New Investor With Little Credit And Lots Of Ideas =)
I am new to investing and have plenty of cash, but little credit. For most of my life, I have paid for things with cash. I just got my first mortgage and because I have no income, I had to do a no doc loan. The only way to get a relatively normal rate (6 1/8% 5/1 ARM) through my mortgage broker was to put 40% down. I got the mortgage mainly to help my credit, but also because my investments are doing better than the 6%. My credit score was around 725 when they pulled it for the loan but I simply didn't have *enough* credit. I have had the mortgage since June, a car payment for a year now and one credit card for 6 years.
I am looking at a bunch of different paths now and am trying to decide what makes the most sense.
Here's the scenario:
The house was $500k.
I am almost finished with a $120k remodel.
I am living in the house.
I have $200k in equity and owe $300k
House will re-appraise $700k-$800k (Fingers crossed!)
The interest only payments are $1850/mo with escrow accounts for taxes and insurance
I have $200k in company checking for REI
Here are some different ideas I have had on how to proceed. Keep in mind I'm new to this and don't know all the possibilities.
1) I can keep the house I'm in and re-appraise and refinance it hopefully with better rates AND free up some cash.
2) Keep the house without refinancing
3) I can sell the house I am in. Then can I:
a) 1031 Exchange into a new construction?
b) Find a way to write off capital gains tax?
Now the tricky part, what I plan to do with the money:
There is a 3-acre lot I can buy and possibly sub divide into two 1.5-acre lots. It is not on the market but I cold-called the owner and he said he would sell for the right price. He lives in Michigan and inherited the lot. I asked what the right price would be and said $500k chuckling. The lot's value is approximately $475k but I believe he will take $400k for it. If I sub divide, the lot cost is $200k and I would spend approximately $600k on constructing a new house. I still have to meet with the builder and see but the house would be approximately 6000sq. ft. and would sell for $1.5M+
These figures might not be very accurate but they are the best I can assume without meeting with the builder. Will I have to sell my house to build the new one because I don't have much credit? Does my idea make sense? Please let me know, like I said I am new to this! Thanks so much for taking the time to read and respond. Best wishes,
~mike
Re: like I said I am new to this!
Ummm, you want to build a $1.5M 6000 sqft house on you first try? My advice, start out a tad smaller and work your way up. You will make countless mistakes on your first, second, third speculative attempt at new construction but it's the only way to really learn the ropes... most of which you can't get from reading books.
Sounds like you have about $600k in cash and equity. Screw up a $1.5M deal and you could wipe out a good chunk of that. Call me crazy but a $1.5M house should have top-of-the-line everything. I just don't think you are going to achieve that for the $100/sqft you are projecting. In my neck of the woods it's between $150-$200 not including the land.
You really need to take a hard look at the numbers (I hope you are highly proficient with excel spreadsheets, planning and organizing). Try to get a firm handle on the true costs of time and money involved in building and selling a custom home. Keep in mind that it is highly likely you will lose money on your first speculative construction deal but you will learn an enormous amount... consider it the price of quality education.
To have any chance at profit in this arena, your goal should be to become a General Contractor. You have to be very knowledgeable and experienced, very good at what you do, make incredibly intelligent decisions on the fly during the construction process regarding material substitutions, screw-ups, how/where to add value, cost overruns etc. etc. etc. etc. etc.
A lot of people mistakenly think that they can build a spec home using a GC and sell it for 10-20% more than they invested in it. Not likely... unless you get very lucky. If you really want to profit from spec homes you must be the General yourself and I can't even begin to tell you how much knowledge and experience that takes including good relationships with all the subs.
Build some moderately priced houses using good Generals and try to break even while learning everything you can.
Sorry if this is not the advice you wanted to hear.
Spinwilly,
Thanks for the reply. I've done a little more research and you are right. It will cost almost $200/s.f. Unfortunately, all the land in my area is almost gone. Lots are selling around 250k/ac. and in some places as high as 1M/ac. I found these 3 acres of amazing land for under $500k. Like I mentioned before, I may be able to talk the owner down to as low as 350k. Seems like a great oppertunity. Maybe a good option is to buy the land and put it on the market. I mentioned that it has never been on the market before and that the owner who inherited it lives in Michigan. I still need to check with the city but if it could be sub-divided, there could be some profit to be made right there.