# New home builder startup cost?



## SoBBeN

Hi, I have been working in the trade for the past 10 years. Since day one, I wanted to become a new home builder. After a long grind of saving money I saved up 120k. I'm wondering if this is enough to start a new home builder business? Even though I only plan to startup in 1-2 years.

As for my situation at home while starting up this business, i'll be missing 1k a month to cover my bills (my business cost included). Assuming i would only be working on my business.

I'm allready pre approved by the bank to build a spec home. Is this the best way to start this type of a business? I was also thinking while selling this spec home, i would use it as show house maybe.

In my region 2 story homes 1600Sq are listed at around 240k - 270k
which after talking to a real estate agent is what he suggested I build.
I might even do some of the work myself to save money, depending on how busy I am.


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## Jaws

120k sbould be plenty. Get good systems set up for billing and book keeping.

Not sure about the spec. How is the market in the area? Any hope to put it in a parade of homes or something?


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## The Coastal Craftsman

120k to build a $240k house. Good luck. I know every areas different but around here they are only just lucky to break even. We just bought a house that's brand new for $50k less than it cost to build. Now is a bad time to be a home builder unless you got a buyer lined up.


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## Jaws

BCConstruction said:


> 120k to build a $240k house. Good luck. I know every areas different but around here they are only just lucky to break even. We just bought a house that's brand new for $50k less than it cost to build. Now is a bad time to be a home builder unless you got a buyer lined up.


 If you have good credit, most institutions will give you a spec loan for 20%. I assumed he was not throwing his whole nest egg into the house, if he built it.


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## SoBBeN

Jaws said:


> 120k sbould be plenty. Get good systems set up for billing and book keeping.
> 
> Not sure about the spec. How is the market in the area? Any hope to put it in a parade of homes or something?


according to our real estate agent, houses take around 3-4 months to sell in the area. What exactly is a home parade? Do you mean like a home show? or a new development subdivision?


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## Jaws

Here we have a tour of homes, that builders enter projects in every year.


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## SoBBeN

Jaws said:


> Here we have a tour of homes, that builders enter projects in every year.


ya never heard of anything like that before I live in a small city of 130k people


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## SoBBeN

Jaws said:


> If you have good credit, most institutions will give you a spec loan for 20%. I assumed he was not throwing his whole nest egg into the house, if he built it.


I can get the loan for 5% but then I got to pay an insurance that cost around 3% of the total loan, so i'll be paying the land cash or paying a 20% down payment, i'll then use the rest of my money to pay my subs while i wait to get stage payments from my bank. Dont want to make any subs wait for their money.


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## Warren

Been working in the trades for 10 years and never heard of Parade/tour of homes?
Your best bet would be to build something for yourself to live in. List it for sale during construction, if you sell it, Great! If not live in it and list it again later.


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## Ninjaframer

I wanted to enter my first ground up in our parade but the owners didn't want to do it, they let me go through with a photographer and take pictures for an add in the parade magazine though.


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## Gary H

I agree with Warren on this one.


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## Builder Butch

I dont want to discourage you but I want you to understand the business. I built homes for 25 years, my whole family builds and develops. I started in 1987 right out of college with 6 grand, but things were alot different then, money was easier to get for builders and borrowers alike. Until 2007 I built 40 to 70 highend homes per year. I made a million dollars by the time I was 30 and when it crashed I got out without bankrupcy but I lost almost all of it. My dad used to say this business makes idiots out of genius' and genius' out of idiots. I've been in deals that should have gone great and did'nt and seen deals that were a long shot that made a fortune. 

You have to study the market, what people want, whats hot, whats not, what the other builders are doing, what the existing houses are doing, how the supply stacks up against demand then even with all that info it can change in a wink. Forclosures are a big thing now and people will buy them over yours due to price. Don't listen to the agents if they knew it all they would be doing it. They will get you in trouble quick. 

In the end is is hard work, a lot of worry over the risk. My advise would be to not risk more than you can lose. plan for the worst and hope for the best meaning if you invest 30k of your 120k after the loan how high is the chance that at a fire sale you could dump the house and not loose more than your remaing 90K? If you loose more then you have to file for bankrupcy. Then how much profit potential is there risking your 120k?

Our market is such that I'm not willing to invest my money now because the rewards are to small and the risk to high.

