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inherited lot - exploring my options

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timallix

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I have recently inherited a 1/2 acre ocean view lot in Parksville, BC, a present from my ageing parents. The tax assessed value for the lot is $300k. I have a friend, experienced in real estate investing, urging me to build on the lot in order to increase the profit potential after selling. So I started thinking, Hmm, 200k p/sq foot construction costs, decent rancher is 2000 sq/ft, that`s 400,000 I have to borrow to build, not including contingency money.

I am a low income earner (less than $50k p/year), and I am not sure if a) I could get approved for a builder`s mortgage, or b) if this is not a rather tricky first real estate project to take on. I live in Whistler, so this would involve managing the project from a distance. It doesn`t look good from a rental perspective, would be massively negative cashflow. I contacted a real estate agent in Parksville, he suggested starting with a garage with an attached suite upstairs, and renting for positive cashflow, I have yet to run the number on that idea.

I bought Don Campbell`s books, and that has given me some insight into acquiring houses (already built), in well-researched, high growth areas, for positive cashflow. If I sell my property, I would have enough down-payment for several mortgages, and by following Don`s "formula", this might be a better "baby steps" start as an investor. Or perhaps invest with Cooper Pacific and drift around the world for a year or two, that is also definitely a tempting option.

What to do, what to do... Any advice out there?

Tim.
 
Hi Tim,

My question to you Tim is this what is the property worth when you have built the house?

One way to build on this would be to find a JV partner builder who would take care of the construction and the financing. He takes care of the building and carries it. In the end he gets his expenses back and you get the land value and you split the profits. This would be an easy way for you to do this without having to finance the project yourself.

Hope this helps

Regards,



QUOTE (timallix @ Mar 29 2008, 01:56 AM) I have recently inherited a 1/2 acre ocean view lot in Parksville, BC, a present from my ageing parents. The tax assessed value for the lot is $300k. I have a friend, experienced in real estate investing, urging me to build on the lot in order to increase the profit potential after selling. So I started thinking, Hmm, 200k p/sq foot construction costs, decent rancher is 2000 sq/ft, that`s 400,000 I have to borrow to build, not including contingency money.

I am a low income earner (less than $50k p/year), and I am not sure if a) I could get approved for a builder`s mortgage, or b) if this is not a rather tricky first real estate project to take on. I live in Whistler, so this would involve managing the project from a distance. It doesn`t look good from a rental perspective, would be massively negative cashflow. I contacted a real estate agent in Parksville, he suggested starting with a garage with an attached suite upstairs, and renting for positive cashflow, I have yet to run the number on that idea.

I bought Don Campbell`s books, and that has given me some insight into acquiring houses (already built), in well-researched, high growth areas, for positive cashflow. If I sell my property, I would have enough down-payment for several mortgages, and by following Don`s "formula", this might be a better "baby steps" start as an investor. Or perhaps invest with Cooper Pacific and drift around the world for a year or two, that is also definitely a tempting option.

What to do, what to do... Any advice out there?

Tim.
 
QUOTE (timallix @ Mar 28 2008, 11:56 PM) I have recently inherited a 1/2 acre ocean view lot in Parksville, BC, a present from my ageing parents. The tax assessed value for the lot is $300k. I have a friend, experienced in real estate investing, urging me to build on the lot in order to increase the profit potential after selling. So I started thinking, Hmm, 200k p/sq foot construction costs, decent rancher is 2000 sq/ft, that`s 400,000 I have to borrow to build, not including contingency money.

I am a low income earner (less than $50k p/year), and I am not sure if a) I could get approved for a builder`s mortgage, or b) if this is not a rather tricky first real estate project to take on. I live in Whistler, so this would involve managing the project from a distance. It doesn`t look good from a rental perspective, would be massively negative cashflow. I contacted a real estate agent in Parksville, he suggested starting with a garage with an attached suite upstairs, and renting for positive cashflow, I have yet to run the number on that idea.

I bought Don Campbell`s books, and that has given me some insight into acquiring houses (already built), in well-researched, high growth areas, for positive cashflow. If I sell my property, I would have enough down-payment for several mortgages, and by following Don`s "formula", this might be a better "baby steps" start as an investor. Or perhaps invest with Cooper Pacific and drift around the world for a year or two, that is also definitely a tempting option.

What to do, what to do... Any advice out there?

Tim.

You can sell it and take the cash to play with, or take out a secured personal line of credit to use the equity of it. I`m not sure if you can secure a LOC against bare land, but I`m sure someone will correct me. LOC`s are the preferred method of using equity to fund real estate around here. Building on your lot might be putting all your eggs in one basket that can take a long time to return or fall off the tracks in several ways. Unless you`re experienced in building and contracting I might suggest staying away from it.
 
