Hey Daniil Kleyman here. I wanted to record another quick case study for you. This one dealing specifically with new construction and financing this new construction. I’m getting ready to, I’m gearing up to do a bunch of new construction projects actually here that are going to start in the next month or two and so I’m going to run through a case study of one of these projects, a duplex. I’m getting ready to build on some land that I own and why should you watch this? Right?
I’ve always thought it’s really good to learn how others do deals. Everybody has a couple of key strategies that they stick to but it’s always… I’ve always been really interested to learn from others and especially when those people are able to really get into the meat and potatoes of their deals and into the numbers.
So to me the stuff is always interesting and I hope you find it interesting as well and can learn from this. I’m going to show you how I’m financing my new construction deals and I’m also going to show you a different way to use the Rehab Valuator software than what you’ve probably seen and you can replicate it. So if you’re watching this then you probably already have either the free or the paid version of this real estate flipping software. If you don’t, then just watch this case study and at the end I’ll give you a link to where you can get at least the free version of this software and then an upgrade if you want to. But this is going to be a pretty technical case study. I’m really gonna go deep here into some numbers. So really make sure you’re paying attention, take notes, write down your questions. There’s not going to be a lot of fluff in here. I just really want to run through this particular real estate deal and then run through how I’m modeling it in the software.
So the deal basics, this is a 33 foot by 135 foot wide lot. The lot is 33 feet wide, 135 feet long that I purchased with cash for about $18,000 about six months ago. I’m going to build a duplex. It’s going to have two units. Each unit will be roughly 1,250 square feet. It’s going to be a two bedroom, two bath apartment. In terms of unit mix, 1,250 square feet is plenty to stick a three bedroom apartment in there, but I am choosing to make these really nice big two bedroom apartments and I’m foregoing a little bit in rent by not making them three bedrooms, but I’m also getting a better profile of tenants.
It’s usually with three bedrooms, it’s going to be roommates, they’re going to move or change units every year. With two bedroom apartments, I’m going to get a little bit less than rent, but I’m going to get a better quality tenant, most of my two bedrooms are usually either couples or better quality roommates, just two of them, usually it’s young professionals or people with really good jobs and they tend to stay longer, treat the property better. So I’m making a conscious decision here to get a little bit less in rent but get better quality tenants with less turnover. That’s been my experience.
I’m ball parking hard and soft construction costs roughly at $70 a foot and I’m hoping to come in below that. And then again, don’t look at the $70 a foot number and assume anything about what it’s going to cost you or your market. This is my number. Construction costs vary market to market, they vary based on contractor relationships, how good of subs you have. Cost of materials varies widely by regions, by time of year, by cost of gas in the particular times. So these are my numbers, but always do your own research. Don’t just assume that these same numbers will work for you.
So before I go through this deal, I want to point out that I’m not doing this case study to show off the kind of killer profitable deals that I’m doing. This new construction stuff is not that sexy. That’s really not the point here. The reason that I say the new construction stuff is not that sexy because it’s not, well it’s not terribly profitable from the get go. I’m only targeting 15 to 20% equity position at the end of the project.
So this isn’t a deal where I’m going to be into it for 60 cents on the dollar and I’m going to have a huge 40% profit margin. No, the new construction stuff… new construction costs money, so these are not terribly sexy, super profitable deals, but the end product of all of my new construction stuff is going to be a high quality, high-end attractive rental, and I hold all my properties, I don’t flip them. It’s going to have no to very low maintenance for the next five to seven years. So again, I’m going for a smaller equity position in day one, but I’m building instead of buying somebody else’s rental property, somebody else’s renovation, I’m building these myself so I know what the finished product will look like. I know it’s going to be good quality. I know it’s going to be very low maintenance and highly attractive to my target tenants.
So that’s really the idea here. So I’m not doing this case study to show you, hey, look at how much money I’m making in these deals because that’s not the point here. So also, this is in an area where I’ve got about 20 other properties in very close proximity to the new construction I’m starting to do, including the five new construction projects that I’m getting ready to start. So in a way to a small degree, I’m bringing my own property values up. Let me show you this. Let me switch out of here and go to Google Maps.
