My wife and I are new investors in Versailles, Kentucky, just outside of Lexington in central Kentucky. We have been successfully renting our previous home for the past 4.5 years, but have not yet purchased our first deal. The past few months we have spent reading books, blogs, and the BP forums, and listening to podcasts, trying to learn as much as we can before taking our investing to the next level. Our $100K HELOC on our primary residence should be in place very soon and we plan to open another HELOC for $40K on our investment property in the near future to allow us to make cash deals. Our primary objective is to buy and hold SFR's, but we are also considering small multifamily properties.
We are currently evaluating an opportunity and I am hoping to get some advice from the BP community.
We are looking at a 0.55 acre of land that currently has a small older house on it that needs to be demolished. The current asking price is $30k, but the property is owned by an estate and the realtor believes they will likely take $15k for it. We will also have to pay $5,300 to have the house demolished and cleared, so the total out of pocket would potentially be $20k.
We are considering building one or possibly two townhomes or duplexes with 3/2 on the property. We have already confirmed with P&Z that the property is zoned for multifamily. The property is located in a C class neighborhood. Next door to the property is a 48 unit townhome community built in 2007, which is separated by thick brush. A 3BR/2BA 1,220 sq ft home is currently renting there for $595, but I think we would be able to get $650 per mo.
Our realtor told us that we can probably build a duplex for $100k, but I have not researched this yet. As we are new investors, the thought of building a new townhome or duplex from scratch on our first deal is a little scary and intimidating. I would love to hear your thoughts on this deal. Is this too much risk and too big of an undertaking for a new investor? Is there anything else we should be considering?
Any advice and guidance would be greatly appreciated! (Sorry for the lengthy email! Thank you for reading!)
Hey @Randy Philpot welcome to the group! I'm currently working on several things in Kentucky and know the fear of the 1st one. I'd say there's a lot of variables still left unanswered. Do you know the vacancy rate of the properties next door? How quickly do you want your money cash flowing etc? I know you mentioned Versailles are you also considering other areas? Great seeing you on here & I'd say soak in the podcasts & blogs. Such great info here. Feel free to PM or reach out if you have any questions!
As for this being to risky and big for a new investor, I think that depends on how big your britches are and what goes in them.Seriously, it depends on how much risk you and the wife are comfortable with.With new development there are a lot of moving parts and thus more risk.At a minimum I would seek out a developer in your area and attempt to add value to his business in exchange for information and possibly partnering with him.A C class neighborhood won't support new development unless it is in the path of progress and has a lot of potential upside.That's a risk you may or may not want to bite off.The above rents on the 3/2 won't support new construction.
You maybe better off starting with a strategy less complicated and risky.Regardless, I wish you luck.
@Randy Philpot I agree with the concerns that @Bryan Drury has addressed. How would you also be funding your construction of this new build? If you are using your HELOC to pay for all of this construction even on a fear and clear new build you might be crippling your REI future. As an investor you want as little skin in the game on deals if you are looking to grow rapidly. Not sure where you deal is but a lot of neighborhoods in central Kentucky do not support new builds.
Like Bryan has also stated the neighborhood may not support this. What is the ARV on the property once it is built? What is your exist strategy if things start to go south? You also need to confirm what the actual build cost would be. Is your agent including water tap on fees, architect fees, interest accrued on your HELOC or just the flat building cost?
Not saying it can't be done and you can't do it but it looks like you need more information before you can make a better decision. Points for creativity though.
Great info guys! Thank you so much for your insights and for confirming my instincts. I agree with your comments that this scenario is a little too complex and presents more risk than I am willing to accept at this time.
Thanks again for your help!
also, going by pure numbers, your initial investment for a duplex would be 120k and rents would be 1200 conservative, which equates to 1% rent/purchase (total investment) ( always see if your deal would work with the most conservative rents, not the gut intuition, because intuition won't pay the mortgage). 1% might struggle to cashflow depending on your expenses and frankly doesnt look like it warrants the level of work needed to achieve that. You could find a buy and hold fixer upper for this mediocre level of return and be getting ROI in months instead of 3-8 months for a new construction. Regardless, seek for something with higher return for your effort. That sounds like way too much risk for someone whose never managed a rehab. Not to mention, the duplex doesn't look like it would have a good exit strategy. Your potential buying pool would be low and majority of investors might not bother with C neighborhoods either so that buyer pool come selling time would be mighty small and difficult to exit. Shoot for higher quality deals with less rehab criteria! Start with ones needing rehab, but not more than you can bite off. also use the BP calculator to evaluate even your hypothetical deals. It might help you be more grounded in reality and what really is a good return on your time/ effort/ stress levels. I personally end up with properties ranging from the 1.3-3% rent/purchase ratio if that helps you, with the 3% ones being much more elusive in this current market.(I found this in 2012)
@Randy Philpot Not to pile on, but this strikes a nerve with me. I have a lot of existing rentals and am buying more. I also have some vacant lots in a perfect spot to build new duplexes for rentals. I want to build there and I have to keep holding myself back. Why?
Someone gave me some really good advice. They said do not start building until you can't find ANY existing properties for significantly (10-15%) lower prices. That's true in Atlanta and they are building like crazy. Here in my small town outside Atlanta not so much. I believe it's coming but it's not here yet and I suspect your area is similar.
Also, generally I tell newer investors to start very simple with a win. Find a decent cashflowing property and start with that.
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