Tear Down Properties: Am I Missing Something?

11 Replies

Hi BP,

I recently looked into a duplex deal in a C+ class neighborhood. The house had a major fire about 4 years ago and was not touched afterward. After being exposed to the Florida weather that long, there's nothing salvageable about the existing structure. I had talked to some people about the cost of tearing it down and rebuilding. I got quoted roughly $100/sqft ($160,000 to replace) and $10-$15k for the demolition. All that with cost to purchase the property would leave a total investment of $200,000. The problem is, other Duplexes in the area are being sold for less than half that.

My question is, how are people making money off situations like this? Is this just a quirk of my local market (Orlando) or is there something I'm not factoring in? Does new construction really appraise for that much more or are people just ok with putting in over market value so long as they're making positive cashflow? New Construction is low in my area, but it's not zero.

Thanks in advance.

Sounds like the area doesn't support spec new construction.  Find an area with higher exit prices.  I'd only do this where exit values are over $200psf.  You might be able to build for less, but that still won't put you where you need to be.  

@Nicholas Candaffio ,

@Jon Klaus is correct on this. Not every market can support new construction for rentals, regardless of whether it is bare lots or a tear down project. My market is similar to yours in that I cannot build for the cost to purchase existing stock.

I'm wondering what it would take in a less expensive market to build and hold.. So say I bought a piece of land for 8,000 in a residential neighborhood that is a little bit lower end (C/D), and paid for new construction of a very small house on that land. What would the numbers have to look like? Is building a house just too expensive to cash flow, in that type of neighborhood?

The rough construction cost numbers look good to me for a ballpark estimate.

@Tyson Hosey ,

New construction, for the cost and typical attracted clientele, is more oriented towards A/B neighborhoods; especially at the SFR level. It would be hard to find quality tenants that would maximize the rental output of the unit for the cost of construction in a junk neighborhood.

There might be some great pre-fab houses, that can be put up at a much lower cost than new construction.

I'd think long and hard about what the market is trying to tell you, the supply and demand, and the long term viability of an investment there if you can buy existing construction for less than half the replacement cost of new construction. Red flag maybe?

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