I'm out with 2 men working with my tools doing remodeling and home improvements keeping my bills paid and protecting what cash I survived with until things look better...if ever. A hard days work is nothing be be ashamed about in my eyes.

I wish you all the luck in the world.


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## CHRenewal

Awesome saving that 120K!! This is a critical time for you right now and doing it right is paramount. First you live in a smallish town of 130K as opposed to me living in a metroplex of 5 million,

I would first get a good accountant and a good lawyer to set-up your business the right way. Make sure your business systems are in place. Then I WOULD NEVER spec a home today. I would only do it for a buyer. Make those real estate people giving you all that advice to bring you clients that want to build and sign up a contract!! DO NOT risk your own money right now.

Second, USE the banks, for your benefit. With that 120K, this is what I would do and it is what I have done. I would go buy with 20% down a foreclosure and fix it up and get a real good real estate agent to sell it or lease it then go to the next one, then the next and the next. Your accountant will help you to pay zero taxes on any of these flips. Once you get a good feel for this and have a good real estate agent that will take you about a half a dozen before you find one, then I would build a tricked out custom home for a high-end buyer that signs a contract before a shovel hits the ground. 

You are in a good position to make it happen. My suggestion is to buy foreclosures and turn them.


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## Jaws

SoBBeN said:


> I can get the loan for 5% but then I got to pay an insurance that cost around 3% of the total loan, so i'll be paying the land cash or paying a 20% down payment, i'll then use the rest of my money to pay my subs while i wait to get stage payments from my bank. Dont want to make any subs wait for their money.


Sorry, I meant 20% down.


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## Jaws

SoBBeN said:


> ya never heard of anything like that before I live in a small city of 130k people


Must be regional. It is great exposure for builders. Im from an area with 40,000 in three counties, we generally have a parade with 10 high end homes.


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## Ninjaframer

Jaws said:


> Must be regional. It is great exposure for builders. Im from an area with 40,000 in three counties, we generally have a parade with 10 high end homes.


Same here with a population of 30,000


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## Warren

CHRenewal said:


> Awesome saving that 120K!! This is a critical time for you right now and doing it right is paramount. First you live in a smallish town of 130K as opposed to me living in a metroplex of 5 million,
> 
> I would first get a good accountant and a good lawyer to set-up your business the right way. Make sure your business systems are in place. Then I WOULD NEVER spec a home today. I would only do it for a buyer. Make those real estate people giving you all that advice to bring you clients that want to build and sign up a contract!! DO NOT risk your own money right now.
> 
> Second, USE the banks, for your benefit. With that 120K, this is what I would do and it is what I have done. I would go buy with 20% down a foreclosure and fix it up and get a real good real estate agent to sell it or lease it then go to the next one, then the next and the next. Your accountant will help you to pay zero taxes on any of these flips. Once you get a good feel for this and have a good real estate agent that will take you about a half a dozen before you find one, then I would build a tricked out custom home for a high-end buyer that signs a contract before a shovel hits the ground.
> 
> You are in a good position to make it happen. My suggestion is to buy foreclosures and turn them.


If you pay zero taxes on a flip, you either made no money or you cooked the books. Only way to legally do it is to live in it for two years.


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## Gary H

Warren said:


> If you pay zero taxes on a flip, you either made no money or you cooked the books. Only way to legally do it is to live in it for two years.


I believe there is another way. If you keep buying them and flipping, the profits get pushed to the next house. But if you stop, then you will pay dearly on the profits.


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## bwiab

I'm wondering how much of this 120k will go towards insurance? I'm also looking to start a new home building company and was told by an insurance agent that I should budget 30k to 70k to GC a new home! That sound right to anyone?

I was planning on one house for next year, but at that rate I'd be lucky to break even on my insurance premium alone. 

SoBBen - have you gotten insurance quotes for your start up yet?


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## CHRenewal

Warren said:


> If you pay zero taxes on a flip, you either made no money or you cooked the books. Only way to legally do it is to live in it for two years.


Wrong!!!! talk to your accountant my friend.(do you have one?) As long as you put ALL profits into another investment, i.e. more foreclosed properties, there ARE ZERO TAXES on all gains!!! Therefore, learn tax code before you make yourself look foolish like you just did.

@SoBBen, this is why your talk to an accountant. They will lead you better than any contractor who doesn't know you or your business.


