Investing in Real Estate 9 - Scrapes, Pops and New Construction
This blog will discuss a type of real estate investment, scrapes, pops and new construction, in the Five Points area in Denver.
What this investment is: Purchasing a small home in an expensive neighborhood that may or may not need work. The home is bulldozed and a new home or duplex is put on the lot. Alternatively, the existing home is renovated and more square footage is added on. A pop-top is adding a second story to an existing home to add more square footage (commonly, a master bedroom suite).
Equity needed: Being able to document your income and your assets will be critical. For a commercial loan, your net worth should generally be at least as much as the loan you are seeking. The good news is that the commercial loan usually does not show up on your credit report, so it doesn't count towards the "four investment home limitation" from Fannie / Freddie.
Importance of credit: Essential. A 720 FICO is a must. A 740 would be better.
Importance of experience with contractors: Critical. If you have never done it before, start with an easier "paint and carpet" project to build your skills. The more sophisticated the project, the better your contractor management skills must be to make money. Not surprisingly, the simpler projects have lower profit margins than the complicated projects. Make sure you can take the time to really focus on the project. We run classes on how to do this from time to time. Go to http://www.yourcastle.org/events.cfm to see when the next session is.
Important of experience with property managers: Generally not important for this type of investment.
Next week, we'll continue to explore scrapes, pops and new construction in more detail!