Builder offered me his last finished spec at 392 or a piece of the next one for the same money

The 392 on a 418 list is a 6 percent discount and he's been carrying since August. If his carry is 2,500 a month he's already spent 12k of that discount waiting. Which makes me think the next thirty days he gets more motivated, not less. Have you asked what his loan maturity date is?

A few definitions first, since the two options work in completely different ways.

Buying the finished house makes you the owner. You hold title, you collect rent, you carry the taxes and insurance, and your return comes from rent minus expenses plus whatever the house is worth later. The risk you take is the rental market and the price you paid.

Putting money into the next build makes you an investor in someone else's project. Your money sits with no cash flow until the house sells, and your return comes from the sale price minus every cost of building. In most of these deals the construction lender is repaid first, then the developer's own capital and yours get sorted out by whatever the operating agreement says. Words like preferred return and split mean nothing until they appear in a signed document with a definition of what the split is calculated on.

Two things to sort out before you compare returns. Ask, in writing, what happens if the build costs more than budgeted and who funds the overrun. Ask what happens if the house doesn't sell by a set date. Those two clauses decide most of the outcomes in ground up projects.

An arrangement where you contribute money and someone else does the work can be a security depending on how it's structured, and how the rules apply varies by state, so have a securities attorney in your state read the documents before you sign. That's a real professional question rather than a forum one.

On the rental side, get the current assessed value and ask the county how new construction is reassessed in your jurisdiction, because that number often changes after the first full year.

Before I'd look at either I'd want his last four projects, budget versus actual, and the closing statements. A builder who volunteers a discount on standing inventory in the same breath as asking for equity in the next one is telling you his working capital is tight. That isn't disqualifying. It does mean the equity deal is partly funding his cash gap and you should know which part.

Ask him what percentage of his last four came in over budget and by how much. If he can't answer from memory he doesn't track it.

2,350 on 392 is 0.60 percent a month. In my markets I won't touch anything under 0.85 and I'm buying at 140 to 180 a door. You'd be paying for a new roof and new HVAC you don't need for fifteen years, which is real, and paying for it out of cash flow you don't have.

But I also don't know your market. If that submarket rents go to 2,600 in three years the picture changes.

The thing I'd check on the finished house is why it sat since August. Five months on a finished new build in a normal market usually means the price was wrong or something about the house is wrong. Walk it with someone who does mechanical work and look at the lot, the grading, and where the water goes. I've seen brand new houses with a driveway that pitches into the garage, and the builder knows and hopes you don't.

Option one, and I say that because it's the one where you can explain what happened at every point. Rent comes in or it doesn't. With the equity piece you find out in fourteen months whether you were right, and you find out from a spreadsheet someone else made.

@hollow is right that 0.60 is thin. Thin and understandable beats fat and opaque for me.

@verity does that hold if the thin one loses money every month though? A 392 purchase at 2,350 rent with new construction taxes could be negative after management and reserves. Understandable and negative is still negative.

marlow, is the 90k the whole purchase or the down payment? Because the two options aren't the same size. If 90k is 20 percent down plus costs on the house then you're taking on a 310k loan and the comparison is 90k of your money against 400k of exposure, versus 90k of your money against 90k of exposure in the build. That changes what risk means in both directions.

@quill caught the thing I was staring at. The leverage sits on one side only.

Separate question for the room. Is there a version where marlow doesn't put money in at all and instead gets paid to handle something the builder is bad at? He's got four to six houses a year and no time, which usually means the selling side is a mess.

@beacon that's how I got into this, doing the thing a busy operator hated. It pays and it teaches you the business for free. It also isn't what marlow said he wants, he said no second job, and getting paid for work is a job.

On the actual poll, I'd want the finished house but not at 392. He's five months in with spring coming and his lender counting days. 375 with a 21 day close and I'd look hard.

One thing on the finished house. If it's still listed with a broker there's a listing agreement and probably a commission owed even on a deal he brings himself, depending on how it's written. That affects what he can actually net at 375, so ask whether the listing is expiring and when. It doesn't change your price, it changes whether he can say yes.

Run it. 392 purchase, 313 loan at say 7 for a non owner occupied thirty year, that's about 2,080 a month principal and interest. Confirm the actual rate quote in writing because investor pricing moves. New construction assessment in a lot of counties comes in near sale price, so call taxes 1.2 percent, 392 a month. Insurance on new construction is cheaper, call it 160. Management at 8 percent of 2,350 is 188. Reserves, and I know it's new, but I'd still hold 150 for turnover and vacancy.

That's 2,970 against 2,350. You're 620 a month short and you put 90k in to get there. The bet is entirely on appreciation and rent growth, which means it isn't an income deal at all at that price.

At 375 with 25 percent down it improves and it's still negative. I'd vote for the equity piece before I'd vote for that rental, and I'd vote for neither before I'd sign an operating agreement I haven't read.

@sextant your 7 percent and 1.2 percent are the two numbers I'd fight about, and they both push the same way, so the conclusion holds either way. I get roughly the same shortfall with softer assumptions.

What's missing from the equity side is the margin. marlow, on a 1,700 foot spec in that market, what does he build for and what does he sell for? If it's 285 all in and 418 out, the margin is 133 gross before selling costs and interest, and 90k earning a preferred plus a share of that is a real number. If it's 355 all in on a 418 sale, there's nothing there for you after his lender and his own money, and one bad subcontractor eats the whole thing. Everyone in this thread is arguing about the rental because it has numbers attached. The other option has none yet.

@ledger's last line is the whole thread. You're comparing a deal you can price against a deal that's still a conversation.

The question I'd ask him is where the lot for the next one came from and whether he owns it yet. Builders who are short on working capital sometimes want your equity to buy the dirt, which means your money is at risk during permitting and site work, the stretch before there's anything standing to sell. That's a different risk than funding the vertical build with permits in hand. Ask which stage the 90k goes in at.