in during the first year!

...Loans are kinda hard to get right now, and the SBA loans that I've looked into are high interest and have fees and want 40% down and on and on. So the loans I could get would be from either credit cards and/or friends or family. Paying borrowed money (esp. on credit cards with the BS games they are playing now with jacking up interest rates with no notice)with borrowed money makes me a little nervous--so I guess I'd need some input on this one! ...I suppose I could take out a cash advance of like $50k (I have those checks where it's 0% interest for the first year and then jumps to like 21% in year two with a 3% transaction fee) and then go to the bank and take out a loan for $50k at a decent interest rate and then if the credit card pulls something slick, I could either transfer the balance or pay it off from the bank. (Just thinking out loud here.)

2. Sell shares of the company. I could sell shares of the company and have the company buy the cabins and own 50%. I could get investors to buy in for $x per share (I think I'd make the buy in low--like $10k a share), and tell my investors to expect nothing for the first 6 months. After 6 months the odds of you getting 9% is very high. The goal at this point would be to get them their 9% and anything over that, we'd split 50/50. Then once the investors split reaches the amount they put in, we continue to split the profit until the investor is capped out at a certain amount--maybe $20k (so double their money--just pulling numbers out of a hat here as I don't know how to figure the math on this one. I have no idea how to figure what a share would be worth or what a reasonable return would be--for both me and the investor.)

3. Sell investors cabins only. Investors buy cabins from us for $50k (let's say) and give us 30% down. We presale 3 of these--their down paymnets are what I would use to float all the startup costs--and pay the monthly payments. The investors get mailbox money from their cabin as I would manage it.

I have done a ton of research and am continuing to do so. The touism in this area is steady and 2009 was a record breaking year. I know from my experience that the cabins I would be developing would fit the demand that is there.

Is this concept fastlane? No. Could I potentially scale it to where it could become fastlane, sure.


...So how would you dice this?

 

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[biophase]

What about a combo of 1 and 3. Finance all on credit cards, once you are in construction, pre-sell cabins before they are done if you have to.

Is the end goal to management all 15 cabins or to sell them off?

 

[yveskleinsky]

Hmm...well the long term plan would be to hold on to these. I wouldn't be subdiving the land, I would be renting it investors. ...So they'd have a lot fee of like $200 a month (rough number) that would cover all utilities as well as of course being on a great piece of land!

As far as combining 1 and 3, I was hoping to get some presales (or money in the bank somehow) before I even signed the owner finance papers on the land. ...Can you explain the reasoning behind putting it on credit cards and then getting financing? ...This is all new territory for me, so I apologize if I sound like the noob I am at this!

Oh and as far as managing them--I'm thinking I'd like to grow a property mgmt company of my own--which would be something I could somewhat scale down the road. I'd personally like to have an onsite manager within year 2 as I have no desire to be there 24/7 until I die lol.

 

[mkzhang]

As for #3, I have background knowledge on forecasting and your so call splitting of shares and see if its enticing to investors or not.

Give me a PM of your investor idea in a little bit more detail, and I will see if I can give you help you out with the calculations.

 

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[mainstreet]

I agree that you need to find a property manager to be fastlane material on this one as you dont want this to be your job for the next 15 years. Now to where I disagree. I would NEVER finance your down payment on credit cards becuause that KILLS your ability to make it a profitable situation. I am not talking about interest rates or minimum payments, I am talking about your credit score PLUNGING to depths you didnt know existed after you max out a few cards and NEVER being able to refinance becuase you are suddenly a high risk credit customer. You can have a perfect pay history with many years of on time payments, you max out your credit to available limit on those cards - you might as well be homeless when trying to refi that property. Leave the credit cards alone, family and friends or investor money - fine... I would rather own 50% of a deal I can properly finance than 100% of a deal that causes me not to be able to finance a Volvo. I get calls at least once a week from someone whom has started their business in that manner - screwed their credit score - now needs help. Help in that situation, if you are able to find it, is extremely expensive. NOBODY will do business with you when your FICO reads in the 500's because of the maxed out cards...