So here, this is Churchill and Richmond where I’m doing a lot of my construction, Richmond, Virginia. So this is Google Maps. So this is the empty lot that I’m going to develop. Now a couple of interesting things to show you. This right here across the street is a rental property that I own. Over here directly across the street, what you’re seeing here is an old set of town homes. These are being demolished as we speak and there is a huge new construction apartment building going up here. I know for a fact that their price points are going to be much higher than what I’m budgeting here, which means that these guys are going to have a two bedroom apartment that’s going to be more like 8-900 square feet and they’re probably going to ask, 13, 14 $1,500 for it.
Which means it’s not going to be very hard for me to compete against them because I’m going to have much bigger two bedroom units with more parking and my price point is at least for what I’m budgeting is going to be lower. So I’m going to have a very attractive product compared to what’s going up directly next door.
Then also in this area I’ve got a ton of other rental properties I own. As a matter of fact, if I just go over three blocks here, this is a mixed use building right here that I’m currently converting to a restaurant and four apartments. We’re going to be finished in a couple of months and directly next door to it, I also own this land, I’m going to do some new construction here and I’m currently negotiating a couple of other projects right around here. So some bottom line is I’m heavily focused on one area, so every new good quality product that I bring to market really in a small way serves to improve the area and bring up my own property values. So let’s keep going.
So financing overview. How am I financing this deal? I’m going through a local commercial, a local portfolio lender, a local community bank. These are commercial lenders that I have very good relationships with and the particular bank that I’m doing my new construction financing with is going to finance 85% of the total cost of the project as long as it’s below, 70, 75% of the after repair value. So the construction loan is six months and it’s interest only. Now what happens at the end of that six months is instead of me having to pay off that loan or refinance, I have the option of just rolling that loan directly over into what’s called the mini-perm, which is essentially a 20-year amortizing loan that’s going to have a five-year call or a five-year reset at the end. So basically my construction loan then becomes my permanent loan.
I don’t have to do anything else if I don’t want to, which is pretty convenient, right? So because I plan to hold this property, this works pretty well for me and I’ll show you how that works in the software in a second.
So let’s go through the numbers. I bought the land with cash for $18,000. My projected construction budget is… and including my architectural, and I say soft costs including my architectural fees, engineering fees, etc., etc., survey, soil reports, which I’m having done right now, etc., etc. I’m projecting roughly $175,000 but I’m hoping to… that’s tops. I’m hoping to come in below that. So my total hard costs and my construction soft costs are going to be 193,000. Projected after repair value is $250,000. So the construction loan that’s available to me is 85% of this cost, which amounts to $164,000 roughly. Cash required? Well, it’s going to be my construction budget, minus my loan, 10,000 almost $11,000. Then cash invested at the end of the deal is also going to include what I’ve paid for land.
So that brings me roughly to cash required to do this deal of about $29,000 not including my soft costs, which are closing costs on the loan, points and interest. So I’ll show you all of the numbers in just a second. But I’m showing you this, I’m going to have some cash that I’m going to have to put into this deal, roughly $30,000 plus interest on my construction loan. So my investment criteria at the end of this project becomes, A how much sweat equity am I going to have? So what’s going to be my total cost basis versus this after repair value.
The value of this building will be $250,000. My cost is going to be a certain percentage of that. So I want to have at least 15 to 20% sweat equity in this deal, which means I would have to have my total cost basis equal to $250,000 let’s say times 0.85, 210,000. So I’m targeting at least 40 to $50,000 of equity in this project once I’m done and then I’m going to be looking at my return on my cash going forward on the cash that I’m leaving in this deal. And again, once I show you the numbers in the software, it’ll make more sense. So let’s go to the software.
Okay. So if you’ve used Rehab Valuator before, you should be pretty familiar with the Rehab and Holder flip analysis interface. So we’re going to be using… because I’m going to be holding this deal, we’re going to be using the second exit strategy, which you can see here in the right. But let’s go through the numbers. Over here I’ve entered my purchase price, $18,000. I’ve entered my closing costs and before I show you this actually let me show you what I’m talking about. This is the duplex. These are the architectural plans that I had drawn up. This is what this duplex will look like roughly over here on the right. I’ve already got the survey done and this shows how this duplex will fit onto that survey, onto that plot of land. I’ve got my foundation drawings, my floor plan. So I’m building really big spacious two bedroom units.
In the front on each floor you’ve got a big living room with a kitchen, with an island and then a bedroom and a bath, a bedroom and a bath and then decks in the rear. This is the exterior of the building. So this gives you a better idea of what I’m building. A hardy plank siding, TPO roof, standing seam, metal roof on the porch. Nice… this is in a historical area so I can’t put vinyl windows in, so I’m going to put in… well actually in here I think I am, I’m able to put vinyl windows in.