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## Builder Butch

bwiab said:


> I'm wondering how much of this 120k will go towards insurance? I'm also looking to start a new home building company and was told by an insurance agent that I should budget 30k to 70k to GC a new home! That sound right to anyone?
> 
> I was planning on one house for next year, but at that rate I'd be lucky to break even on my insurance premium alone.
> 
> SoBBen - have you gotten insurance quotes for your start up yet?


no way? all you need is work comp/ gen liability and a builders risk policy much like a homeowners policy. A umbrella policy if you are worried about anything and they are cheap...like $400 to $700 per year.


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## Warren

CHRenewal said:


> Wrong!!!! talk to your accountant my friend.(do you have one?) As long as you put ALL profits into another investment, i.e. more foreclosed properties, there ARE ZERO TAXES on all gains!!! Therefore, learn tax code before you make yourself look foolish like you just did.
> 
> @SoBBen, this is why your talk to an accountant. They will lead you better than any contractor who doesn't know you or your business.


If you put all of your profits back in, you have not yet realized a gain. I love how you tend to misconstrue everyones postings. At some point, when all is done you will have to pay the taxes. Once you have actually realized said GAIN!!


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## Shellbuilder

There will always be a market for new homes, new cars, new clothes….list goes on. You just have to now what price range to build in. Right now in my area lower priced new homes are hot hot. Ultra custom is also hot.


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## SoBBeN

Builder Butch said:


> I dont want to discourage you but I want you to understand the business. I built homes for 25 years, my whole family builds and develops. I started in 1987 right out of college with 6 grand, but things were alot different then, money was easier to get for builders and borrowers alike. Until 2007 I built 40 to 70 highend homes per year. I made a million dollars by the time I was 30 and when it crashed I got out without bankrupcy but I lost almost all of it. My dad used to say this business makes idiots out of genius' and genius' out of idiots. I've been in deals that should have gone great and did'nt and seen deals that were a long shot that made a fortune.
> 
> You have to study the market, what people want, whats hot, whats not, what the other builders are doing, what the existing houses are doing, how the supply stacks up against demand then even with all that info it can change in a wink. Forclosures are a big thing now and people will buy them over yours due to price. Don't listen to the agents if they knew it all they would be doing it. They will get you in trouble quick.
> 
> In the end is is hard work, a lot of worry over the risk. My advise would be to not risk more than you can lose. plan for the worst and hope for the best meaning if you invest 30k of your 120k after the loan how high is the chance that at a fire sale you could dump the house and not loose more than your remaing 90K? If you loose more then you have to file for bankrupcy. Then how much profit potential is there risking your 120k?
> 
> Our market is such that I'm not willing to invest my money now because the rewards are to small and the risk to high.
> 
> I'm out with 2 men working with my tools doing remodeling and home improvements keeping my bills paid and protecting what cash I survived with until things look better...if ever. A hard days work is nothing be be ashamed about in my eyes.
> 
> I wish you all the luck in the world.


thanks for the post and the heads up.
I've been thinking about this a long time and i'm willing to take a lost to try and build a successful business. I cant live with myself not knowing if I ever could of accomplished my goal in life.
I rather lose 30k to know the answer rather than never try and allways wonder.


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## CJ21

Not trying to discourage you, but I would rather build on someone else money. Spec Homes are not selling fast enough.


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## fjn

Warren said:


> Been working in the trades for 10 years and never heard of Parade/tour of homes?
> Your best bet would be to build something for yourself to live in. List it for sale during construction, if you sell it, Great! If not live in it and list it again later.


 Warren gave you some incrediblely sound advice! You need to check with your bean counter. Their is a gov. tax shelter if you are married and live in the home where you can shelter 500K, single 250k.It is like meeting a real honest to goodness Santa.


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## SoBBeN

CHRenewal said:


> Awesome saving that 120K!! This is a critical time for you right now and doing it right is paramount. First you live in a smallish town of 130K as opposed to me living in a metroplex of 5 million,
> 
> I would first get a good accountant and a good lawyer to set-up your business the right way. Make sure your business systems are in place. Then I WOULD NEVER spec a home today. I would only do it for a buyer. Make those real estate people giving you all that advice to bring you clients that want to build and sign up a contract!! DO NOT risk your own money right now.
> 
> Second, USE the banks, for your benefit. With that 120K, this is what I would do and it is what I have done. I would go buy with 20% down a foreclosure and fix it up and get a real good real estate agent to sell it or lease it then go to the next one, then the next and the next. Your accountant will help you to pay zero taxes on any of these flips. Once you get a good feel for this and have a good real estate agent that will take you about a half a dozen before you find one, then I would build a tricked out custom home for a high-end buyer that signs a contract before a shovel hits the ground.
> 
> You are in a good position to make it happen. My suggestion is to buy foreclosures and turn them.


