Where is the big money and how to build a winning deal

Entrepreneur of the Week Ben Fruchter
# Post 5
How to build a winning deal?
First of all it is important to say - there is no one answer that is correct. There are many ways to reach the same goal. I will share with you my way and my personal experience having built over 3,000 private homes.
We are engaged in the field of new construction. Construction of entire neighborhoods of private homes. Some we do construction and sale, some construction and rental. Sometimes in group models as an LLC and sometimes individually owned homes in the investor's registry. Some of the houses we sell to private investors and some to American investment houses.
Usually our investors purchase the properties in Presale on paper.

Why is it actually worth buying houses on paper?
When a contractor builds a new neighborhood of hundreds of private homes, the first house is not sold at the same price as the 300-house house. This is not just happening in the US. In Israel, too, when residential neighborhoods are built, prices climb as the neighborhood progresses. Investors who buy in Presale even before construction begins, usually enjoy a significantly higher value increase than the average increase in the same market and from the outset already in the purchase make an excellent deal when buying properties below the market value of a ready-made house.
Another significant advantage of purchasing on paper is that you have to put a little equity in relation to the value of the house, because the big contractors have bank financing for the construction. When the home is ready the purchase is completed by a mortgage from an American bank that usually gives up to 70% financing. This means that the investor has to bring in about 30% and other transaction fees that also need to be taken into account. To date we have completed building over 85 neighborhoods, and in all of them investors have enjoyed a wonderful increase in value. The fact that the investor brings in only 30% from home makes the increase in value a very significant factor in his profit potential.

Let's look at an example investor transaction:
The business plan: Purchase a property on paper in new construction with 70% bank financing, rent for two to three years, enjoy the increase in value and return back to the bank to do a mortgage cycle.

Let's see what it looks like (real numbers from the deal):

Neighborhood: Southgate in Huntsville, Alabama.

The house: 4 bedrooms 2 baths, 3 toilets and double parking. 2,400Sqft.
Date of purchase: December 2018.
Purchase price: $ 246,060.
Bank Financing: 70% ($ 172,242).
Equity required for closing including commissions: $ 81,828.
Date of closing and receipt of the property: September 2019.

Rent: $ 2,000 per month.
Current expenses: $ 730 per month. (Property tax, insurance, management fees, etc.)
Mortgage interest expenses: $ 854 per month. (So ​​the interest rate for foreigners was 5.95%).
Annual cash flow after mortgage interest expense: $ 4,992.
Current return on equity: 6.1%.
—
Two and a half years later (February 2022) - Mortgage turnover:
Appraisal: $ 390,000.
A new mortgage taken out $ 253,500 (LTV65%), at an interest rate of 3.9% fixed for 30 years !.
Repayment of previous mortgage and loan establishment costs: $ 182,000.
Total Equity Repaid: $ 71,500.
Accumulated rent in two and a half years: $ 15,000.
Total pocket equity: $ 86,500 (106% of the equity invested !!!).
pay attention! The investor put all the money back in his pocket. Tax exemption (no tax on mortgage turnover).
There was also no tax liability on the current lease due to interest expenses and depreciation on the property.
The investor has not sold the house and still continues to generate positive cash flow from it every month.
What is left to do ?:
Leverage all the returned capital to purchase another property?
* The name of the investor will remain stored in the system for privacy reasons.
* I also bought a house in the same city in the same business model as one of the investors
(put your money where your mouth is)
In pictures:
- Pictures of houses we built in the neighborhood
- A video of me in the neighborhood from a few months ago.