Building Duplexes

[Brad A.]

Back Story So my wife and I are upcoming investors. :) We will be finishing the rehab on our first flip in the coming weeks and closing on the next deal in the next couple weeks as well. Additionally we built a home about 1.5 years ago, acted as the GC and poored some sweat equity into the build as well. To sum it up we refinanced a construction loan into a 30 year fixed and ended up with about 25% equity without bringing anything to the table.

Now the questions When I am considering deals for our buy and holds that we want to have some day I like seeing 40% equity after financing with 20%. If I can build a duplex and walk away with 25% I only have to make up the 15% to reach my goal of 40%.

15% is less then the 20% I would normally have to fork up. Also I wouldn't have to hunt/compete for a deal that I can get at 80% the ARV.

Is anyone else doing this?

Michigan, Grand Rapids, Kalamazoo

[Mike Wood]

@Brad A. I am working comps before I even get to the plans and specs phase. I work with my realtor on recent sales house comps in the immediate areas to the land I am considering.  This should give you a good idea on what homes are selling for on a $/SQ FT basis.  I try and only comp to renovated or new houses, and will typically throw out any older non-renovated or foreclosure comps.  You then should have the area's selling price per SQ FT.  I am generally conservative on what I use for my basis, as the bank's preconstruction appraisal will be conservative.   Then all I need to know the approximate size of house I am building, and I have a pretty good idea of the completed value.

The more tricky part is estimated construction costs, which is something that you might need help on, most do.  I have done this a few times, so I have a good handle on my costs and can develop a detailed estimate once I have floor plans, and a good rough estimate based on size, bedrooms and bathrooms.  

My costs range from $75-100/ft2 build costs (not including land), so I am looking for areas that comp out much higher than that.  My first build cost me $83.65/ft2 (building & land)and comped out at $88.16/ft2, not so good. My new projects are estimated to cost me $108.43/ft2 (building & land) and comp out at $145/ft2, which works nicely.

Once I identity the right property, I then make sure that zoning supports duplexes and rental rates are within profit requirements.  If I can get the land under contract for what I want to pay, then I start working on the plans and specs.  Once I have those complete, I get with my builder to finalize price.  The final step if bringing everything to the bank for review and approval of the construction loan.  That is when they will do the preconstruction appraisal using the spec and drawings.