Why doesnt more people do new builds than just flipping?

Hilo, HI · Member since 2014 · 30 posts · 10 votes

Aloha everyone, Im an investor in Hawaii and I build homes from the ground up. Just out of curiosity, why doesnt more people do new builds in the Real Investing World? Majority of the investors that I come across in Hawaii have never done a new build or they only flip houses. Its just a thought. For me, when I do a new build there are no unknowns as far as the construction goes. Everything is a step by step system and there hasn't been any unknown surprise, if anything maybe only some scheduling rearranging, but nothing major like flips. What are your guy's thoughts on this?

1 Reply

117 views

Most Popular Reply

Alex Franks

Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes

10y

Originally posted by @Mana Silva:

My answers are never as detailed as Jay Hinrichs but I believe it is more or less folks don't know.

All the resellers or gurus, not one of them is preaching or teaching new construction( that I now of ). I rather keep it quiet and just keep in building. Watching other folks telling them you are correct low end deals are the way to go.

So most of the folks here and in the local meeting are failrly new. I see it daily here as they flock to the meeting then jump in the low end deals. The truth is the market tells us what to do and why. Right now for us in NC and SC it is cheaper to build then buy. Jay is correct capital is needed and most folks don't have that.

We are building both retail and turn key rentals here in both markets.

Enjoyed your post though

Alex

Flips, rehabs are not even in my conversation any more unless it is an apartment building.

