Building vs buying units

3 Replies

Hi all,

I'd like to get some advice on the following.

I own a couple of properties in central California with potential for building up additional units on each one of them.

The first one is a tiny single family home (~800 sf) on a big R3 lot where I can get a permit to build 2 or 3 additional units (although the cost of the permit per unit is much higher if I build 3 or more units, so I might stick with 2)

The second one is a duplex, 2 1-bed small homes on a big R2 lot where I can build at least 1 more unit.  For the existing units I could also convert the garage (legally) into a second bedroom to make each unit 2bed/1bath and increase the rent in addition to the 1 new unit.

I haven't run the numbers yet, and I know without numbers is hard for anybody to provide advise, but I was just wondering if experienced investors would generally lean more towards using the existing funds to build the new units, or forgetting about building and use all the funds to purchase more properties. I have rehabbed a couple of my rentals in the past, and although I have not built anything from scratch yet, I have general contractors in the family and I'm very familiar with the whole building process.

Could anyone advise please?

Thank you. 

It really just depends on where you are, the local cost to build per SF, price for infrastructure, etc. In some areas where you can buy and rehab property for less than $100/sf, that's going to be tough to match building from scratch. On the flip side, if you are spending $500-$1000 to buy square footage, I would guess you can just about build anywhere for less than that, so if you have available room on available property that might be a no-brainer. 

One thing on building from scratch - have all your money available and accessible. If you have to wait on draws or cuts from others, it can be a serious drag on progress. I built from scratch using a construction loan and it took forever to get draws from the bank, and just about broke me building it. 

Pricing aside I would suggest doing some more research on your code to see if you can up you unit counts. Usually, not always, its going to be a units per acre type deal. I dont know your code but it seems a like you might be able to find some ways to build more on those lots. I guess depending on what your definition of a big lot is.

As the duplex, I would not convert the garage. Ya its an easy extra bedroom but typically I would think a garage would out weight a bedroom. If you are considering putting money here why not do an addition to the duplex instead. That way you could add 1-2 bedrooms as well as a bath. Making its a 2/2 or a 3/2. The addition I would guess would cost less than a new build and worth more in the end. Especially if you only build a 1 unit building. Thats a lo of expense for 1 unit.