Double R3 lot-oh what to do...

therenoguy

Inspired Forum Member
Registered
Hi all,



Apologies for the length of this question.



Before I understood real estate, I bought a 100' X 120' R3 lot in Innisfail. This is the real estate equivalent of getting pregnant when you're 16: now I know better, but I'm stuck with the thing so I need to make the best of it.



For those not familiar, Innisfail is 20 minutes from Red Deer, in spite of being that close, it does not benefit from the ripple effect, attracts non income earning seniors, has growth well below the provincial average, and last I heard, due to an anti development council, there are little if any houses going up. I have had the place for sale off and on for 3 or 4 years with nary a nibble.



So it's time to do something with it and get it to bring in some rental revenue, or at least create a salable entity. The trouble is I'm not sure what direction to head, or what criteria I should use to decide.



My conversations with a realtor/prop manager have yielded few details.



Ideas currently being floated:



A row of 4, 2 story, town house style units with garages, condominiumized for easy sale down the road one at a time?



A 6 unit apartment of 2 or 3 bedroom units?



2 separate buildings, each with 3 units in them, built over a period of two or three years?



Im a big boy, I'm not looking for a lot of hand holding, just some general direction. For example:



"I, or someone I know was in a similar situation and the best alternative proved to be......"



Or



"These are the criteria you should use to consider as you narrow down your options.



Or



"Find out about ___,___, and ____ before you decide which way to go."



Thanks. Much appreciated.



Keith.
 

Thomas Beyer

Senior Forum Member
REIN Member
Can you sub-divide the lot into 2 lots ?



What are you asking ? Maybe the price is too high ?



Did you talk to some local builders , possibly a JV with one or 2 of them ?



Do you have enough cash and credit to finance a construction project where 750-900,000 is required ?



Can you rezone the land to single family or industrial or 6 story residential ?



Is there currently a mortgage ? Isn't sitting on it a wise idea as land prices are not going down in the Greater Red Deer region ?
 

therenoguy

Inspired Forum Member
Registered
Thanks for your reply and expertise, Thomas. I appreciate your time. My answers to your questions are under them.



---

Can you sub-divide the lot into 2 lots ?



Yes, but there is a single R3 across the street someone has had for sale for years as well. Singles aren't selling any more than doubles.

---

What are you asking ? Maybe the price is too high ?



Agreed. I bought it with a 500SF house on it, in 07, for $240. I knocked down the house, on the advice from what I consider to be an experienced investor, to sell it as a ready-to-build lot. Now no one has nibbled at $189, and I had an offer of $145. I'm not really in a position to lose 100K on it.

---

Did you talk to some local builders , possibly a JV with one or 2 of them ?



Yes. There was a builder. I would provide the land, he would build in it. But his deal put me in a second position to a bank, something I will never consider. As you know, if he defaults to me I have zero recourse.



I'm a little nervous on that front. I have no experience with them, and I don't want to end up in a bad situation with someone who is less than scrupulous, or there is some issue that ends up submarining the whole enterprise.

---

Do you have enough cash and credit to finance a construction project where 750-900,000 is required ?



Not in cold cash, but I have assets larger than that. I have yet to go down the road of trying to get a commercial loan, because I feel I should decide what I'm going to do, have it drawn up, and get quotes. I want to have my ducks in a row before I walk into a lender's office.

---

Can you rezone the land to single family or industrial or 6 story residential ?



No. I have been told the land can be divided, but not rezoned. I must build at least 4 units(the tiny house had been grandfathered)

---

Is there currently a mortgage ?



A line of credit was used.

---

Isn't sitting on it a wise idea as land prices are not going down in the Greater Red Deer region ?



I've been sitting on it since 07, and land in this town is not going up at all. It was just last year someone tried to offer 145.



Thanks,

Keith



By the way, do you or anyone else have an example of what people have built on a similar lot?
 

Matt Crowley

Senior Forum Member
REIN Member
We are going through a similar process with my job right now (on a bit bigger scale). We have been examining the benefits of building purpose build high-rise (20 story), mid-rise (steel stud 6 story), mid-rise (wood 4 story), or townhouses.



What we have found is that the development margin is negative for high-rise and mid-rise (steel stud 6 story). Development margin is valuation at take-out loan time minus the total cost of construction plus land. 4-storey wood-framed has a very small development margin that will commit a large amount of cash equity capital to the project even after take-out.



Townhouses provide the highest development margin and the greatest safety factor. Achieving rents of $1.40 - $1.45 / SF is not unreasonable, especially with a garage. The safety factor is achieved because the units can be finished one by one and rented rather than a more all-or-nothing release of units with the other building types. Upon take-out, we are observing approximately a 5-year period until all cash equity is repaid. (Land equity is not repaid until later).



To elaborate a bit further, we have to meet a DCR of 1.1 (Debt Credit Ratio = NOI / Debt Service). So, we have an initial construction loan at 70% of total project cost and a take-out loan that can go up to 85%. The difference between the take-out loan and construction loan is cash released to us at take-out time. With a strong development margin, more cash is released. This is where I would begin with the analysis...a strong foundation for cost of construction and an equally strong understanding of market rents for the different unit types.



I've never built on my own (so I don't know the answer for on a smaller scale), but our lenders allow us to finance 70% of the construction costs. 30% must be equity, but the land equity we have offsets that equity requirement, which significantly decreases the amount of cash we need to input for development.



If you are looking at developing the site and not locking cash into it for longer term, townhouses are well worth consideration.
 

3canctheayr

Inspired Forum Member
Registered
Being that you're between Edmonton and Calgary, with only an hours drive to Calgary, you should be able to build something and market it to Red Deer and Calgary residents. At least, that would work very well here in Ontario.
 

Thomas Beyer

Senior Forum Member
REIN Member
[quote user=therenoguy] I bought it with a 500SF house on it, in 07, for $240.


ouch ..



[quote user=therenoguy]I knocked down the house,


double ouch ..



Should have kept the house, maybe fixed it up a bit, added a room .. and rented it for $800 - $1000 ..



lot is probably worth 140-150 .. maybe less even .. so yes a 100,000 lesson ..



If you build is there a market for 2 half-duplexes ? I'd research that angle. Either by yourself, or a JV with a builder. Say you sell the lot for $150,000 plus 50% of profits .. and maybe collect 25-50,000 cash upfront and the rest as a 2nd mortgage until sold .. that might work ..



Research what is selling .. talk to some realtors and local builders .. they know what the market wants @ what price points .. then take it from there.



Just ensure the 100,000 lesson doesn't become a $200,000 lesson ..
 

therenoguy

Inspired Forum Member
Registered
Thanks gents. I will consider these ideas, do more research, and as always, share my results so others can learn from my successes/mistakes.



Cheers

Keith
 
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