Buy land, build a house and sell it. A simple sounding formula, and in some areas there is a lot of profit potential. The downside? This is actually more complicated than many ways of real estate investing, and may require a lot of cash.

There is profit to be made buying land at a good price and selling it. There is profit to be made developing the land into lots, and profit to be made building houses. This way puts all three of these together. That makes it potentially three times as profitable and it also means three times as many surprises during the course of the project.

Build A House To Sell - An Example

You find a piece of land near a growing town - hopefully one that is for sale (but it can't hurt to ask in any case). Similar pieces of land have sold for around $40,000 and seem to be used for homes that sell around $250,000. You investigate the costs of having the land surveyed, the necessary legal requirements to build (and those costs), and you make sure the buyers are out there. For the latter, talk to a real estate agent who is active in the area.

Now you find out what it will cost for a driveway, power, water and sewer hookups, electrical pole, and to have a nice home built. You should already have an idea what the per-square-foot construction costs are in the area before you start looking at land. Then you need to firm up those estimates when you have a particular property in mind.

You may have to talk to those who have built in the area, to find out about any special considerations, like how deep the wells are going if city water is unavailable (because depth largely determines cost).

What else? Investigate financing options. Call officials to see what the permit process involves, including costs and the time it takes. Talk to a builder. Ask a real estate agent that is active in the area how long it will likely take to sell a new home there. Calculate all your buying expenses, preparation costs, building costs, holding costs, and selling costs.

Once you have done your calculations, make an offer on the land. But be sure that you aim high when you set your profit targets with these kinds of deals. A delay here or there, an argument with local authorities or a construction surprise or two can quickly eat up your profits. Early on, every day of heavy rain can cost you time and therefore more holding costs, for example.

For the sake of the example, let's say you can get the property for $35,000, get it prepared for another $35,000, and get a house put on it for $120,000. Your other costs will be about $20,000, so you have a potential profit of $40,000 if the home sells for $250,000. That may seem decent - and it is - but if the prep-work comes in at $42,000, construction problems add $8,000, and the delays from those problems means $6,000 more in holding costs - and then the market softens, meaning a sale at $240,000, you're down to $9,000 profit. That's why you need to aim high.

On the other hand, there will be times when the surprises are on the positive side. When we moved to Tucson, Arizona in 2004, there were new subdivisions that had been built on the premise of sales at $150,000. By the time half of the homes sold, however, the rest were selling at around $200,000. Unless something else changed, that means close to $50,000 extra profit on each. This might make you want to build a house to sell.

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