QUOTE (ChrisDavies @ Mar 29 2008, 11:11 AM) You can sell it and take the cash to play with, or take out a secured personal line of credit to use the equity of it. I`m not sure if you can secure a LOC against bare land, but I`m sure someone will correct me. LOC`s are the preferred method of using equity to fund real estate around here. Building on your lot might be putting all your eggs in one basket that can take a long time to return or fall off the tracks in several ways. Unless you`re experienced in building and contracting I might suggest staying away from it.

What a great idea Chris...

Yes, you can borrow against bare land but only up to a MAX 50% loan to value. Banks are reluctant to go higher than 50% because they feel that if the client defaults on payments and they take the land, there`s no cashflow ability as they can`t rent a house to people to generate cashflow. In other words, a plot of land isn`t generating revenue to them in the worst case scenario that the client defaults so they`re not fond of lending against it. 50% LTV gives the bank a more than comfortable cusion in disaster scenario where client defaults on payments and the market is tanking, the bank still could sell quickly and re-capture the entire amount lent...

In this case, you would be able to get a line of credit for $150,000 to use as your downpayments on rental properties. A very good idea (provided the cash flow from these rental properties service both the rental property AND the LOC). Best part of all, you still get to keep ownership of that wonderful piece of family property overlooking the ocean (just keep your payments up to date!).

This way as Chris suggests, you get the best of both plans. You get to keep the property AND jump start your personal Belieze..
 
QUOTE (dwb @ Mar 29 2008, 11:26 AM) In this case, you would be able to get a line of credit for $150,000 to use as your downpayments on rental properties. A very good idea (provided the cash flow from these rental properties service both the rental property AND the LOC). Best part of all, you still get to keep ownership of that wonderful piece of family property overlooking the ocean (just keep your payments up to date!).

This way as Chris suggests, you get the best of both plans. You get to keep the property AND jump start your personal Belieze..

Thanks very much for your suggestions, however, I don`t see how it would be possible to get positive cashflow when borrowing the down payments and at the same time covering the mortgage payments. The way I understand this, my rental properties would be 100% financed, ie 25% LOC for down payments + 75% mortgage. In the current market, wouldn`t it be almost impossible to find properties that would show positive cashflow on that kind of leverage??
 
QUOTE (timallix @ Mar 29 2008, 10:56 AM) Thanks very much for your suggestions, however, I don`t see how it would be possible to get positive cashflow when borrowing the down payments and at the same time covering the mortgage payments. The way I understand this, my rental properties would be 100% financed, ie 25% LOC for down payments + 75% mortgage. In the current market, wouldn`t it be almost impossible to find properties that would show positive cashflow on that kind of leverage??yes, that would be VERY risky !

Option a: Why not SELL the lot .. find a realtor .. and list it .. you do NOT have to take any offers .. then decide in the interim what to do ..

Option b: put an ad in the local paper. s.th. like:

" Local Experienced builder required to build 2000 sq ft house on my lot at XYZ address for 50/50 profit sharing. Phone #"

You can probably find a local builder who also is scrambling for cash .. but has some and has experience .. and do a JV with him: you contribute the lot worth 300K, he builds the house for 300K (as his cost is lower, he does some work himself for free, does the general contracting for free, and his local buddies work for cheap for him) .. then you sell it and split any profit 50/50 !

this would be worth about 800K .. so 100K each !!

Option c: do nothing .. sit on the lot .. and camp there for free once in a while .. it likely won`t fall in value .. then build a house with your own money once you have it years later ..
 
QUOTE (timallix @ Mar 29 2008, 11:56 AM) Thanks very much for your suggestions, however, I don`t see how it would be possible to get positive cashflow when borrowing the down payments and at the same time covering the mortgage payments. The way I understand this, my rental properties would be 100% financed, ie 25% LOC for down payments + 75% mortgage. In the current market, wouldn`t it be almost impossible to find properties that would show positive cashflow on that kind of leverage??

Entirely dependent on the market. For example, very tough to accomplish this in certain places strugglng with affordability such as Vancouver, but extremely easy to find such positive cashflowing properties even at 100% financing in good appreciating areas of places like London Ontario.

Don`t forget, your line of credit interest would be tax-deductible as would be the rental mortgage of the new place.

The most important thing to understand is to avoid going negative cashflow at all costs if you are to do this.... this is so much more important to understand than the fear of 100% financing. It`s monthly payment servicing that could possibly derail you - not necessarily the high mortgage to property value.

Even though you are 100% for the investment property(s) you still have significant equity in the lot. Also remember that selling the lot means that everyone will want a piece of the pie: realtors, lawyers, taxman etc... drawing out the equity in a loc avoids these significant expenses.