Startup Help

 

[yveskleinsky]

Great point about maxing out credit cards and that sinking my score.

...My other main concern with credit cards is that they are just changing interest rates whenever they feel like it--regardless of your past with them. So the last thing I want to have happen is that my rate goes from 0% to 25% because they feel like it.

...I'm okay with taking 50% or so of this deal, I'd just need to figure out how to run the math to figure out what to sell "shares" at. For example, would I take the total purchase price of land and perhaps 5 cabins plus operating expenses for one year (or more?) and then decide on a minimum and maximum amount of investors we'd want in and then decide on the number of shares based on that? ...And since my strategy wouldn't be to sell, how would I cash out the investors?

Again, thinking out loud. Any and all ideas are appreciated! Thanks guys!

 

[biophase]

Hmm...well the long term plan would be to hold on to these. I wouldn't be subdiving the land, I would be renting it investors. ...So they'd have a lot fee of like $200 a month (rough number) that would cover all utilities as well as of course being on a great piece of land!

As far as combining 1 and 3, I was hoping to get some presales (or money in the bank somehow) before I even signed the owner finance papers on the land. ...Can you explain the reasoning behind putting it on credit cards and then getting financing? ...This is all new territory for me, so I apologize if I sound like the noob I am at this!

Oh and as far as managing them--I'm thinking I'd like to grow a property mgmt company of my own--which would be something I could somewhat scale down the road. I'd personally like to have an onsite manager within year 2 as I have no desire to be there 24/7 until I die lol.

I guess I don't understand the strategy clearly.

On one hand if you go at it alone. When you are done you have 15 cabins on a single 17 acre lot. You manage it yourself and get all the cashflow.

On the other hand, when you are done you have 5 cabins owned by investors (not sure now, how do they exactly own it if you don't subdivide, are they like condos?) and 10 cabins that you own? You manage all 15 of them. On 10 you get the cashflow, on the other 5 you get a management fee?

Or, you sell all 15 cabins, subdivide the land and strategically end up with a few acres free and clear and you management all 15 as a management company.

Or, you sell all 15 cabins, subdivide the land and strategically end up with a few acres free and clear and you let the investors management it themselves and just take the profits and your acres of land home.

I had no reason to choose credit card financing over others. I guess my opinion is that it's easy financing. You only need to come up with $28k (which I assume would be credit cards) and then pay about $1500/mo for the loan. Are you going to rent out the house that's already there?

How much is it going to cost to build the 15 cabins? Are you going to build all 15 at the same time or 1 by 1?

 

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[mkzhang]

...I'm okay with taking 50% or so of this deal, I'd just need to figure out how to run the math to figure out what to sell "shares" at. For example, would I take the total purchase price of land and perhaps 5 cabins plus operating expenses for one year (or more?) and then decide on a minimum and maximum amount of investors we'd want in and then decide on the number of shares based on that? ...And since my strategy wouldn't be to sell, how would I cash out the investors?

Find out the average growth for what you're doing in the industry, find out the average growth of that around the area, give each a weight to get an average of the average.

The forecast your growth for the next several years including your expenses and income (total). With this you can find out how much you are paying now, and how much of an increase you will have to pay later, you can also find out how much you will be making now, and how much more you can make later.

Take the rest of the 50%, split it to whatever ratio you want, and based on the forecast of each period, you can see how much its growing. Then do a discounted present value of all the future forecast period to see how much in "present" day money their investment is worth. If they invest 10k each, and with 5 years of growth at a nominal interest rate of around 5% its only worth 12k now, I don't think anyone might be interested.

You then take all of those and play around with the interest rate to see how to split it to give them the maximum interest rate of growth (also more safety in case your forecast is off). With that interest rate you can also give your investors a safety net of how much greater of a return compare to something stable (say inflation or 5 year bond etc). Base on the data you can also give a confidence interval of any % (50%, 95% anything) on how accurate your forecast of income and their return is.

