Newbie New Build for STR Questions
Hi all,
Long time reader, first time poster. For context, I still consider myself a newbie but have had a couple rentals, done an EASY DIY flip, and now have a 2 airbnbs that do well in Baton Rouge, LA. I've now purchased a double-lot in the same area close to LSU with the plans of building two triplexes for STR (MTR/LTR flexible depending on market conditions). We will build in stages, starting with one lot then the other and we are funding the project with cash from family (yes, I am giving them a return). The buildings each will be total 3,500-4,000 living sqft w/ attached 2 car garage, and 3 additionaloutdoor parking spaces on each lot behind the building.
This will be the first time I embark on a new-build and while I have a GC that is mentoring me through the process (he built the home we currently live in, but years before we met him), I want to make sure I'm doing my due diligence. I'm wondering if experienced individuals would be willing to chime in on a couple of points:
1. We won't be running this project through the GC's company books. The GC (wonderful man and well respected in the community) typically does much larger residential and commercial developments now, but we've developed a very good rapport. The agreement is that he will mentor me through the custom build process, he coordinates his subs and I will pay them directly when they are done with the work. The GC also coached me that although I'm not working with a bank, we will still pull permits, require inspections at the different stages, and do everything by the book. I have the proper permits/insurance in place for this stage already. Currently, we are finalizing the floorplan with an architect so that we can move forward to pricing the project build with the GC. At that point I'm expecting to put a contract together with the GC. Are there any pitfalls I should consider with this type of working relationship? Anything I should ask about in specific? Are there any potential drawbacks? I will say this gentleman has mentored me through purchasing the property, demolition, pulling permits, architecture, and other aspects so far. He's invested a lot of time already so I'm not questioning his commitment or intentions, but as always...CYOA.
2. Considering the above, what is the range for GC fees? He estimated his fee would be total construction cost x 13.5%. Is this within industry average? I would be paying him in stages of project completion with 20% held until project completion. I just want to make sure that it's still a fair rate with me contributing a good amount of leg-work and paying vendors directly.
3. It seems like I will be responsible for selecting finishes/fixtures. Any advice on how to organize myself to tackle this? Are there any resources, guides, books, websites, etc. that I can use to help me through the process? The GC doesn't seem like he will be providing much guidance on it, just sending me to 'his people' at pro-source and 'his cabinet guy' etc. I'll be designing for mid/upscale rental.
Thank you for sticking around to read this and any advice in advance!
Patricia
@Patricia Urcuyo I visited Baton Rouge and went to an Alabama vs. LSU football game. Such a special place, amazing environment, and Tiger Stadium is huge! The tail gating scene was unreal. I've never seen so much $$$$ and people on a college campus.
What's the strategy here? Are you targeting students, football fans, nurses, or what? New construction is great, the GC/mentor sounds like a great relationship, but I'm more curious about the cost of construction, predicted cash-flow, and ROI. Most investors I know aim for older properties that need work. They generate better returns than new construction.
Following! Very curious hear peoples responses!
13.5 is not bad at all.
Definetaly use his folks. Probably be less likely to get ripped off.
@Patricia Urcuyo I feel you are starting out correctly. A few of my thoughts:
1. I totally agree that you should do this "by the book" even though a bank is not involved. You should have a complete cost breakdown and all selections made prior to the start of construction.
2. Cost + 13.5% is a very fair fee. However, be aware that the dis-advantage with cost plus contracts is the GC is less motivated (or totally unmotivated) to control costs. This is where a line item budget with discussion regarding any variances is very important. I've seen deals go very badly on cost plus because the "we will worry about the budget once we are complete or almost complete" causes massive budget over runs.
3. Architects are great for plan details but they are not known for being very cost concious. I would check with the GC to see where you can save money by substituting products where feasible.
What kind of contract will you have with him? Owner/GC or Construction Manager?
This arrangement you have sounds like he is acting as a CM...essentially he is a liaison to the subs but carries no contracts with the subs (thats you). This method is great for cost savings (guessing he would be charging you at least 25-30% if this was a traditional build method). It just puts more work on your plate as the owner though it seems like you are ok with having a skin in the game.
Also, whose name will be on the building permit? I would push to have his name and insurance on the permit if you dont have a contract with him. He needs to be on the hook in some capacity legally, otherwise it could be easy for him to bail or not be accountable. If you had a bunch of experience in building homes I wouldn't be that concerned but this is your first build! Feel free to give PM me or give me a call if you have any other questions. I can give you some ideas about selecting/tracking finishes.
Hi all – Apologies for the delay in responding. We welcomed our first child into the world last week!
Thank you all for your thoughts and for taking the time to respond. It’s very useful and practical advice that puts me more at ease.
What I'm hearing is 1. the fee is fair 2. be very intentional with the type and structure of the contract 3. discuss budget in detail and variance upfront 4. make sure there is skin in the game from GC/CM. 5. Get quotes from his vendors.
@Jaron Walling I agree - it really is a unique environment down here. I'm happy to share more information.
Our Airbnbs are mid/upscale and target parents of LSU students, professionals, and (mostly responsible) groups for events (weddings/reunions/retreats). The new build will focus on the same guest avatars and possibly also LSU students with the means seeking a furnished rental.
The GC provided me with a very detailed breakdown of costs for another build that could be a guiding point on what to expect. We are still working on architecture and once we have the plans he will price the build. I'll scale up/down and adjust where needed. Based on that project, it looks like I'll be spending about $110/sqft to build ($125/sqft if including GC fee). Goal is to stick to $400k build budget per building. ROI technically infinity since none of my money is in the deal. Projected cash flow is 4-5k per building based on initial estimates. I can share updates once I have concrete numbers.
@Kurt West Thank you for the offer. I sent a connection request and I'd love to chat.