But please understand that you need to find positive cashflow if you are to do this. I`m sorry I wasn`t clear on that in my first post. So this means you may need to look elsewhere then where you currently live....

Situations like the one you are in where you are sitting on a pile of non-cashflowing equity are part of the reason why places like Saskatoon boomed, and saw like 50% returns in one year: many investors took/take the equity out of high equity homes in BC and Alberta and put it to work in lower priced real estate assets that cashflow well. Best of both worlds whereby one toe is in historically high appreciating markets and the other toe in lesser appreciating markets but provide the necessary cashflow to the portfolio.

Hope this helps.
 
QUOTE (dwb @ Mar 30 2008, 07:33 AM) Situations like the one you are in where you are sitting on a pile of non-cashflowing equity are part of the reason why places like Saskatoon boomed, and saw like 50% returns in one year: many investors took/take the equity out of high equity homes in BC and Alberta and put it to work in lower priced real estate assets that cashflow well. Best of both worlds whereby one toe is in historically high appreciating markets and the other toe in lesser appreciating markets but provide the necessary cashflow to the portfolio.

As I am just getting started in this real estate investment game, this sounds like a hell of an ambitious way to go for a newbie. Finding, buying, organizing property management, for several properties in Ontario, all the while trying to make a living here in BC. Seems like a disruptive and risky (not to mention stressful) approach to this problem. All the same, it`s good to know that it is possible to do 100% financing for positive cashflow. I have never researched any properties outside of BC, all I know is this gameplan would be pretty much impossible anywhere in this province.
 
QUOTE (timallix @ Mar 29 2008, 12:56 AM) I bought Don Campbell`s books, and that has given me some insight into acquiring houses (already built), in well-researched, high growth areas, for positive cashflow. If I sell my property, I would have enough down-payment for several mortgagesHi Tim, my bad, I guess given the information you provided above I assumed you wanted to start aquiring several properties for cashflow.... especially when you came right out and said that when you opened this topic.... What you said above is that you want to use the money for downpayments on several mortgages (properties). In BC that will be tough to buy "several" even with $300k. Hence the Ontario suggestion or other alternative high growth areas with strong cashflow for you.

To me, handing over the property to an unknown JV guy to build a house for you and blindly sitting around hoping and praying that the guy does a good job building it is incredibly speculative and insanely risky as all you have done is given up full control over your investment. And then hoping and praying that a buyer comes along? That just compounds the speculation and risk.

It begs the question, what if the market turns on you and your newfound stranger JV guy? Certainly not unheard of, especially in the province of BC. I`ll answer for you: You`ve just lost your shirt, you`ve succeeded in losing the land that was given to you (for free), and finally to top it off you`ve brought some stranger into the situation with pending complicated and expensive legal ramifications as a result of the market downturn. Very, very risky.

Furthermore, again, selling triggers the requirement to divide up much of the pie to others (tax-man, realtors, lawyers, etc...) and thus in my opinion not the highest and best use of the situation. But hey, to each their own.

If the market turns on you and you`ve instead chosen to invest in cashflowing properties instead of trying to "flip" your land and the JV built house on it, well, you`ll actually end up ahead. If you`ve selected a long-term investing plan with positive cashflow in solid areas approved by the property goldmine scorecard, its a much different scenario: If your positive cashflow supports the monthly payments (including the line of credit against the bare land), well, in a market downturn, rents historically go up, thus improving your cashflow and allowing you to weather the storm until the market recovers.

If you don`t like hiring property managers to manage properties out of town for you, maybe some smaller towns that are drivable distances in BC would work for you? Or better yet, are there `several` properties in the city you live in that you could achieve positive cashflow with the downpayments from sale or a $150k refinance of the land?
 
A buddy of mine just sent me an email, his suggestions below:


"Just wanted to pass on to you what I have discovered for your reference. First I wanted to say I read those responses , although I think they are interesting , I think the best strategy would be not to sell your property , as it will always appreciate in value.

It can always be 1) Leveraged, 2) Built upon, 3) Rented out, 4) Lived in.


There are just so many ways of you doing with the property what you will but I think holding on to it and building on it is the best thing for you, and if you can be the one organizing it you would save a lot of money. This is what I know so far and we are going to do this but on a much smaller scale.


1) Get Health Authority appproval for your septic and confirm your water source, without this no building permit can be issued by the regional district. You can go to the government website and get the specs on how to dig prior to your perc test. Can be done by yourself. Save Money.

2) Get your building plans done, preferabley by a draftman, way cheaper than by a architect, we are having ours done and it will cost about $500-$800. They will need a topographical survey (topog), and a site plan.