3 Reply

See this reply in the discussion

48 Replies

Jump to latestLatest

Sort by

Account Closed
Hilo, HI · Member since 2016 · 17 posts · 3 votes
10y
Great post! Look forward to hearing some answers.
0 Reply
TJ Urban
Investor · Kailua Kona, HI · Member since 2016 · 19 posts · 4 votes
10y
@Mana Silva Great question, I'm interested in hearing some answers. By the way, I have a deal right now if you interested. $90k purchase, $20k rehab. ARV looking like $150,000. Down Hawaiian beaches. Let me know what you think. I'm waiting on couple more deals to get in contract this week as well. Vacant land on couple of them. 1acre HPP lots, comps on those areas were average $31k. Let me know man, let's deal. I'm blasting these out to everyone who's interested
0 Reply
Mike Hanneman
Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes
10y
For me it's the time issue. I can be out of most flips in under 2 - 3 months. Planning/permitting alone on new builds could take that long. Maybe I'm wrong but that's what it seems to me.
In some areas investors are buying houses and renowing(sp) them for under $150K wouldn't it be hard to even build an average home for that today?
0 Reply
Account Closed
Contractor · Grand Rapids, MI · Member since 2015 · 8 posts · 2 votes
10y
My thoughts exactly. I think it can be done, but new homes are typically more expensive then older homes and you can't really build a new home for below market value. Perhaps if you can get the land/lots during a downturn.
1 Reply
Scott Johnson
Real Estate Agent · Haiku, HI · Member since 2016 · 14 posts · 1 vote
10y
I'm really new, so I might be a way off, but aren't the financing options between a flip and a build different?
0 Reply
Roger Pokorny
Rental Property Investor · Muncie IN · Member since 2015 · 68 posts · 25 votes
10y
Yes, the financing between a flip and new build are completely different. Many banks will not lend on property that requires major work. The banks I have worked with will state you have to have a functioning bathroom and kitchen. In other words , they will lend on property with minor repairs, but nothing major.
There are some banks that will lend on a property with major repairs and they will run their numbers on the after repair value (ARV) and require the investor to put down 25% of their own money. This type of loan is far less common than the typical mortgage.
A new build will require a construction loan with draws at certain milestones. Once construction is complete the loan will roll over into a conventional mortgage.
The scenarios can be very similar, but in reality are very different.
3 Reply
Justin Fox
Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes
10y
It may be easier to find distressed properties to flip than cheap lots with sewer/water available in some areas. Contractor fees may be higher in an area on average and prevent meaningful returns vs flipping.
Cleared lots might be way too expensive in an area worth building and kill the deal.
I mean, I've built two houses and I won't build unless the appraised value will be 30-40% more than what I built it for. Might not be doable in some places.
Some of these flip guys pick up homes for $10/sqft. i'm sure in a lot of areas it takes at least ~$20/sqft just to get the house dried in (scale for comparison). Also, when you flip, you're improving a house and its neighborhood. Maybe that's satisfying as well?
0 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
10y
new construction cost per square foot = a lot higher than purchase price + rehab per square foot
it may cost $100/sqft to build versus $60/sqft to buy + $15/sqft to rehab
2 Reply
Paul Ortiz
Anaheim, CA · Member since 2014 · 163 posts · 51 votes
10y
@Mana Silva
Most people are not to familiar with the construction process, here in Southern California there is also the shortage of available land, Most new ground up construction has to be Urban-Infill. So the hunt for land is time consuming and there are a lot of variables that go into it, for example;
Utilities: Water, Power, Sewer
Size of the Lot and what you can built.
City Codes,
Most Flips are in and out in a couple of months, in ground up construction in to it for at least 9 to 12 months.
0 Reply
Jonathan Orr
Developer · Boise ID · Member since 2016 · 287 posts · 110 votes
10y
@Mana Silva I have wondered that for some time. I am in the same boat, I would much rather build ground up than rehab. However I think everyone on here is correct. @Paul Ortiz made a good point especially for people in dense areas and the time it takes. With the time and effort to build in dense area there is a fine line between being feasible or a money pit. For example I had a property that I thought was perfect for a multi-family in-fill. However it has a commercial zone that was set many years ago (even though it was surrounded by res.) so in my analysis it wasn't feasible for me to carry on and try to get it rezoned for a small development. Instead I am able to do a couple quick fix n flips and focus on a bigger ground up development in a less dense area of california.
However, it can be the opposite in different parts of the country. For example I know people in Oklahoma or Nevada that find it easier to build rather than rehab because they have the land and also the municipalities are easier to work with.
It really is a case by case basis. Yes the payout is almost always better but the time value of money is a factor people need to take into account.
1 Reply
Matthew A.
New Haven, CT · Member since 2016 · 90 posts · 99 votes
10y
Maybe Hawaii and other parts of the country are much cheaper, but in CT I would think an average home would cost around $200-$220 a Sq/F. in a decent town. so if you build a 2,000sq home you are looking at $400,000 - $440,000, not including costs of land, contractor fees etc. The poorer towns or cities might get away with $130-150 a Sq/foot. On the flip side, Greenwich/Westport and some other of the wealthiest towns in the country probably can go for $400-500 a sq.
Just based off of data online.
Luckily CT has high rental rates, but building new just sounds like negative cashflow city to me.
0 Reply
Joe Cantanzriti
Rental Property Investor · Chicago, IL · Member since 2014 · 132 posts · 74 votes
10y
I would agree with some of the previous statements as well, I think the majority of people are unfamiliar with the process and renovating seems simpler to most, though I would certainly argue against that once you understand the new construction process. Also financing as always is an issue. . It could be more difficult to find a lender who will finance your flip than one who would finance your spec build. Though if your end game is to hold the new constitution than we should be comparing it to a rental property and not a flip of course.
1 Reply
Rocky V.
Rental Property Investor · Arlington, TX · Member since 2012 · 788 posts · 640 votes
10y
@Mana Silva
When is the last time you had a 45 day turn around from closing to closing? I have had several flip deals in which I purchased home and resold within 45 days. I don't think this can be done as a builder. Best of Luck!
0 Reply
Paul Donoho
Architect · Honokaa, HI · Member since 2013 · 8 posts · 3 votes
10y
quite obviously it's a case by case basis and entirely dependent on your location and all the factors. hawaii is very expensive to build in generally, certainly as much and more than connecticut, however there are areas where you can put something up for much less per sf. there is so much demand for certain price points that even the worst shape homes garner 1/4 million or more. i'm looking at flip opportunities here a lot now, and, at distressed pricing, you're seeing so much termite and rot damage, aged and salt water affected plumbing and electrical that it's a tear down. and i agree completely with @Mana Silva that rehab presents (for me) too many unknowns inside those walls whereas, once i'm outta the ground on a new build, i KNOW everything is in brand new condition and placed in working order (and can of course sell it for more). Rocky V., obviously you can't turn a new house around in 45 days (unless you're throwing up 1,000 in a subdivision as a mega home builder) so you're not addressing his question in too helpful a manner. I know Mana is doing a bang up job with his new house builds and appreciate the question and useful feedback.
oh, one other point, unless your rehab is purely cosmetic seems to me you should still be doing some planning and still be getting any required permits. if you're working it like Mana, he's got standard plans going and works though the permitting process, all part of the management plan.
0 Reply
David Luetkemeyer
Investor · Stillwater, OK · Member since 2016 · 36 posts · 17 votes
10y
I agree with Rocky. I can turn flips way faster than I can build.
0 Reply
Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
10y
I know lots of people that build new for rental property. Land is cheap and plentiful where I am located. Flips are different. Time is faster and profits can be larger than new construction. That can change over time. Ultimately one of the key measures of existing home value is new construction cost. Given the same square feet, location and amenities, new will cost more than used. This is a general statement, so don't everyone pile on me!
0 Reply
Jason V.
Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes
10y
Originally posted by @Matthew A.:

Maybe Hawaii and other parts of the country are much cheaper, but in CT I would think an average home would cost around $200-$220 a Sq/F. in a decent town. so if you build a 2,000sq home you are looking at $400,000 - $440,000, not including costs of land, contractor fees etc. The poorer towns or cities might get away with $130-150 a Sq/foot. On the flip side, Greenwich/Westport and some other of the wealthiest towns in the country probably can go for $400-500 a sq.
Just based off of data online.
Luckily CT has high rental rates, but building new just sounds like negative cashflow city to me.
You ever read the "Diary of a New Construction Project?" BP Diary Book
That was a mostly new construction project completed for around $60/sq. ft. with middle to high end materials in a nicer area in Atlanta.
In my area you can do new build for around $70-75/sq. ft. (including lot improvement) which is still more expensive than you can buy comparable properties for. So you have to have a really good reason to build, because it just doesn't make sense in most cases.
0 Reply
Jon H.
Investor · Kent, WA · Member since 2014 · 55 posts · 16 votes
10y
@Mana Silva You're in a sector of the industry that works great for you! I can tell by your enthusiasm that you love what you do. It's kind of like asking why doesn't a pedal bike become a dirtbike? Or people who build mountain bikes just build a dirtbike? Just preference and everybody has their own.
I opt to further my skill in remodel ,new construction and other areas.
I think new construction takes a vast amount of knowledge on a multitude of different aspects compared to rehabbing-depending on your area and market and what you're building.
Mahalo
Keep at it!
0 Reply
Ellis San Jose
Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
10y
The Difference is Risk
The time it takes to exit a new construction project vs. an existing complete structure. Compare the rate & term of a land acquisition loan, construction loan vs. an existing house.
0 Reply
Ryan MurakamiPro Member
Professional · Las Vegas, NV · Member since 2008 · 45 posts · 8 votes
10y
@Mana Silva I have a cousin doing new builds in Oahu. Last time we spoke though, he said he wanted to look into doing flips instead. The main reason: new builds tie his money up for too long. Maybe you have a more efficient system or better financing than him. I don't know much abut new builds but would love to learn!
0 Reply
Christopher B.
Rental Property Investor · Knoxville, TN · Member since 2011 · 701 posts · 531 votes
10y
I had this conversation with my electrician just a couple days ago. We came to the conclusion that we don't see how builders are making much money, compared to the time, effort, and risk they anyways.
I own a piece of land that I thought about subdividing and building two spec homes on. After calculating everything up I decided I'll probably just sell the property to a builder because it's return isn't worth the effort. Maybe my prices are just high though, a lot of builders out there.
0 Reply
David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
Originally posted by @Mana Silva:

For me, when I do a new build there are no unknowns
How long have you been building new homes? Those that broke ground in 2006 ran into some pretty big unknowns. To be fair, flippers that started in 2006 ran into some pretty big unknowns too, but if they were good then they got out before the market ate their returns. Developers, not so much, unless they were VERY good and VERY well capitalized.
0 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@Mana Silva? here are my thoughts both as a new home builder and a HML who has made many HM construction and rehab loans over the last 30 plus years.
1. In todays environment depending on location in the country ground up loans are virtually impossible if you do not have significant cash and experience.. NO experience no cash NO loan. Whereas rehab loans are Far easier to get
2. the amount of new home construction lenders is miniscule compared to rehab lenders.
3. Time.. far more time to build
4. more complicated more room for error and disasters.
5. depending on Market lots can be very tough to find and very expensive.
I have done both and continue to do both.. right now I would say I am doing better on ground up than rehab.. However I borrow from banks at 5% and only pay interest on drawn funds.. so rehabs have higher interest carry as the first draw is much larger than the price of a lot.
Definalty depends on the market.. I build in Portland and Charleston.. we make solid 15 to 20% NET profits on Gross sales.. but we do volume.. as opposed to rehab were we have to hunt for the next deal.. Like one project in PDX I have 27 homes on in a subdivision were I bought all the lots. we will build and sell it out all in 16 months.. hard to find 27 rehab flips and get them all done. Plus I only have to go to one place and once I closed on the dirt I don't have to spend one second of my time looking for the next deal. .Although I have 23 lots 1/2 a mile away that we will start building in Oct.
In Charleston we have been buying spot and 3 to 5 here and there.. so have 11 going there. Same profit as Oregon and actually higher on some because the market moved so quick we have some 25% profit on gross and one we are going to make 200k on a 550k sale price.. this is HIGHLY unusual thought and the most I have ever made on one home in my 42 years of doing this... ( not withstanding a big 5 million dollar mansion we did and made 1.5 million on ) but that's not my core.
So for those reasons is why 80% flip 20% build.
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
1 Reply
Emma Jackson
Wholesaler · Vaughan, Ontario · Member since 2016 · 16 posts · 2 votes
10y
Sometime new projects face some challenges
0 Reply
Mark McClure
Rental Property Investor · Jacksonville, FL · Member since 2016 · 25 posts · 25 votes
10y
Besides the timeline of flip vs new build you also have to consider the municipality. If you can go in and do cosmetic work on something that's already done it saves the headache of permits, surveys, sewer, water, electrical etc. The bones and utilities already exist so that saves you from having to deal with government officials who just want money for every little thing you do on a new build.
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.