Hope that helps, sorry I can't be more specific because I don't feel so comfortable sharing this out in the open lol

 

[yveskleinsky]

I guess I don't understand the strategy clearly.

On one hand if you go at it alone. When you are done you have 15 cabins on a single 17 acre lot. You manage it yourself and get all the cashflow.

On the other hand, when you are done you have 5 cabins owned by investors (not sure now, how do they exactly own it if you don't subdivide, are they like condos?) and 10 cabins that you own? You manage all 15 of them. On 10 you get the cashflow, on the other 5 you get a management fee?

Or, you sell all 15 cabins, subdivide the land and strategically end up with a few acres free and clear and you management all 15 as a management company.

Or, you sell all 15 cabins, subdivide the land and strategically end up with a few acres free and clear and you let the investors management it themselves and just take the profits and your acres of land home.

I had no reason to choose credit card financing over others. I guess my opinion is that it's easy financing. You only need to come up with $28k (which I assume would be credit cards) and then pay about $1500/mo for the loan. Are you going to rent out the house that's already there?

How much is it going to cost to build the 15 cabins? Are you going to build all 15 at the same time or 1 by 1?

Great response--I really appeciate it.

The cabins are actually considered RVs, but make for the perfect weekend rental (www.parkcabins.com to get an idea of what I'm talking about.) The land would basically be like an RV park, except I would put a deck on the front of these and make them look and feel like a mountain cabin. So the investors would be a lot fee, just like they do in an RV park, and in this case a property mgmt fee since they are rentals.

...The total amount I would need for statup would be:

$28,500 which would be for the down on the land.
$15,000 for bringing utilities to the property/adding on to the existing
$15,000 for site prep
$35,000 for the cost of the cabin x however many
$5,000 for deck supplies
$5,000 for furnishings

Total: $103,500

(I know I can get flexible terms on all of these costs--probably down to where I pay half in April and half in September on the down on the land and the rest can be put on a monthly payment plan of somekind.)

These would be the monthly expenses:

$100 property tax
$100 insurance
$100 advertising
$100 maintenance and repair (x number of cabins)
$675 payment on 1 cabin ($35k at 15% over 7 years --these things don't finance well as they are considered RVs--the cool thing though, is that once they are stationary for 2 years on a foundation they can be reclassified as a SFH.
$100 utilities x number of cabins (there would only be electric and propane--which wouldn't be more than $50 combined for this size cabin, the cabins would all be on well and septic, so I figure another $50/month just to go towards use of those.
$1650 for the loan on the property

Total: $1850

The estimated income in year one would be $15,000 per cabin or $1250 a month. So I would need 2 cabins just to break even on the monthly expenses. If I financed the startup costs somehow, I'd need at least 3 cabins.

*The estimated annual income is assuming $125 a night at 33% occupancy so 120 nights a year. Average occupancy is much higer (55%) but I'd rather estimate low--plus this land is off the beaten path so there wouldn't be much drive by traffic, which may lead to a slow start but I'd think give way to lots of repeat visitors.

I am estimating that there will be no income for the first two-three months, but then peak season should hit and these places should be good to go and hold their own.

...To answer the question, "would I own 10 and investors own 5?"--yes, that would be one way I am considering but not the most desirable for me as the cashflow on these cabins is great. But having the investor responsible for furnishing and the payment every month would take the burden off me too--and I'd think it may be easier to get investors if there is something tangible behind their money that they could liquidate.

(I spoke with a builder of these cabins who said he has a customer who is finding the land then putting these RV/cabins up and then turning around and selling them to investors. So he buys low and then sells high, and owner finances them--then he sets up onsite mgmt and collects mgmt fees as well as lot rent. I love that concept if I do decide to go the route where owners buy cabins. If I bought low and sold high, I'd make my money back on them quickly, as I'd ask for at least half the payment of what I'd pay for them as a down from the buyer and then have residual income from the owner financing.)

If I sold "shares" then the company would own the cabins and the investors would just own a % of the business--which seems like a better way to go incase one cabin isn't rentable for whatever reason--and easier to give a "soft" guarantee of a return. Since I'm not planning on selling, I could give the investors an opportunity to sell their shares back to me or other investors as a way to cash out.