3) Do septic excavation and site foundation digging for the house at the same time, pay by the hour. Simple excavator people not that expensive. zec-->

4) Build foundation, confirm if your will have either a

1)concrete slab, 2)crawl space or 3) complete basement. This should be decided when getting your building plans done.

5) Frame House, pay by the hour, most houses take about two weeks to complete. Buy all materials yourself based on plans and go over with your finishing carpenter,ie: 2x4`s, 2x6` 2x10`s, decide on siding, buy truss and roofing system.

6) Contract electrician, contract plumber for inside work.

7) Inside finishing is the most expensive (devil is in the details) Do as much as this as you can with your finishing carpenter (pay by the hour) as long as you have proper plans it should not be a problem. This includes getting a dry waller ( pay by the hour) I know of someone that is from Parksville, for carpentry he is the brother of a friend of Monica ( remember the Hansen Family from Parksville).

$18-$25/hr

8) Do all flooring yourself, painting etc, moldings etc, these are all things that you can do. Plus, you like all of that handy man stuff.

I believe in order to be the general you might have to apply to HPO, I am still loooking into that.

c-->

What a fun project,



Talk to you again. I spoke with Monica and she remembers asking the Harvest Home people what the cost of the lock up materials were for a 2000sft house and I think they were around $50-$80,000 range, all materials provided, minus electrical and plumbing stuff. Take a look at their plans and ask for cost estimates. Could be a way to go. I will keep you posted how we make out with our little project."


Any comments?
 
If you can build the house then it might be worth doing. IE Sweat equity will give you a bigger amount to begin or REI career.

I think what you have to look at is opportunity cost. If you sell the parcel as is right now for $300k what could you invest in? Would this give positive cash flow? Would this appreciate in value? How many properties could you buy. Take for instance you got 4 properties that appreciated at 5% per year rather than this land that appreciates at 10% per year. 4*5% = 20% so on 4 $300k houses you have made $60k plus your tenants are nice enough to pay you some cash every month and pay your mortgage off slowly but surely.

There are many ways to work out this solution. It would be different for everybody involved because everybody has their unique situation and a different Belize that they want to get to and different levels of risk tolerance.

If you want some deals that we have done or have a look at some that we assign we work generally in the ONT AB market but we get some things in BC as well and we work with Lease to own tenants.

Again most of the answers you have to provide yourself we can provide different ideas.

My email is [email protected] give me a shout if you want to see some numbers.

Regards,
 
QUOTE (dwb @ Mar 30 2008, 03:00 PM) ...
To me, handing over the property to an unknown JV guy to build a house for you and blindly sitting around hoping and praying that the guy does a good job building it is incredibly speculative and insanely risky as all you have done is given up full control over your investment. And then hoping and praying that a buyer comes along? That just compounds the speculation and risk.

It begs the question, what if the market turns on you and your newfound stranger JV guy? Certainly not unheard of, especially in the province of BC. I`ll answer for you: You`ve just lost your shirt, you`ve succeeded in losing the land that was given to you (for free), and finally to top it off you`ve brought some stranger into the situation with pending complicated and expensive legal ramifications as a result of the market downturn. Very, very risky. ...

of course you would check references, check out his other projects .. BUT: if teh guy is serious and a good builder and nows local contractors and is honest that is a GREAT way to build a house for almost ZERO cash invested while mitigating risk .. since teh builder would not spend his own money (say 150-200 real cash) and then not produce ..

It also assumes you have done your homework regarding value of oceanfront homes .. 800K to $1.2M sounds quite reasonable for oceanFRONT !

many local builders lack the cash to buy the land AND finance the high-end home .. so go and find a reliable, honest hard-working guy .. and with proper due dilligence and market research this can be very profitable .. and enjoyable .. and possibly repeatable with a 2nd lot from the proceeds !
 
QUOTE (thomasbeyer2000 @ Mar 31 2008, 06:12 PM) It also assumes you have done your homework regarding value of oceanfront homes .. 800K to $1.2M sounds quite reasonable for oceanFRONT !

It`s not quite oceanFRONT, but oceanVIEW. The lot is just across the street from the oceanFRONT houses. Still, beach access is right there, and with a good arm you could throw a stone into the Georgia Straight from my lot (with a bad arm, you`d probably hit the oceanFRONT house!)

I`ve been recommended a reputable builder who has built two homes for the parents of my real estate expert friend, and he likes to do JV`s. I am still trying to figure out my options, because part of me would really like to have that spot for my own retirement. I am 48 and don`t have much in the way of savings, but I guess I could build a shack and do the reverse mortgage thing. No kids, no wife.
 
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