So anyway, it’s a brand new, really good quality product because I get to build it from scratch. So back to the numbers. I’ve already closed on the land. So my closing costs that I just put here is a lump sum. I then put my holding costs, I’m just ball parking here, insurance. Every construction project I do, I take out construction insurance policy that protects me against the building being damaged, burning down and also covers liability. I’m going to have some utility bills, water, sewer, electrical.
Then to financing, under financing I can either select all cash or I can select financing. I’ve selected the lender caps cost and caps that cost at 85%. I’m going to pay 1% origination point. And then I’m also ball parking another one point roughly for all the closing costs when I get the construction loan. So this is here where my closing to buy the land, but then there’s a separate closing I will do when they put the construction loan in place. So this is where I’m ball parking my construction costs, my closing costs on the construction loan.
All the points and closing costs I’m going to pay up front when I close on this loan. This is the interest rate that I’m paying on my construction. For bank financing guys right now this is pretty cheap, but I mean I’m able to get a rate this cheap because I’m doing five, six projects at the same time. So again if you go to your local lenders and depending upon when you watch this case study, it may be a few months after I’ve recorded this, rates could be in a completely different place. So I don’t want you watching this case study a year after I recorded it and saying, “Hey, this is crazy. You’re full of crap, I can’t get anything close to four and a half percent.” This is what I’m paying right now. That’s it.
Interest payments, I’m making interest only payments during the rehab. Here I’ve selected no, I’m not splitting backend profits with lender. This isn’t a private loan. So I’ve set up my purchase price of the land and I’ve set up my financing criteria. Now I’m going to go to exit strategy number two and if yours look like this, you can click show second exit strategy and you can go here. The first thing I’m going to do is I’m going to enter my rehab budget and because I’m just in the preliminary stages here, I’m just entering a lump sum.
So you can go here and you can enter a detailed input and you can itemize and at some point in next couple of weeks I’m going to start itemizing my budget for this project. But for now I’m running a quick and dirty analysis. I’m going to select quick lump sum and I’m going to enter 2,500 square feet times $70 a foot.
My construction budget is $175,000 and I’m going to click return to analysis. My construction is going to take four months, fingers crossed after repair value, again, I’ve entered the formula here. I’ve typed in equals 2,500 square feet times $100 a foot. That’s my after repair value. Then it’s going to take another two months for me to find the tenant and roll over. See, this right now says months to close in the refi, but instead of refinancing this, as a form of refinancing, I’m just going to let this loan roll over into permanent loan.
So I’ve got a total timeline before it rolls over into permanent loan of six months, four plus two. This shows me the total capital that I need, maximum that can be financed. Again, remember maximum that can be financed is 85% of costs, which is 85% of this, plus this. Total loan, this shows me how much cash I will need in the deal, including the land that I’ve already purchased.
So basically anything over my maximum loan amount will be cash that I have to bring to the deal. So out of this $37,000 I’ve already paid 19 plus for the land and I’m going to have some additional cash that I’ll need to bring to the table in order to complete this deal.
My total all in costs at the end of rehab, I’m projecting to be $201,000. $201,000 versus the after repair value means I’m going to have very roughly 20% equity position in this deal. My total cost is 201, property is worth 250, I’ve got roughly $50,000 in equity once I’m done with this project. So now this is where it gets interesting because again, I promised to show you a different way to use Rehab Valuator and so the way I’m using it for this deal is normally here you would be modeling a refi event after you’re done with construction and you’ve got a lease in place.
But because this rolls over to a mini-perm, I’m not really refinancing, I’m simply taking the existing loan amount and I’m making that my permanent loan. So what I’ve done here is I’ve entered the formula, percent, what percentage of appraisal will my refi be? Well it’s going to be equals my total loan amount divided by the after repair value, which means I’m refinancing at roughly 66% of ARV. What this does is it simply takes my existing loan amount, which is 164 and rolls that over as my new loan amount, which you can see here.
I hope you’re following me. If you still have questions, leave a comment below this video or email me at Daniil D-A-N-I-I-L @rehabvaluator.com and I’ll explain anything that you’ve missed.
