Questions About A Deal - Need Some Help From You Pros!
)Sorry administrators - posted this on the residential side before i saw this forum)
Okay, here's the deal.
While talking with a friend of mine a few months ago, I mentioned that I was considering building a custom home as an investment. My friend, who is a real estate investor, said that he would be interested in doing the deal together.
He said that he had done this before with another person and it had been a good deal.
This is how the deal was setup and presumably how our deal will be setup. I will meet with him in a about a week where I will find out all the details.
1-The investor will purchase the property.
2-The investor will finance all construction costs with cash or bank money.
3-I will build the home without pay.
4-Upon completion of the home, I move in and live in it for 24 months mortgage free. At the end of 24 months(capital gains purposes), the home is listed for sale and the profit is split 50/50.
I guess my question are: Where is my downside? What are some risks that I need to be aware of? What questions should I be asking?
I know there are some legal and tax implications here.
Any advice you pros can offer would be appreciated.
I'm sure there will be questions - feel free to ask.
Thanks,
Bret
Here are some numbers.
Lot cost = $120k - 160k
Construction cost per square foot = $85 - 95
Home size = 4,000 square feet appx.
Homes in area currently selling for $140 - 150 per square foot
Thanks
One thing I see is the investor will buy the property and will be in their name. Anything you do to the property will benefit him.
I suggest you buy it as Tenant's in common - even if he puts up the cash to buy the deal. That way you can go your separate ways after the deal is done, if you want.
mhinds,
Thanks for your input.
Bret,
I just got your email today as I have been away from the computer. In theory the deal you presented sounds pretty appealling to you as the builder and occupant. I myself am very gunshy of partnerships though and this one could present some difficulties if not drawn up correctly. For starters, the IRS code requires that the title holder live in the property for 2 of the last 5 years to avoid capital gains. As such, your name would have to be on the title. The other issue is to make sure your contract agreement clearly spells out how you are to be compensated should either of you elect to dissolve the partnership. What happens if at the end of the build and just prior to you moving in your investor finds some reason where he thinks you should not be allowed in the house? How would you be compensated for your time in the construction phase? Contracts are made soley to handle the "worst case" scenario. If everyone did what they said they would then we would not need written contracts. Make sure your contract clearly states how the dissolution of the partnership shall be handled so that you are not left in the cold and the investor got a free builder. If you can cover that then I would say that is an interesting proposition. Unless of course, you are able to finance the house through your own construction loan in which case i would say don't fool with the other guy and go do it on your own and keep all the profit yourself.
Good luck and let us know what you decide!
xtothez,
woodsong's post reminded me that I had replied several days ago to the email you'd sent me, but I wasn't sure if you received my reply.
woodsong,
Nice to "see" you.
Nancy
Thanks for all your responses.
We met yesterday and are hashing out details. I'll keep you posted.
Thanks again,
Bret
Yes you can use your rental properties as income. They would calculate that by the cash flow from each. As long as you have a lease that would cover the mtg for that period of time with at least six months out, it should not be a problem to get a loan for another property.