What size to build…

Question

So I've decided to go with building a single family rental home. My question is, what size do you think would make sense financially? Say you could build a 800 square ft home for 125k , but you could build a 1500 square ft home for 180k . Anyone have insight on this? Or actuall experience with this?

JD Martin · Answer

If I were building a SFH specifically as a rental it would be a 3/2 square box with no garage or at most a side carport, with an integrated front porch or rear porch. Preferably on a slab, which is the cheapest foundation you can build, and with roof trusses. I would try to limit the SF to about 1100-1300 depending on the floor plan. Even with the run up in prices if you GC it you can get into something like that for $150k not including the lot, so in the right areas it could make a lot of sense.

Drew Phebus · Answer

Ya I think I need a mentor. :-(

Henry Clark · Answer

OP.  Stress test your model

1.  Interest rates go up 1% point

2.  You missed your estimate by $xxxx

3.  Lumber goes up 300% due to tariff, covid, fires in Canada.

4.  Tariffs. You can’t find hardware or even a 200 amp box for sale anywhere.

5.  Can you find a GC or will you manage?

$10k profit on $150k investment or say $200k with lot and utility hookups.  I would rather do a 3% Bond.  Risk andjust your return. Unless you plan to use this as a plan to learn to scale.

Stuart Udis · Answer

It sounds like your BRRRR process is flawed. Appears you are allowing the desired appraisal to have too great of an influence on the renovation process. It's something I am observing more and more but a ton of investors are completing half-baked renovations without upgrading failing systems with one thing on their mind: 100% recapitalization on a refinance. Unfortunately, a home inspection and sale process is far less forgiving and the results in an arm's length transaction aren't remotely close to the appraised value these partial rehab BRRRR's generate so I don't believe it's the best comparison.  I also doubt there's any "established" neighborhood in the country where a parcel can be purchased for $10K. Ultimately with margins so thin, the land can be free and the numbers still don't work.  It's good that you're acknowledging there will be learning curve but the only lesson you are going to learn here is not to build the least expensive home humanly possible ever again.

Stuart Udis · Answer

@Drew Phebus You are using the other builder's product as proof of concept. Do you have the knowledge and resources to self-perform or will you require a GC? Your costs look much different if you are paying a GC's overhead and profit margin. If you do self-perform, how much does the CGL coverage and other misc. overhead of self-preforming cost you when not spread over multiple projects? Who will finance the ground up project for the investor who has never owned any property? Do you need a survey and geotech study? If so are those costs built into your model? The costs associated with performing those tasks for a one-off single family is monetarily inefficient.

Going back to the other builder's proof of concept, does the other builder build similar homes at scale? If so, what efficiencies do they benefit from? Preferred supply house and sub-contractor pricing? Do they have a relationship with an architect and structural engineer who is reproducing the same plans at a discount rate and saving time because the plans have already been produced and vetted by the municipality leading to quicker permitting turnaround times?

Building the most inexpensive single-family house that can be engineered as a one-off build  is one of the last places I would recommend investing money at this time. National builders who have the benefits of economies of scale have largely stopped building entry level housing. If the numbers don't work for them, it surely won't work for you.

Jeremy Horton · Answer

Sounds like it actually makes the point

"If I were to build I would only do multi family affordable housing at scale - townhomes, a small apartment complex, trailer park etc "

Jason Wray · Answer

Drew,

It's great to build new as long as there are comps to support the subject property being built.  Mapping it out is easy using the lot size, sqft, bed/bath count, property type, local rents, and location.  There are a few things that can help it +/- based on property type alone or number of units.

Building moderate or even using Modular versus Manufactured for example can be a huge difference in future equity and rents.  Neither one of them is a bad option as long as you map out your proxy in advance covering all of the above and having a strong team/Network to help plan and execute.

Building as a Primary Home or Vacation Home lets you finance the land into the build if needed.  If you own the land/lot then equity will or can be applied in most cases.  If its an investment it gets tougher and the rate/terms/fee's will be higher.  You also get a higher LTV/CLTV with Primary and Vacation versus investment.

If you can build as a Primary or Second/Vacation home you can still convert into an investment down the road but you start with a higher LTV (Less down), and lower rates/fee's until you need to refinance down the road.  Most of my CA, NY investors buy in Indiana and over the last few years have cashed on the quicker positive ARV options, and better purchase prices

If you ever have any questions, feel free to check out my profile or send me an email.  I am always happy to help other BP members save money and time!

Drew Phebus · Answer

Stuart! Thank you sir for a very thorough response. These are all very good questions! Your response will definitely seem smarter than mine. My thought process went like this. Im brrr'ing properties that are built anywhere between 1920-1960's. So at the end of the day they are remodeled homes but still older homes, plaster walls, older wiring, etc. ,but have 120-135k invested in these homes. I am finding homes that make since to brrr but Its so time consuming finding these deals. And I am not interested in cold calling 1000 people a day. That's just not what I want to do with my time. So back to building my own investment properties. If I can find a lot for 11k in a well established neighborhood and build for 150k, why wouldn't I do that. At this point I may still have a GC build It for me. He only builds investment properties so he's very familiar with this. But it just seems so easy. Let's say this goes very well, there may be a learning curve at first, but will eventually become easier and I could start developing entire rental neighborhoods. There's so many apartments going up now days but I truly believe people want to rent homes.

LawRosa Hart · Answer

Hi @Drew Phebus,

This is a great question. I think the best approach is to base your build size on comparable properties (“comps”) in the area. You don’t want to overbuild and price yourself out of the market, but going too small can also hurt your rental potential and resale value.

Look at what’s renting and selling nearby and factors such as the average square footage, bed/bath count, and price per square foot, etc. and try to stay within that range. That way, your property fits the market and your numbers make more sense both for rent and long-term value.

Jeremy Horton · Answer

How many are you building? What's the long term plan look like? What's the overall cost of these homes including the lot?

I like the idea of rental neighborhoods - we have a few smaller ones here. It's either affordable rentals at scale - small cookie cutter shotgun type homes or luxury homes. That seems to be where the profit is.

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