But when I’m doing is, the interest rate stays the same, right? It’s the same interest rate because it’s just one loan, my construction loan, then my permanent loan, it has the same rate, 4.55% but now it’s a 20 year amortizing loan. Normally if this was a real refi, I would have two or 3% in here as my closing costs on my new refi loan. But because this is just a loan that rolls over into permanent loan, I’m not going to have any additional closing costs, so I’ve put zero here.
Now I go in and model my income. There’s two units, two bedrooms, two baths, 1,250 square feet and I’m ball parking $1,100 in rent for each one of them. I’ll actually try to get more, but this is what I’m budgeting and I’m not putting any vacancy here. Obviously I recommend if you want to be conservative, you model a month worth of vacancy, but my units stay rented year-round. Every unit I have we run a very tight ship and especially in my new construction product, it stays rented year round. So I’m not modeling any vacancy but what you model is totally up to you.
Then my projected operating expenses, I’ve entered my insurance, my property taxes here and I get to put on a tax abatement in place, which is pretty cool and that’s a separate topic. Again, for now I’m not modeling any maintenance because for the first couple of years I really expect not to have much maintenance. If I were to really want to be conservative and realistic, I’d stick a couple of hundred dollars in maintenance costs here just in case there is turnover. For now, I’ll leave this alone because I just want to see what my base case is.
So now the model gives me my net operating income, my new mortgage payment. This is my new loan amount. I’m not taking any cash out at refi. This is how much money I’m leaving in the deal, so I’m tying up $37,000 in cash. This is how much equity I’m left with in the project. This is going to be my monthly cashflow, $1,000 a month. And then this is what I’m looking at, right? So I told you before that I was going to look at two investment criteria’s, how much equity and then what my cash and cash return is. Because I’m leaving $37,000 in cash tied up in this deal, I want to know what return that $37,000 is generating for me. Based on my first year cashflow pretax, my money’s going to earn 33% on an annualized basis.
Now if I go here and I stick, let’s say, 200 bucks in maintenance a month, that return goes down to 27%. Still, that’s a pretty good annualized return on my money, 27% right?
Then as a good sort of sanity check, I can go here and I can say, well, the debt coverage on my new loan will be 1.78 so that’s pretty good. My banker will look at this as well. My payback period to recoup my cash that I tied up in this deal, again even with being conservative about maintenance expenses, still my payback is under four years. This is what that tells me, 3.77 years to get my $37,000 out of this deal with cashflow. Capitalization rate base on the after repair value is pretty good as well. Based on costs, it’s even less.
So I hope you followed me so far, but here’s where it gets pretty cool. This is what I’m doing from here. I want to send this to my banker and show him the rough numbers on this deal. So along with my personal financial statement and a couple of other deals, I’ve sent him my architectural plans, I go here and for this particular purpose I’m going to use marketing sheet for refi exit. So let me show you quickly what I’m sending my banker.
This is what my banker gets, along with my architectural plans for some other data, he’s getting this one pager. Address, four bedrooms, four baths, square feet, year built, my information. Then I just put in a description here, new construction, each unit, expected finishes. Scenario below shows what loan will look like once it rolls over to a mini-perm and this is misspelled. Projected rent.
So here’s what I’m showing him, after repair value is $250,000. Purchase price is 18. Rehab costs, holding closing costs, projected financing costs. My total cost basis in the project will be 80% of after repair value. I’m shooting for a loan of $164,000 and I’m committing a total of $37,000 in cash to this deal. This is what the loan will look like once it rolls over to a permanent loan. This is what my banker wants to see. Loan amount of 164.
This is how much equity there is in the deal. This gives protection to my lender. My lender has 85, $86,000 of equity above his loan that protects him. I’m showing him that I’m going to have skin in the game, 37 grand, monthly cashflow, and here I’m showing him the debt coverage ratio of this new loan. So bankers will typically want to see roughly a 1.25, 1.3 debt coverage ratio. Debt coverage ratio simply shows my lender how well my income from my property can cover the mortgage payment. So debt coverage ratio of 1.78 basically shows that I’m collecting 178% of the mortgage payment and my expenses that are due, very roughly. I’m collecting income, my net operating income of my property, my rent collected minus insurance, minus real estate taxes, minus maintenance is 1.78 times the mortgage payment.
This is a very important number, so you need to understand how this number is calculated. Assuming a 4.55% rate and a 20 year amortization. I have a very good debt coverage ratio. This is something that my banker wants to see and he’ll run his own numbers to verify this, but this is a good number. So this is what I’m sending him, I can generate this with just a click of a mouse, type in a couple of comments here and this is good to go. I can print this out, send this to my banker. Well it makes me look like I know what I’m doing, which is pretty important. Now obviously I can supplement this with some other reports. I throw in a cover page here, I can throw in comps.