...Oh, and yes, I will be renting the house.

 

[bflash98]

What I would do is create a proforma of the costs and revenue for the life of the project with the cabins being sold when they are completed. The purpose of this exercise is to see if the internal rate of return is good enough to merit doing the project. I would put a monthly management fee in for you.

If the project has a good return something in the 25% range then I would set it up with as many shares as there are cabins. A person could have more than one share. Based on your projected costs the buy in could be the first years expected expenses and then you could make a capital call every year for the next years expenses. In order to discourage people from not putting their next year's money in you could have a dilution penalty.

If the investors are in the project just for the return and they don't want a cabin then you could sell them on the retail market and cash out the investors. You could take your share of the profits from the first cabins and use it to start buying out the investors of the future units that you want to own. If this is the case you may want to have 1500 shares as opposed to 15 so that you can buyout shares in smaller increments.

If the investors are interested in owning the cabins then I think the company should build all of the cabins before transferring them to any of the share holders. This could mean that you rent them out until all of them are done. This will spread the risk out evenly to everyone on the project.

If you want an idea of what a proforma would look like for a project with lot development. PM me and I can send you one I created recently for a small lot development project. You will need Excel 2007 to edit the file.

 

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[yveskleinsky]

I had a thought...what if I initially sold shares, with the intended exit strategy to be to sell the cabins in 3 years (after mgmt is in place and after they have a seasoned track record as rentals) to either myself or to other investors? It would be kinda like a value play, but with cabins instead of apartments. So I could give an ROI for 3 years, plus returning their initial capital and then sell. Hmm.

 

[hatterasguy]

I think your numbers on site prep maybe a little low. Is this all woods? Clearing trees and building roads so you can get access is going to cost way more than $15k. How much sewer do you have to run and stuff? Or is this on septic?

Careful with site work, it adds up really fast.


It looks like this to me:

$285k for the land
$525k for the cabins
Personaly I'd figure on another $100k to do the site work and make it a camp ground. Depends on the ground you have to work with I havn't seen the site.


So if you get $15k per year for each cabine your going to bring in $225k. Why 15 since its unzoned why not 30 cabins and some tent sites or something like that?

Looks like your going to need about $900k to set this up, but with that kind of cash flow thats not that much. You shouldn't have any trouble finding a partner, or a hard money lender. How much cash do you have to put into it?

Personaly I'd keep that thing for myself and enjoy that cashflow.

 

[Russ H]

Yves-

1. How does this fit your PLAN (sorry, you know me-- had to ask)

2. How much will it cost to subdivide? Have you checked w/planning commission, etc?

3. Are you SURE you can do this? Change a pc of land from vacant to an RV park?

4. Are you SURE you know the conversion costs? By us, there are hefty planning fees for stuff like this-- and a zoning change (or even just a change of use allowed by zoning). Takes months, and lots of planning.

5. Assuming you can do all of this (legally) and it's not going to cost you an additional 3 years and $200K: Have you considered doing them as time shares? You could sell them for a max of, say, 28 days a year (THEIR use), but you would rent them out for them the rest of the year and pay them a portion of what you take in. Shared risk-- but THEY are the ones that pay you $50K or so upfront (for their timeshare)-- this way you get funding.

Here's an example of how this is done in Napa:

The Westin Verasa Napa Residences - a Napa Valley real estate opportunity

(the first weekend they offered this, they raised over $52 MILLION-- and this was 18 months before the hotel was even built!!!)

-Russ H.

 

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[yveskleinsky]

Russ,

Good feedback--I was hoping you would weigh in on this.

As for my plan--that's a long story and I'm kinda a bundle of raw nerves about it right now, so suffice it to say that this is the plan.

For starters the land is unzoned. I did talk to planning and zoning (multiple times) and they told me that I could do whatever I wanted out there.

...I have never thought of time shares, and don't know anything about it. I'll look into that as an option for sure.

Thanks!