hi all,
I have a potential deal that just got dropped in my lap, and it has some pros and cons, so I wanted to get your input, and see if its really a good deal or not. Here is the situation:
I have a family member, in Hawaii (where housing costs are astronomical- totally unaffected by sub prime meltdown as of yet- but rents are good), with a piece of land and a multi-unit building on it. There is room (about 3000sqft) to build about 2 studios, or possibly 2 1 bedrooms. But to be conservative, Ill speak only about the possibility of building 2 studios.
So my family member is already renting out the units that exist, and they have never really gone vacant for more than a month, its right next to a university, and has a great flow of quality renters and student renters. The rents are about 750 per unit, and there are 4 units.
For the two studios I would build, I would have to pay for contruction, but pay nothing for the land. However I would not control the land, until my relative passes on (as my brother and I are the beneficiary) but would have to sell it in that event with 50% of the existing property going to my brother. I would not have a choice in selling as its stipulated in the Will but I have 0 problems with that. Construction would cost somewhere under 100K for these 2 units. I have a crew that has done similar projects. I would not need a mortgage to build it (though sometimes its beneficial to have a mortgage). I would need to pay eletricity and water for the two units most likely, and just lump that into the rent. There is also a small maintenance fee, which on my end might be about 50 bucks a month. I would get about 750/month for each unit (based on standard rents that the other units have been getting for years)
So here on some pros and cons that I have thought of for this deal:
Pros:
1. Its easy to construct, and extremely cheap for me to build at 100K or less
2. The ROI could be pretty good. With a potential 1500/month gross return (probably about around 1200/month net on the two units before tax.
3. Rental area is extremely strong
4. No need to buy the land (which in Hawaii would cost me about 3-400K most likely for a similarly sized lot, I just need to pay for the construction of the improvements.
5. I would eventually inherit the entire piece of land and units minus 50% for my brother (of the existing land and improvements). Though we would most likely have to sell it all, I don't really mind as it would be worth way into the millions and I would just roll that into something else most likely.
6. The improvements may add value to the existing property as it increases the property income.
7. To get the same amount of return, I would need to spend around 250-300K on a property (at retail, if I got a "deal" the ROI could be more comparable, but those are hard to come by here)
8. Since the deal is so cheap I would still have another 250K in cash or so, to play with, and if I was somehow able to get financing for the improvements, even more. As opposed to putting that ALL into another property to make it cash flow about the same amount of money per month (at retail)
Cons:
1. There is the issue with my brother that would have to be worked out. He would get 50% of existing property after my relative passes on, but I would have to work out what % of the property these improvements fall under as I would need to get my share back out. Im assuming this is just a matter of a lawyer drafting something up or an addition to the will once the % is figured out. My relative will most likely not pass on for another 30+ years, but this is just an estimation obviously.
2. I would not control the land that is under the new improvement, only the 2 studios constructed on the land. I dont think my relative is going to sell, but in the event of a sale of the entire property, I would need to calculate how to get my share of the improvements out. And if its sold soon it might be a bad deal due to the fact that the improvements probably wont really appreciate (am I wrong about this?). Highly unlikely that it will be sold, but a risk none the less.
3. The improvements will probably not increase in value very much and may even go down since they are just rental units, so how would I figure this out? and if so I would lose money on a sale (but having the units would significantly increase my cash flow (since my expenses are low, 1200 a month is rather significant money to me that I could use to invest in other things) Although the units would most likely increase the value of the entire property as an income generator.
4. May not be able to get a mortgage on the property (though I dont technically need one) as I dont own the land, Im just building on it. This limits my options for borrowing out of the property and for refi/heloc usage. Basically much less leverage going forward on that 100K, although I'm getting some leverage by getting the improvements so cheap I guess.
5. Ownership issues, besides the ones above? I dont know how to structure the deal so that I actually own the improvements. Im assuming this is more lawyer stuff, but Im not sure. This along with the above ownership issues sound like the biggest risk to me. Although its family, it still has potential for getting messy. Does anyone have similar deals they have done and know how to structure everything so it stays clean? This has to be possible through contracts.
Any other problems/ideas? or does it sound like it has potential? Any help would be great, thanks!
