The plan is to buy a single family home in San Jose California for $750k. It is tiny – 900 sqft – then build a 1000 square feet home addition and sell it for $1.3m or so in about 9 months. Last year i did a similar project – a 1000 square foot house for $800k – added 1000sqft and sold for $1.6m. It sold 2 weeks after being listed. Construction costs for a contractor are about $150 per square foot for a home addition – barebones cost. Homes sell for anywhere from $400 per square foot at the low end to over a $1000 per square foot for highend homes. If you exclude the lots which are worth $500k in this area a $500 per square foot value for homes is about average.
New homes get a big premium – approximately 20%. So this flip which will have a new floor plan and be new from the foundation to the roof will get closer to $600 per square foot with an unburdened cost of $150 per square foot resulting in a profit potential of $450 per square foot for the home addition or $450,000.
So here is my plan
1. purchase price is $750k – purchase will be tenants in common between my 401k trust and my new LLC. the 401k trust will put in $200k cash, a hard money lender will loan $550k to the LLC and have a first mortgage on the property for 9% interest and 2 points.
2. i will lend the LLC $275k to finance construction pay interest on hard money loan, permits etc.. I will get permits, etc for all the work. The construction dollars will be paid to a contractor. All the work will be done by licensed contractors and their employees/workers. I know the contractors VERY well and will be their project manager for this project.
3. if all goes well in 9 months I will list the house with a real estate agent and sell it for $1.3m (maybe less maybe more – it just depends on the market)
Proceeds will be as follows;
$550k principal back to lender
$50k sales commission and closing costs etc.
$300k to me for my loan to the llc ($25k profit)
$350k goes back to my 401k – investment plus profit ($150k profit)
$50k goes to my LLC as short term capital gains ($50k profit)
Any comments would be appreciated. My first two priorities are a simple business structure with reasonable liability protection. I am less worried about wringing every penny of profit out of this deal…i am happy to have less risk and give up some profit.