First-time Homebuyer turned First-Time Developer??

Question

I have never purchased a home. I have Excellent credit and roughly 15k in savings. I make a decent wage. Ideally, I would like to purchase a duplex or MF, live in one unit and rent the other(s) out.

But then I had the idea, that since I'm already applying for a loan, why NOT purchase some affordable land and develop my own MF (Duplex or 4-plex) from the ground up!?

...Any thoughts or ideas on this, Pro's? What kind of loan would this be and is it even possible?

Jonathan Taylor Smith · Answer

@DeShawna Travillion - That would be a construction loan; however, they most often want you to have already purchased the land. Getting a construction loan that includes the purchase of the land is difficult - but I guess not impossible. And construction loans are going to want a larger down-payment (i.e. 20%) versus only needing maybe as little as 3.5% to purchase an existing MF property where you will live in one unit and rent out the other(s).

And a construction loan to build a MF property may be considered commercial development (even at 4 units) versus building a SF home to live in yourself - and if so, they may want you to have prior rehab / development experience to some degree. Also consider that the cost of construction is currently inflated due to materials and labor shortages. Existing housing prices are also inflated, but I'd imagine you can buy an existing 4-unit MF property for less than building 4 new units... But that's just my guess.

My $0.02... I'd look for a slightly distressed 2/3/4-Plex as your first property to live in - and you'll learn a ton in rehabbing and renting the other unit(s), while also making connections in the local area - that will all help you develop a future property from the ground up.

J.T.

Jonathan Taylor Smith · Answer

@DeShawna Travillion - You're Welcome! Pull up the tax records in your city for all 2/3/4-Plex properties. Reduce that list to the ones in your desired area(s) - then drive those areas to view ALL of them. Note those with signs of distress that are located in an area you'd otherwise be willing to live for at least a year. Note those that are owned by individuals versus entities. Starting with the ones owned by people (not companies) and those that have been owned by those people for the longest time (not recently purchased) - and reach out to ALL of those people asking if they'd be willing to sell their property at...

Let them know that you are looking to get started in REI and want a MF property where you can keep your housing expenses low by living in one unit and renting out the other(s). Get pre-approved with a lender to make that purchase - but what you are really looking for is someone who will do seller-financing or a lease-option.

You can reach out to them via direct mail, or you can do a "skip trace" on the list to get their phone and email address. You'll get rejected on your first call, and you won't be any good at it. It will be stressful and you'll be nervous. By the 100th call you will be good at it and the nerves will be gone. And before the 1,000th call, you'll find someone willing to sell on terms that work for you.

But even if not, start over from the beginning of the list and reach out to all of them again. Your second or third call may come just as something changes in their life that they may now consider it whereas previously they did not. Don't give up and you WILL be successful. Reach out to enough owners frequently enough and it is only a matter of effort and time before you find the right person, with the right property, at the right time - Guaranteed... Good Luck!

J.T.

DeShawna Travillion · Answer

@Jonathan Taylor Smith WOW! You broke that ALL the way down. I certainly appreciate and value your advice. I'll treat it as gospel since I have absolutely NO clue what I'm doing. I kind of figured the development of a new MF was a long shot so I truly thank you for the confirmation and sharing your knowledge.

DeShawna Travillion · Answer

@Jonathan Taylor Smith I'm going to do just as you say. I'm a little intimidated by the cold-calling but you're not the first person to tell me that, so I guess I'll have to get use to it!

Jonathan, if I purchase a property that's distressed, will the bank turn around and give me another loan for rehabbing? How does that work?