I have a potential deal that just got dropped in my lap, and it has some pros and cons, so I wanted to get your input, and see if its really a good deal or not. Here is the situation:
I have a family member, in Hawaii (where housing costs are astronomical- totally unaffected by sub prime meltdown as of yet- but rents are good), with a piece of land and a multi-unit building on it. There is room (about 3000sqft) to build about 2 studios, or possibly 2 1 bedrooms. But to be conservative, Ill speak only about the possibility of building 2 studios.
So my family member is already renting out the units that exist, and they have never really gone vacant for more than a month, its right next to a university, and has a great flow of quality renters and student renters. The rents are about 750 per unit, and there are 4 units.
For the two studios I would build, I would have to pay for contruction, but pay nothing for the land. However I would not control the land, until my relative passes on (as my brother and I are the beneficiary) but would have to sell it in that event with 50% of the existing property going to my brother. I would not have a choice in selling as its stipulated in the Will but I have 0 problems with that. Construction would cost somewhere under 100K for these 2 units. I have a crew that has done similar projects. I would not need a mortgage to build it (though sometimes its beneficial to have a mortgage). I would need to pay eletricity and water for the two units most likely, and just lump that into the rent. There is also a small maintenance fee, which on my end might be about 50 bucks a month. I would get about 750/month for each unit (based on standard rents that the other units have been getting for years)
So here on some pros and cons that I have thought of for this deal:
Pros:
1. Its easy to construct, and extremely cheap for me to build at 100K or less
2. The ROI could be pretty good. With a potential 1500/month gross return (probably about around 1200/month net on the two units before tax.
3. Rental area is extremely strong
4. No need to buy the land (which in Hawaii would cost me about 3-400K most likely for a similarly sized lot, I just need to pay for the construction of the improvements.
5. I would eventually inherit the entire piece of land and units minus 50% for my brother (of the existing land and improvements). Though we would most likely have to sell it all, I don't really mind as it would be worth way into the millions and I would just roll that into something else most likely.
6. The improvements may add value to the existing property as it increases the property income.
7. To get the same amount of return, I would need to spend around 250-300K on a property (at retail, if I got a "deal" the ROI could be more comparable, but those are hard to come by here)
8. Since the deal is so cheap I would still have another 250K in cash or so, to play with, and if I was somehow able to get financing for the improvements, even more. As opposed to putting that ALL into another property to make it cash flow about the same amount of money per month (at retail)
Cons:
1. There is the issue with my brother that would have to be worked out. He would get 50% of existing property after my relative passes on, but I would have to work out what % of the property these improvements fall under as I would need to get my share back out. Im assuming this is just a matter of a lawyer drafting something up or an addition to the will once the % is figured out. My relative will most likely not pass on for another 30+ years, but this is just an estimation obviously.
2. I would not control the land that is under the new improvement, only the 2 studios constructed on the land. I dont think my relative is going to sell, but in the event of a sale of the entire property, I would need to calculate how to get my share of the improvements out. And if its sold soon it might be a bad deal due to the fact that the improvements probably wont really appreciate (am I wrong about this?). Highly unlikely that it will be sold, but a risk none the less.
3. The improvements will probably not increase in value very much and may even go down since they are just rental units, so how would I figure this out? and if so I would lose money on a sale (but having the units would significantly increase my cash flow (since my expenses are low, 1200 a month is rather significant money to me that I could use to invest in other things) Although the units would most likely increase the value of the entire property as an income generator.
4. May not be able to get a mortgage on the property (though I dont technically need one) as I dont own the land, Im just building on it. This limits my options for borrowing out of the property and for refi/heloc usage. Basically much less leverage going forward on that 100K, although I'm getting some leverage by getting the improvements so cheap I guess.
5. Ownership issues, besides the ones above? I dont know how to structure the deal so that I actually own the improvements. Im assuming this is more lawyer stuff, but Im not sure. This along with the above ownership issues sound like the biggest risk to me. Although its family, it still has potential for getting messy. Does anyone have similar deals they have done and know how to structure everything so it stays clean? This has to be possible through contracts.
Any other problems/ideas? or does it sound like it has potential? Any help would be great, thanks!
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