Author Topic: Development case study - Non-US  (Read 998 times)

pka222

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Development case study - Non-US
« on: June 19, 2014, 09:10:11 PM »
Based on rents and land prices where I live, I think there is room to develop a rental business based on new construction.
Assume for this case-study that prices are in USD but we are in a developing country and note that planning permits, zoning, standards are all up to the developer, i.e. there is nearly no government over sight. In most cases this is bad but given what I aim to do, it's a positive. Labor is very cheap, but supervision and oversight is required.

Property - land in the area I'm interested in is 70-110,000 per 1/4ac.  I'm confident I can pull off the 1/2 ac needed for the project for 180K perhaps 160K.

Construction prices are all over the map, but I have 2 reasonable estimated builds prices at 95K and 105K per 3 bed 2 bath house, with fixtures, water and electricity hookups.. I'd add 10K on top for furnishings  - that is how houses are rented here, beds, sofas, even TVs.

The plan would be to build 4 houses in one go, have yet to decide if 2 should be 2/1 and the other 2 be 3/2s or do all in the family size. I'll base the calcs on the 3/2 but would like suggestions on a mix of sizes or the same same.
 
Rents will be 2200 for a 2/1 and 2800 for a 3/2.  -This is competitive prices and I have a target market based on location.

So we are looking at costs of land ave 170K + building (100K X4) 400K and furnishings 40K totaling = 610,000
Annual rents of 134400.  Using the 50% rule we'd have 67200 to service the loan and profit.

I'd borrow 458K at the very normal 9% variable  rate (been the same for 3 years was 9.5 % before (no penalty for early payment). Servicing the 15yr loan would cost 4058 per month leaving 18504 annually for profit (9% of the 210K in) .  I think occupancy will be high but best to plan for the worst?

Some additional thoughts- I have not yet approached the builders to see what savings could be realized by doing a "small compound" as opposed to single home construction.  I plan to have a common property entrance but each home is a SFH- stand alone with landscaping around it, the parcels will be survey for 1/8ac for potential future sale.

What do the experienced real estate gurus think of this plan? It almost makes the 2% rule (1.8%) and works with the 50% rule.  Is 9% too little expected return in comparison with the risk?

Thanks for your thoughts
« Last Edit: June 19, 2014, 09:23:50 PM by pka222 »

arebelspy

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Re: Development case study - Non-US
« Reply #1 on: June 19, 2014, 11:57:29 PM »
(I obviously don't know which country you're talking about, but) I'd worry most about the stability of the government, and having it taken from me.  That research would be the first step in my due diligence.
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pka222

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Re: Development case study - Non-US
« Reply #2 on: June 20, 2014, 11:09:26 AM »
@ arebelspy- yes a Coup d'état would ruin returns as well as seizure by the government of the day.  Fortunately there is no oil to be found for a 1000 miles around here.

Due diligence on that side can be considered complete, the head of state issues the permit for non citizens to own property (I meet all criteria) and in the 50+ years since independence from the western colonizers  the government has been remarkably stable, in a pro development non-land-seizy way.

I have been appreciating your comments - great piece on buying land sight unseen- I guess that would be the other option- build a US portfolio while living over here- benefits would be even more stable government, very easy to estimate costs, very cheap credit.
Benefits here- I know the local market better that anywhere in the US, there is a lack of 3/2s in the 2500-3000$ range and I recommend rentals to colleagues regularly. Down side is the high interest rates.