You can really take this as far as you want to take it, right? The software is pretty versatile, so you could communicate as little or as much of your deal as you want. The other report I always like to look at is my summary report and this is something that’s available in the free version of the software. This will break down the entire deal step-by-step for you. Actually this will also show me exactly what my financing costs will be and how my financing costs are broken down. This is very important.
Then one thing that I like to do is in the software, if I click on view reports, I have something called Scratch Pad. Well, I actually use this to… I have a bookkeeper, but I also use this to keep track of my costs as well. Scratch Pad is a blank sheet of paper that you can just fill out with whatever you want. It’s in the software and I like to keep track of my transactions.
So originally when I bought this lot, I recorded it, and this is very simple. Every time anything gets paid on this project, it’s a line item in this sheet. Every time any expenses are incurred, it’s a line item, date, amount, purpose. Who I paid to, method of payment, this is just the name for one of my checking accounts, check number. So I get to keep track of all my costs here. Once I have a detailed rehab budget, I can start comparing those costs to my budget. It’s very, very, very easy to do, but a very good way of keeping track of all your expenses. Obviously you should have a good bookkeeper as well, but I like to do this.
So one more thing I want to show you before I let you go. I told you in the beginning, this is not like a super sexy deal. If everything goes well, I’ll have at best about 20% equity position in this deal, but because this is a 20-year amortizing loan, in addition to my cashflow, there’s other ways I’m making money. I’m not just collecting $800 a month in cashflow on this deal. I’m also amortizing this loan and building wealth through paying down the mortgage. How much am I paying down?
Well there’s a free tool that you can download, if you go to the RehabValuator.com, amortization-worksheet, there’s a free tool that I’ve made available to you and I’m going to show you how to use it.
Click here, we’re going to download it. This tool will allow you to model any mortgage, fixed rate, arm calls, anything in between. So I have a loan of $164,050 amortizing over 20 years, at the rate of the 4.55%. If I go here, I can immediately see that in the first five years I’m paying off 17.22% of that mortgage. So in addition to all the cashflow I’m generating in the first five years of that 164 grand, I’m paying off almost $28,000 off that loan through through my mortgage payments. That’s with no prepays. So download this tool, it’s pretty useful and it shows you… you can literally model any kind of mortgage share. But my point to you is that, yeah, I’m only starting with a 20% equity, but I’m going to build my equity pretty quickly because my loan amortizes over 20 years.
In the first 10 years I’m going to pay off with no prepays, almost 40% of that loan, I’m going to pay it down. So when you hold property there are obviously other ways to build wealth than just cashflow and sweat equity from from the outset. Mortgage amortization is also very important. So download this tool. You can do arms here, you can do interest only. You can do any amortization from one to 30 years actually. Pretty useful tool because this immediately tells me that, hey, even though I’m not starting with a ton of equity in the beginning, I’m going to build that, I’m going to build more equity pretty quickly.
So hopefully everything made sense. Again, I told you not a lot of fluff, just lots of meat in this case study. What should you do after watching this? Well, please comment below this video. If you have questions, let me know you have feedback. Let me know if you’ve enjoyed this case study. Also, let me know if you hated this case study, let me know as well. If you’ve enjoyed it, please share it. There are Facebook and Twitter share buttons under this video unless you’re watching it on YouTube in which case there still should be share buttons under this video as well.
If you don’t already have the software, you can go to RehabValuator.com and there you can download a free copy of a software called Rehab Valuator Lite. This software will allow you to actually do most of what I just showed you other than generate the marketing reports and the detailed rehab budgets. You’ll also have an option to upgrade to the premium version of the software that lets you do everything that I just showed you, but there are no strings
You can just download the free version and play around with it. There’s also tutorials and more case studies on my website. Once you’re on the website, actually, if you simply go here, you’re going to get access to all of this stuff. All of the tutorials are here. All of the case studies that I’ve recorded, there’s a ton more case studies here, and I really recommend that you watch every single one of these because again, no fluff, just content in every single one of these case studies. There’s wholesaling case studies, rehabbing and flipping case studies, etc., etc., etc.
So that’s it. I hope you’ve enjoyed it. Leave me some feedback, leave me some comments and I will talk to you later.