Happy New Year Bigger Pockets! This is my first post and I have been a member for 6 days. I appreciate any advice in advance. My opportunity is:
I currently have a a contract on 5 city lots in a small town in TX. I am purchasing the lots for $20k. $4k down, finance 15 years fixed rate. This is the town I grew up in and is in need of newer/nicer middle class rentals.
Once the city learned of my intentions of possibly building rental units on these lots they would like to speak with me in regards to possibly using city owned lots for construction of even more rental units.
I will have approx. $50k in cash in June to invest as I see best.
There are apartment complexes in this town but they are old and not well maintained. The town is in need of middle class nice rental units.
Local bank will offer 15% down payment, 7 year loan, 30 year amoritization.
My initial thoughts are to build a duplex, refinance in 2-3 years, draw equity out and build again. I should have this same $45k cash available annually through my primary career.
How would you proceed? Thank you for your help!!
Sent this one out late last night so I will re-post. Thanks!
Tons of questions that, if you could answer, would probably get you a lot better advice from the BP masses.
1) What do the numbers look like on your duplex?
a) Lots are 4k or maybe even free if the city comes through?
b) How much will it cost to build the duplex?
c) What will the duplex be worth when you're done?
d) How much will the rents be?
2) I'm not sure I'm following 100% but are you saying that every year you'll be able to pull 45k out of your job to build another duplex?
3) You mentioned refinancing a build after 2 or 3 years and pulling your equity out. How do you know you will have gained any equity in that time?
You're only putting down 15% for the construction loan so you'll be starting at 85% LTV. Most banks will only refi rental properties at 75% LTV. I doubt you're going to see significant gains in equity in 2 or 3 years - particularly when new construction properties like duplexes don't tend to appreciate very much early on from their new construction price.
What I would say is that 15% down for new construction with amortizations of 30 years is pretty good financing terms. But the keys as to what most people from BP will be able to help you with is going to be based on getting some more details based on some of the questions above (and i'm sure many more).
My concern would be why the lots are so cheap. Typically when land is that cheap, then I tend to think of rents being kind of low too to where new construction doesn't make sense for decent returns. Lets say your duplexes have 2 bedroom/2bath 1,200 sq ft for each side. And lets say they rent for $850/mo. Lets say the build cost is 250k.
At 15%, you'd be putting down 37,500 and would have a loan at 215k. At 30 yr amort and 5%, you'd be at 1150/mo. 1700 in rent. After taxes, insurance and repairs/vacancies, there is no room for profits (200/mo total?) even with repairs being really low given its new construction. But now you've got 37k sunk into that returning 0? Is that ok? Principal paydown another 250/mo so thats something. Still, is that ok for you?
Now lets change that up a bit. Lets say you build each side as a 3/1, 1100 sq ft and you can build the duplex (both units) for 200k total. And lets say you can rent them out for 1k each side. Now your numbers look completely different.
Down payment is 30k. Loan is 170k. Payments 900. Taxes, insurance 300/mo? Repairs/vacancy, etc 250/mo? Now you're making 550/mo profit or 6600 a year on 30k. Thats a lot different.
I think you can see what some of my suggested next steps would be:
1) Figure out where you'll get the best price/rent ratio. Will a 3/1, 1100 sq ft unit get 950 compared to a 2/2, 1,000 sq ft unit get 750? Is there a better unit size that will jump you up to higher rent at a greater proportion? Also, what do you think you're build costs are going to be?
Based on how cheap the lots are, i'm guessing you can build for a little under 100/sq ft. But that also depends on what units you do. Can you do two story units? That may save on foundation and roof costs. But is a ranch style a better fit as people are aging and don't want to deal with stairs?
But I would definitely start with rents. You absolutely need to figure out what your best unit size to rent numbers are in your area and work backwards from there to see if the numbers make sense.
@Mike H. Thank you for your reply and willingness to help. First, it is a small world as I have been in Jonesboro, AR for one year now. However, the previous 3 years I lived in Bourbonnais, IL and I have many friends in Manteno!
I will do my best to answer all of your questions:
The lots are priced lower due to it being a smaller rural town of only 4k people.
I believe I can have it built around $75-80 sq. ft. I'm looking at a 1900 sq. ft. unit, so lets call it $150k to build. The duplex would be worth around $155-$165k when built.
The rents for a newer 2 bedroom will be in the ballpark of $800/month.
The lots are already platted and ready to build on, requiring very little dirt work if any other than the slab. The water meters should be no cost.
My father will be managing the units for me.
I will be able to sell $45-$50k from stock every year to invest in rental property.
Am I better off building these units over time OR investing my money in properties elsewhere? This town needs new, clean rental units so this seems like an opportunity.
I appreciate your feedback as I continue to crunch numbers. I have a call tomorrow morning with the City Administrator and Economic Development Director. I will keep you posted!
That is a crazy small world. Most people in Illinois don't even know where Manteno is. And only a handful where bourbonnais is and thats only because they either had a relative that went to olivet or they know the bears practice there. :-)
In terms of your numbers. So you're building a 1900 sq ft duplex for about 150k. Sounds like each side will be 2 bedrooms and 950 sq ft then? And will rent for 800/mo.
So here are you numbers as I see it.
Your loan requires a nominal 15% down so 22,500 for the 2 unit duplex. That means a loan of 122,500. Payment based on 30 yr amort (which is what you had mentioned it would be) and 5% (i'm guessing on that) would be 660/mo. Taxes and insurance another 350/mo maybe?
