Rehabing by demolition

[Mike Gomez]

good afternoon,

I'm fairly new at this, with only 1 rental property. I'm new at utilizing formulas to determine if a property is a good buy. But my question is, do these rules apply to a property if you plan on demolition? If not, what are general rules or where can I find formulas to calculate if it is worth buying, tearing down and rebuilding? Any and all input is appreciated. Thanks 

[James Dainard]

Hey Mike,

If you're looking at taking a site through demo and construction you usually want to look at the zoning to figure out what your dirt value is going to be.

The zoning will tell you the density allowed on the site. You're going to want to look for properties that have been recently upzoned, where the density has been increased, so you can get more units on it when you build.

In Seattle, we recently had some changes to zoning so you can now put ADUs and DADUs on single-family parcels. Things like that are what you're looking for.

You'll want to find new-built comps to support your exit values then work backward. To do that you'll need to know your cost per foot to build.

Find the combined total exit value of your newbuilds (make sure to build in hold times and a buffer for the market) back out your profit margin and build cost to see what your number is going to be for what you can pay for the land.

You can search local tax records on new builds to see what a local developer paid for a site nearby as well.

There's a lot that goes into it so make sure to do your research and stick with your comps!

Best of luck!