Investment Update: Results of our Deadwood spec house
At the end of May 2021 we closed on our first spec house in Deadwood! As always with these posts, my goal is to be transparent with my investing experiences: the good, bad and ugly, in the hopes that it inspires you to pursue your own real estate investments.
It’s worth mentioning upfront, that before we signed on the dotted line for this deal, we had already written several offers on other properties, we walked through a number of potential fixer-uppers, we had a purchase agreement in place to buy some land to develop- and none of those deals panned out. The hardest part of investing is having the patience to wait for the right deal, and that often means analyzing several different options before you land on the right one.
With that said, let’s dive in.
In August 2020 we purchased a lot in an established subdivision in Deadwood. It was one of the last lots (it was steep and needed a whole lot of dirt work) so the price was right. We used one of our partnership companies (made up of two couples) to purchase the land for $22K cash. Our partnership company applied for a construction loan through the South Dakota Housing Development Authority. SDHDA’s goal is to create more affordable housing in South Dakota so to entice builders they offer 0% interest construction loans (for the first 6 months).
Using the SDHDA’s construction loan we were able to move forward without an additional $19K out of pocket AND we saved $4-5K in interest payments, the kicker is we had to build an “affordable” home (which actually wasn’t a huge deterrent because we needed to build a home similar to the other homes in the subdivision, can’t build a $500K home in a neighborhood of $300K homes).
Before we broke ground in August, we spent several weeks reaching out to subcontractors with our plans to get quotes. We built a budget based on those estimates of $205K (this included a $20K contingency) to build a 2 bedroom, 2 bathroom home on an unfinished basement. Our initial goal for sale price was $275K (conservative goal, I always run our numbers at worst case scenario), after taking out the cost of the land, realtor fees and closing costs, that sales price would yield a profit of around $40K.
So, where did we end up?
$22K on the lot and closing on the construction loan (our initial investment)
$216K construction loan (11K over budget, due to increases in the cost of materials from Covid)
$12K to sell the house (realtor fees, closing costs)
$0K on interest payments (even though it took longer than 6 months)
The house sold for $308K.
In the end we made a profit of $58K, split between couples, we personally profited $29K.
Material prices went up and it took us longer to build (delays on material shipment and subcontractor schedules) but we were able to sell the home for $33K more than our conservative goal, partially due to the real estate market being hotter than ever.
There are lots of factors that go into building a spec house. Since we have a construction company and are able to build a house, this route of investing makes sense for us. If you don’t have a contractor you can work with, it might not be the best route for you.