Ground Up Build or BRRRR For 1st Investment?

Question

Just starting out in real estate. Biggest issue I have is lack of funding. I have two directions I could go and would love guidance and opinions from more experienced investors.

Option 1: Make connections with other investors for funding and BRRRR our first investment property, then build our portfolio.

Option 2: My mom has a property in Walnut, CA that is free and clear. She is willing to let us build on the property since it is not being used anyway. We were thinking to build a house on the land, put a renter in it, and pull out the equity to then BRRRR properties. The location of the property is among million dollar homes, so we are confident that the property will have enough equity for funding our first deal, while simultaneously acting as a SFH rental.

Would love to hear the realistic outcome from experienced investors. Which of the above is the smarter choice?

Thank you in advance!

James Wise · Answer

If you've got an asset (free land in a highly desirable area) use it. However the question is if you need funding from other investors to do your 1st deal why don't you still need the same funding from those investors to build on this lot?

Jim Pellerin · Answer

@Amanda Cadena as a first time builder it can be very risky.

Amanda Cadena · Answer

@Jim Pellerin

Hey Jim thanks for the response! Can ask why not build for the first investment?

Amanda Cadena · Answer

@James Wise

Thanks for the response. The funding we were going to use was in an area where the value of homes was a lot less than the cost to build.

We were going to do a construction loan and have it roll into a traditional mortgage.

Amanda Cadena · Answer

@John Chapman

Hey John,

1) I do not have enough cash to invest myself. I meant equity partners.

2) There are no pre-existing build options. Nothing on the lot... it is completely empty with just weeds and dirt. From what I have researched the market is GREAT for a new build and also for renting. The average buyers and tenants are asian, average income is upwards of $80,000, the K-12 schools are highly rated, crime rate is low. The house to build could cost around 400,000+... I am still in the process of putting together a pre-construction estimation sheet. The value after built could be upwards of 1.6 Mil.

Thanks for the response!

John Chapman · Answer

There's really not enough information to answer your questions.  Not sure what you mean by "funding".  Do you mean you have enough cash to invest and just need lending sources?  Or do you mean you do not even have cash to invest and are looking for equity partners where they put in cash and you do the labor?  Those are pretty different scenarios.

In terms of building vs. buying, again, there's not enough information to really answer.  What are your pre-existing build options?  Market? Build costs?  Etc.

Finally, I don't know what California is like, but I'm not sure the numbers will pencil out if you build a rental in a million dollar home area.  Just an off-the-cuff response.

Jim Pellerin · Answer

I wouldn't do a build as your first activity as a real estate investor. How about joint venturing with a money partner.

Ground Up Build or BRRRR For 1st Investment?

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