When does it make sense to build instead of buy?

12 Replies

Hello BP, When does it make sense to build on an empty lot for cash flow? I’m asking because there is a vacant lot next door to me and the owner tends to become tax delinquent frequently. Ideally, I’d love to obtain the property and get a duplex or 4-plex built on it. Is building favorable for cash flow?

You can definitely cash flow on a build. Just make sure you buy it for the right price. I can think of a couple advantages (like the build I'm finishing up, tenant moves in this weekend):

1. Buy the lot in cash, and the bank will likely finance all of the construction costs, and roll it into a long term loan once build is finished.

2. Create equity for yourself. This build will cost me a little under $100k, rents $1200, and appraised at $145k, for example.

3. New houses have the least maintenance you can find!

Of course, this does depend on your local market. If there's a flood of extra houses, existing houses will be much cheaper than paying someone to build. Also, if you have a market with a lot of construction, build prices will be high and may take away from your ROI. Please also consider the zoning of the lot as it may only be possible to build a single family, limiting what your gross rents would be.

To answer your question simply, it makes sense to build on an empty lot and rent when you can buy it cheap enough!

Ask investor friends what their build costs are. Or just reach out to a couple builders and ask!

There are many multi-family properties for sale in Rochester, I would look at those before considering building.  If you are looking at a turn key new construction project (IE have a builder complete all the work) I doubt you will be ahead.  If you own a small construction company or have a builder's license yourself it could be a win do to saving the developer fee but I think your goal would be the same price as properties for sale just nicer and newer.  Due to the amount of MF available I don't think Rochester is likely a good play.

Around here and most major metros construction is booming... all the good tradesman are working and always busy. A good time to build is when these people aren't working... not when they don't even want side jobs because they can just work all the OT they want.

A quick way to get an idea if new construction makes sense is by comparing Price per square foot of new construction vs comps.

This is what I would do.

Go to Redfin.com

Set filters for the following.

1) Lot size: similar to what your neighbors lot is

2) Type of Property: Multi family only (since your looking to build 2-4 units

Looks at the price per square foot of 3 comps. This is the sell price/house square footage.

Let’s say the comps are at $100/sf

Now in general (in Southern California) new construction is about $125-$150/sf

In this example...new construction would not make sense.

Hope this helps.

@Alec McGinn It makes sense when construction costs/sq ft are lower than market price/sq ft. You need to understand the differential in your particular market. When evaluating the build cost, be sure know what your architectural/design costs will be, permits, water, sewer and electrical hook ups will be, especially if you're in a rural area.

Originally posted by @Alec McGinn :

John Woodrich are the multi families for sale in Rochester on the MLS? I havnt been looking lately with a new job and just closed on my first property. I would ideally like to find a 4-plex to fix up. In the next year or two.

Not sure if they are on the MLS but I found a few on the commercial side.

4 plex $300k

2 4 plexes $600k

3 6 plexes $1.2M

2 4 plexes $600k

2 4 plexes $590k

9 unit $795k

6 plex $395k

16 unit $1.04M

6 plex $195k

Not sure if any of the numbers work but that gives you an idea of what is available.

@Alec McGinn Generally you buy when the cost of building is more than current market prices. Building makes sense when you can build for less than you can buy. Keep in mind building is a much riskier proposition. 

Regarding the tax sale, if the neighbor has regularly been behind on his taxes but still owns it, That probably means he will redeem before you can acquire it through tax sale.