I have identified many empty lots in a transitional area just outside a major metropolitan city. I am curious if it would be a good strategy to buy these lots and build duplexes or greater to hold and rent? What would be the best financial strategy, ie construction loan/hard money? I've never attempted a new build before, so any helpful information would be appreciated.
Run the numbers and start looking for conventional financing for this type of project. If you go with Hard/Private money to start, you are still going to need some form of traditional financing when the project is done. Start shopping and see what you can find for financing either for after completion or for the entire process. Calling banks/lenders is free. It's time to do some research.
@Dustin Allen thank you for that, I'll sit down with my local bank and have that discussion.
If you don't like what they say, Call the next guy until you find the right product for your needs.
@David Crews Any luck on your findings? I am also interested in the process of building MFH, but have just started the initial research. I would love to hear what you have found out so far.
@Colin Dingfelder I haven't found out much yet. I am currently networking and attempting to find a quality builder who could give me some insight.
@David Crews I just completed my first duplex build in May 2020. Infill lot in a A neighborhood for student rentals. All in cost of 527k (135k lot/392k construction). Value is ~775k.
Used a great/expensive builder and hired a designer to make all of the choices on finishes. Very little on my end. My favorite part was there were zero surprises because it was new construction. Probably my favorite deal I've ever done.
If you can make the numbers work in your market, I'd highly encourage you to build small MFH.
@Will Gaston Great info. Do you mind sharing what your strategy is regarding the “x% rule”? It seems like nowadays 2% is out of the question, and even 1% seems impossible in my market (Minneapolis) for purchasing a MFH. Obviously building new eliminates a lot of the cap ex concerns that you would have with a 100 year old property (roof, foundation, siding, etc). So I guess my question is, how does new construction vs buying change your cash flow goals?
@Colin Dingfelder the rent on this property is $6600 which would put it at around 1.25%. I got a 25 year AM (commercial lender) on it and so my PITI is ~$3800.
My goal on every deal is to have no cash or as little as possible in it when I am done. The reason I think new construction can provide that opportunity is that you can eliminate inefficiencies.
My experience is that students don't care about dining rooms, garages, super high end bathrooms.
I certainly could be wrong but building to your customer seems easier than remodeling to your customer.
@Will Gaston How'd you structure the finance side of it? This is exactly how I'd like to go about it.
@Will Gaston That's phenomenal rent for student housing - I was assuming that it was lower. How many BR are each unit? Thanks again for the insight!
1) Borrowed 135k for the lot from a private lender on an UNsecured note (obviously this only works w/ highly trusted parties)
2) Borrowed 392k from a Local Bank #1 for the construction who had first lien position
3) Leased the property for $6600
4) Re-financed with Local Bank #2 at completed value (to pay off Local Bank #1 and unsecured note)
@Colin Dingfelder it has 3 Bedrooms/3 Full baths on either side.
The property is very nice but it's the mix of the property and location that brings the super high rent (Average rents in the neighborhood are ~$700/BR).
Finding an infill location like that is next to impossible. Although, I am still looking.
First, check the zoning on the lots to see if multi-family is allowed first. I assure you that "Build to Rent" is a thing. It's being done here in the Atlanta area all around. I've seen a couple of models of how this works. One is to build the cheapest people boxes possible and rent them out. Recent rises in rents have made this much more feasible. The second strategy is to build SFR starter homes and rent them out. These will be held and rented for about 8 years. Rent will be collected during that time, depreciation will be taken, and where they are being built they will also appreciate in value over that time period. So in 8 years cash out and do it again. I'm starting to build these in the Atlanta/North Georgia area. I'm just looking for passive equity partners now as I have everything else covered. Research "Build to Rent".
@David Crews That is a loaded question my friend! This is definitely a good model but there are a TON of things that need to happen. First you need to make sure that they are zoned for this use, secondly will the city and it's board members approve this type of new construction? Is there a neighborhood association that could come into play? Assuming that you get the green light on all these, who will build it? This is a HUGE FACTOR that is often overlooked. DO NOT GO THE CHEAP ROUTE with a chuck in the truck builder or you will pay for it with your time, stress and energy.
Once you find someone to build it, what is their build cost and timeline on the project? Once you know this you can run numbers and do research on whether the deal makes sense! You might want to do this before city approval etc so you can have these numbers before hand to evaluate a deal before jumping through a bunch of hoops!
Lastly the financial aspect. Do you have the $$? Most people don't which means you will have to get a construction loan which isn't a very common thing and is a very niche loan on my opinion. This is an area where you will want to ask around in your local market and get a good referral.
I wish you the best of luck my friend, my personal opinion is to find a partner who has done this or who is doing this. These "small" projects are very daunting and can go south fast if you don't know what you are doing!
I've built triplexes and converted buildings into triplexes since the approval of the 2040 plan in Minneapolis and the equation has been great. You have to figure out how to get a value add just like you do when you buy an existing multi family. I.E. I've bought several properties on double lots, split the lots, renovated the existing and sold it off so I have a "free" lot. I then build on it and have a lower cost than other people. It takes more work, more hustle, more looking, ect ect as deals don't just drop in people laps as we all know. I know my target areas and understand zoning/building code to know what I can do. You have to develop the skill sets over time. I get a premium rent over everything else in the area and rent them up fast so there is no vacancy costs/almost no near term capex. I've also bought larger properties and did a full gut/remodel so they are essentially 80-90% new construction and they rent just like new construction, just in established high demand areas. What's not to love?
@Bruce Runn Seems like you have a lot of experience. Thanks for sharing.
I'll add that almost all of our builds and most of our conversions/renovations are for 3 and 4 bedroom places since building bigger/adding bedrooms is the best way to increase the ROI
@Bruce Runn I was thinking along those same lines. Would you mind sharing the $/SF cost for MFH new construction? I’m assuming you are also in the twin cities area.
@Bruce Runn how difficult are these infill lots to find for new construction in the Twin Cities?
@Colin Dingfelder- I am specifically only in MPLS- Are you asking prices before covid or post covid -LOL?
Pre covid-$175 sq ft for construction for 3 and/or 4 bed/2 full bath 1250 sq ft apt's in a triplex and $25/sq ft for all soft costs-architect, permits, SAC, park fees, landscaping, and various other soft costs ect but not including the cost of a standard sized lot.
Post covid with all the increased costs/shortages-???? More expensive!!
Check out millennial investor group facebook page in Minneapolis as we will have info on a presentation I am doing next week on a recent deal
@Will Gaston - I'm not telling you anything you don't know but there's very little low hanging fruit out there and you have to work to get them in different ways. I have one for an individual triplex, have an option on another empty lot, and own 3 contiguous properties with multiple lots that can be split or combined for up to a 75 unit/6 story building and in between so it's a tactic of mine to have projects in the queue and be able to hold/do something in a year or two once I clear past the capital gains timing. Since I've held the 3 combined lots w/rentals and I cash flow them while I decide what to do including possibly selling them off individually and make my money that way since they've appreciated a lot and are in prime locations. I just sold off a project that had a duplex with zoning/room to put an additional 2-3 units on the lot as a cluster development so we don't keep everything but make good decisions along the way.
We bought a lot, and built a triplex on it.
1. New construction is awesome. Super easy to rent out.
2. It can take a long time, our project took 4 years from when we bought lot. A long time to ha e your capital locked up.
3. You need 20% down plus contingency.
4. Perfect for house hacking.