All Forum Posts by: Mike Wood

@John Nix If its a shotgun double (which is sounds like), the center wall is load bearing and will require someone with knowledge to determine header sizes and load path. Generally in those houses, the walls separating the rooms the width of the house are not load bearing.

Good luck with our project.

@Aaron Thivierge I think that fact that you are not accounting for any maintenance, lawncare, capex or management cost is making the deal look much better than it is. If you factor in these costs, the Cap Rate (not exactly a perfect fit as a 4 plex would be valued based on sales comps, not Cap Rate) would be very low, like 6.1. Additionally, even assuming rents go up to $4100/month, your expenses are likely to be over 50% when you include maintenance (5%), Capex (5%), lawncare (2%) and management (8%). Adding these costs in, and you are negative on cashflow.

The empty lots would be very intriguing to me if the area can support new construction.  But if your buy a 2/1 & 2/1.5 fourplex for $300,000, the value is likely in the $80-90/ft2, so it likely will not support new construction, if this is the case, the lots are more of a liability, although there may be other uses (putting storage sheds on them and renting storage space for your tenants, parking etc.)

@Marzieh Rostami I do not think your contractor is giving you great information.  You would be saving all of the costs of framing and foundation ($18.50/ft2 on my recent 1790ft2 build), and most likely exterior siding ($6.35/ft2 on the same build) on a gut renovation.  Other things should be cheaper as well when compared to new construction.  I am able to do a gut renovation (to the studs) for around $50-60/ft2 here, my new builds cost $90-100/ft2.

While I personally prefer to build new over renovations, its not because the numbers say so, but other reasons (old layout doesnt work, existing foot print not be best use of land, etc).  You might want to think about talking to other contractors.

With the above being said, new construction or gut renovation is an aggressive path if you have not done some renovation work before.  New construction can be easier to budget for in the beginning, but there are still areas that can cause significant overages (allowance items), and renovations can have a budget that balloons if you or your contractor dont account for things. 

@Marzieh Rostami  To illustrate and example, lets say you buy the land for $150k, and you build a 1200ft2 house for $132k (=1200ft2 @ $110/ft2), ignoring finance and soft costs, your total cost would be $282k.  On a $/ft2 basis, your cost is $235/ft2.  Thats pretty high for the south.  In order for the bank to finance the project, you would need the value of existing house sales to be very near or above this valuation.

Now, lets look at the same lot ($150k) but lets build a 2,200ft2 house, using the same build cost (larger houses would be cheaper per ft2, but we will ignore that for this example).  The build cost would be $242k (=2200ft2 @ 110/ft2), and your total cost, again ignoring finance and soft costs, would be $392k. On a $/ft2 basis, the cost would be $178/ft2, which is lower and more likely to be in line with the existing house valuations.

I also doubt that tearing down a 1200ft2 house to rebuild a 1200ft2 makes any financial sense. If we assume your new build costs are $110/ft2 (just a bit higher than my area), you should be able to do a full gut renovation for somewhere in the range of $50-70/ft2, depending on how much of the exterior needs to be replaced (siding, roofing, concrete flatwork, etc).  If the house is as bad as you say, you should be able to purchase it for right around the land value.

Do you have any idea what a 1200ft2 house would rent for in your area.  Using your numbers, it would need to rent for well over $2000/month to cashflow.

Additionally, given your numbers, I doubt that a single family new construction rental will work.  I also would not be interested in investing so much money in an area that is a gentrification play, $150k for a lot is very high in my market, and we routinely have house values in the $150-$200/ft2 range.  I have not been able to find a property in my market where the land value is over $100k that will work with a new construction duplex on it.

@Marzieh Rostami  One big downside is that you will need a construction loan to do this, and most construction loans will required 20-25% of the total costs (land + soft cost + build costs) as a down payment/equity.  That is hard to come by.  Additionally, if the land is expensive, building small houses will make valuation a problem, as the land cost will be a larger chunk of the cost/valuation.  

@Luke H. If the house is pier and beam, you should be able to determine the condition of the floor joist, rim joists and any pier/sill beams by accessing them from under the house.  I dont see why you would need to remove all of the flooring to do that. I dont think that $4500 is unreasonable to remove all floor coverings and the majority of the subfloor.

@Falon Sexton  On BP, the 2% rule is the monthly rent should be 2% or more of the purchase price.  For example, a monthly rent of $1000 per month for the 2% rule would have a maximum purchase price of $50,000 (0.02=1,000/50,000).  In your scenerio, your can is worth $125,000, the build costs $180,000, so the total cost is $305,000.  Your projected rents are $2600/month, so your deal is 0.85% (0.0085 = 2,600/305,000). If you use your cost of land or $80k, your rent to cost ratio is only 1% (0.01 = 2,600/260,000).

This all assumes the property would appraise for more than your costs ($260k).  Based on your build costs ($180k) I can assume that its a pretty small duplex, likely a 2/1 each side, total of 1800-2000ft2 max(using $90-100/ft2 build cost, which is pretty standard now a days).  Existing duplex houses in the area would have to be valued north of $150/ft2 for this to work.

@Luke H. If you are talking about removing the flooring (tile, hardwood & carpet) and removing the subfloor, that's a big job and not something that will be accurately quoted without seeing the project.   I am not sure why you would be trying to remove all of the subfloor, its not something that is typically done, only remove & replace what is bad on the subfloor.  The subfloor is under the walls, so it will be impossible to remove all of the subfloor. 

If your only talking about wood flooring, then I would think around $1/ft2 would be reasonable price, carpet would be super cheap, as it only takes a few minutes for a room and tile would depend how its installed (cement board or mortar base), but likely higher than wood flooring removal costs.

@Brandon Wright I would not categorize NOLA has a soft rental market or somewhere with high vacancy, exactly the opposite.  As for your desired area, it is doubtful that given today's house prices, you will find anything that will cash flow in after you move out, which will mean that you will need to plan on selling when you move.  Run the number when you start looking.

@Falon Sexton It will not work that way.  Your $125k in land is paper money, you cant pay for materials or your subcontractors with that "money".  Unless you have cash sitting around, you will need to borrow the $180k to build the house, those are cash costs, which will equate to debt payments.  

The way you describe your project, the cost is around $305k ($125k land + $180k build).  If you went to a bank for a construction loan and you did not already own the land, you would need 20-25% of the costs for downpayment, which would be $61-76k.  Since you own the land, you have more equity than the minimum down payment, so you would not have to come out of pocket with any cash (unless your bank makes you pay some of the closing costs in cash) to close the construction loan.  But the construction loan MUST be enough to fund the build, which is $180k, thus your loan will be at least $180k.  Assuming a 30yr mortgage and 4.5% interest rate (likely too low), the P&I payment will be around $912, not including any escrow payments.

Additionally, investing $305k (land + build) to produce $2600/month in rent is not exactly a screaming deal.  On BP you hear alot about the 2% rule, which is hard to do in most areas, but above 1% is usually achievable, but your deal would be at 0.85%.  You will have more common costs with a duplex than a single family rental, so getting higher return is even more important.  I personally would not build given your numbers, and would instead sell the land to free up capital to purchase project that produce more cash for the investment.