One 3.4M swing or three 1.1M houses with the same equity

Question

I've been running thin-margin flips at 400k to 600k and I have about 900k of equity that could go one of two ways. A partner wants to put all of it into a single dated 3.4M house in a strong high-end submarket, roughly 650k of reno, financed. The alternative is three houses at 1.1M each, which is the top of the mainstream market in my area, spread across two submarkets.

The single luxury deal has the better per-deal number on paper by a lot. It also has one buyer pool that might be four people wide, and if it sits nine months instead of four I'm feeding carry out of the same reserve that is supposed to be my cushion. One bad exit and the whole 900k is in it.

The three-deal version diversifies the exit and keeps me in a buyer pool I actually understand. It also triples the number of GCs, permits and closings I'm running at once, and my last two deals went sideways on execution, not on pricing. At 1.1M I'm also in the dead zone where the finishes have to be near-luxury but the price doesn't pay for them.

Which of those risks would you rather own at this capital level?

aliyah_b · Answer

What I'd want from you before voting is the carry number on each version, because I keep finding that the thing that kills my spreadsheets is the monthly bleed and not the purchase price. On the 3.4M, debt service plus taxes plus insurance plus utilities on a big empty house is plausibly 28k to 34k a month depending on your rate and your county, and the taxes on a 3.4M assessment are not a small line. Three 1.1M houses might carry 11k each, but they don't all sit for nine months at the same time. Your 900k has to survive the worst month, not the average one.

devon_pierce · Answer

Your own sentence is the tell for me. Two deals went sideways on execution. The luxury version asks for better execution than you've been delivering, on finishes where a buyer at 3.4M walks over a bad miter, and it asks for it once with no do-over. The three-deal version asks for the same execution you already do, three times, which is a management problem you can at least learn in public and cheaply. I'd still want to know whether your partner is bringing high-end experience or just money, because those are different deals wearing the same number.

One 3.4M swing or three 1.1M houses with the same equity

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