So 1,000/mo PITI which would leave you with a gross profit of 600/mo based on the 800/mo rent for each side.
Thats probably going to leave you with a 200 to 300/mo net profit given how new the units will be as you shouldn't need a ton of rehab.
So for putting down 22,500, you'll be making say 3,000 a year in net profit. You'll be getting depreciation of 5k a year as well since the lots are basically worth next to nothing. (146k divided by 27.5). That means your net profit will be tax free for awhile until rents go up and your profits go over 5k.
And then you'll be getting 150/mo or 1800/yr in principal paydown as well.
Plus any appreciation.
Thats a solid return. You could do 2 duplexes a year based on your 45k to 50k in stock.
The other question though is that, with the town being so small, how many of these do you think you can do and rent fairly easily?
2 bedrooms and 950 sq ft is really geared toward young single couples with maybe one kid and/or older couples looking to downsize.
That is a limited product in my mind as 3 bedrooms tends to be the most sought after product - by far - in terms of families.
Doesn't mean there isn't a niche for 2 bedrooms at that price point. But with only 4k people, I wonder if you'd be limited at how many you could do and reasonably expect to be able to rent out.
To me, if these numbers were on 3 bedroom units and if the town size was maybe double that 4k, I'd say you might be on to something and should really go to town on them.
But given the bedroom count and the size of the town, I'd be hesitant to build too many.
Again, the numbers aren't really that bad. And if you're getting the village involved, maybe you can twist their arms into giving you a deal on the taxes (at least for a one or two year period maybe?) as an incentive. The free lots is nice. But you've already got 5 of them which means 5 duplexes or 10 doors. And that might be the right number for that size town given the unit makeup.
Then again, maybe you can get 10 down and then bump up the size a bit and get some 3bdrm mix in there a little too?
I would just be very careful in estimating demand for rentals. And would also want to be sure that if there wasn't enough rental demand,I could sell the units individually to owner occupants. i.e. Side 1 of the duplex could be owned by Mike and side 2 could be owned by Cheryl, etc.
That way if things change over time, you have an easier exit than if you are limited to selling them to investors. So hopefully each side of the duplex will be getting their own PIN........
Hello Matt. It sounds like you have a nice plan in the works. I just wanted to chime in and say that if the city is willing to work with you on future development opportunities, you might want to ask them to help you out with a property tax abatement during the construction period. Best of luck!
I've also heard of municipalities donating trees to help with improvements.
@Mike H. Just an update- I am closing on the lots. The city has verbally told me (waiting on proposal from city in writing) that they will install water meters on each lot ($800/each) for no charge and possibly a tax abatement. I will be meeting with builders in near future to determine next steps. I appreciate your help on this one so far and will keep you posted.
I am now looking at a 7 year old triplex unit in TX. The negotiated price is $115k. My local bank is offering 15% down, 7 year note, 30 year amortization. Details with triplex are:
100% occupied, all on one year leases
7 years old, all brick unit
3-one bedroom/one bath units
$550/month rent each-$1650/month total
Landlord pays water/trash
Insurance- $100 ??
Property Mgmt- $165
With your experience would you consider this to be a solid first multifamily investment? It seems to be from my end, however, I am newer to figuring multifamily investments. Thanks for your help!!!! Stay warm!!
Mortgage on a 100k loan amortized over 30 will probably run you about 500 to 550 or say per mo depending on the rate. So thats 800/mo PITI plus another 300/mo in water and PM. 1100. Add in vacancy and repairs and you're pushing another 450/mo (150/mo vacancy and 75/mo per door or 250/mo in repairs?). Thats 1500 going out.....
That doesn't leave much for net profit there.
But I like the financing (15%). And I love the age of the bldg. Is there any chance you can bill the tenants back for water and garbage? Or is there any chance that the rents are a little below market? That is a near new building they're in......
The only problem I have with the deal is the 17k you're going to have to come out of pocket and the net profit you're going to be making.
Is there any reason you can't self manage the property?
If you could self manage and also bill back the water/garbage, you'd be over $300/mo net profit which would be over $100/net per door. Anything over $100 net per door is probably a solid deal.
If you had 20 other houses generating some cash flow, then maybe I'd pull the trigger on something like this even with the lower cash flow. But without self managing and if you can't bill back water/garabage, there just doesn't seem to be enough cash flow coming in on this.
@Mike H. Thanks for the advice, a few things to mention:
I will be self managing the property- my father is a retired maintenance man, is currently bored and wants something to do.
I do think the rents are below market value by at least $50/month.
There is o e tenant currently leaving in one unit that has been living at property since very beginning. He wanted to purchase property but did not have the cash for down payment. This could possibly be an exit strategy if needed...
@Mike H. One other item to note is the water bill runs $95/month with three tenants. The annual taxes are $1500.
So that changes it a little bit.
1) You had 145/mo for taxes so 1,550 a year is more like 125/mo. Saves 20/mo
2) You had 165/mo for PM fees so that saves 165/mo.
3) Using your relative for repairs should save you some in maintenance as well. I would bet at least 100/mo total.
Thats basically 300/mo in savings there plus if you can get another 100/mo total boost in rents across the 3 units (33 of the 50 they're under market). Thats looking more and more like a deal now.
One question though. What is the property actually worth if you were to get it appraised? just wondering if you're paying retail or not. Reason I ask is that if it can appraise out for more, you can get some of your 17k down payment back on a refi and then the deal looks better as well.
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