This is something you made me think about ,when I do my taxes this year I'm going to ask my tax man about this he's in the familly and really good. 
Were I live, a person is allowed to sell 1 house every year tax free, as long as you were planning on living in it. wich is why I thinking of starting my business as a owner builder like a few other people suggested on this post, But I felt that even if i sold it, it wouldn't help me build my business(like advertisement,exposure and such to build clients)


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## SoBBeN

CHRenewal said:


> Wrong!!!! talk to your accountant my friend.(do you have one?) As long as you put ALL profits into another investment, i.e. more foreclosed properties, there ARE ZERO TAXES on all gains!!! Therefore, learn tax code before you make yourself look foolish like you just did.
> 
> @SoBBen, this is why your talk to an accountant. They will lead you better than any contractor who doesn't know you or your business.


but how would you not pay taxes when you decide to not flip anymore? or would you just pay the taxes on the profit you made on the last one you fliped? I'm lucky I do have a really good taxs man that will help me when I decide to ask him.


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## SoBBeN

CJ21 said:


> Not trying to discourage you, but I would rather build on someone else money. Spec Homes are not selling fast enough.


I would rather too, but for me I feel like it's going to be hard to find someone pick me over another expirence builder.


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## fjn

*Me*



SoBBeN said:


> I would rather too, but for me I feel like it's going to be hard to find someone pick me over another expirence builder.


 Just adjust your mindset. If you think you can or think you can not you will be right either way.


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## CHRenewal

SoBBeN said:


> but how would you not pay taxes when you decide to not flip anymore? or would you just pay the taxes on the profit you made on the last one you fliped? I'm lucky I do have a really good taxs man that will help me when I decide to ask him.


This is a good question. Anytime you realize a gain on an investment property, you can do 1 of 3 things. 1. you fix it up and sell it and take the gains and pay short-term capital gains tax (your nominal tax rate for that year). if sold before 12 months. 2. you fix it up and hold it for 1 calender year and then sell it and you take all your gains and pay long-term capital gains tax of 15% (sometimes smaller and sometimes larger depending on your tax bracket, This is why you need a good accountant) then 3. (this is the best for investment). you can take all gains from each sell and 1031 exchange them into new investments. see this link. http://www.1031.org/about1031/faq.htm

Effectively, using your gains to buy more and more property with the gains while you are using your original investment the 120K to build homes, etc.

This assumes you don't need the gains to live on and that you have other income to pay the bills. If you do need the gains to live on then it is simply income to you and you will pay your nominal tax rate. 

Anyways, the opportunities are huge because you can build a reputation for rebuilding foreclosures that will show-off your building skills to your buyers and to real estate people. 

Once again though, get good tax advice on how to do this properly.

Good Luck!!


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## CHRenewal

SoBBeN said:


> but how would you not pay taxes when you decide to not flip anymore? or would you just pay the taxes on the profit you made on the last one you fliped? I'm lucky I do have a really good taxs man that will help me when I decide to ask him.


Correct you will only pay taxes on anything over costs, this includes remodeling costs. If you hold these properties for longer than one year, then you will pay only 15% tax rate(a little more complicated but that is a good rule of thumb, this is why you need an accountant). 

What I have done and am doing is to buy the right properties for the right price and holding them for at least one year renting them and then I can either 1031 them on a sale of tax the gains and pay 15% taxes on those gains. Note: I only buy properties that I can make 20% per year investment gains on the rent.

If interested, read as much as you can to educate yourself.


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## CHRenewal

Warren said:


> If you put all of your profits back in, you have not yet realized a gain. I love how you tend to misconstrue everyones postings. At some point, when all is done you will have to pay the taxes. Once you have actually realized said GAIN!!


Where did I talk about realizing gains? I said an accountant could give him advice on how to not realize gain and therefore, ZERO TAXES. Did I misconstrue you or did you not understand my point? Perhaps, I did not make point clear? Do you not see where someone could effectively not pay any taxes and utilize those taxes on gains to buy and build more equity? Effectively, you could never pay taxes if you never sell the last few properties you acquire.


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