All Forum Posts by: Mike Wood

@Allen L. I would first see what existing duplexes are selling for in the area.  Hard to compare singles to duplexes.  If existing sale prices on a $/ft2 basis are much lower than $100/ft2, it does not make any sense to build.  If they are higher, than move ahead and see what you would build might be worth.

You mentioned an 1800ft2 duplex, that's ~900ft2 per unit, so likely a 2/1.  Talk to other investors or builders in your area and get an idea on cost for 2/1 duplexes in your area.  My guess is right now that's $100-150/ft2 for rental units.  Add in your soft costs and you have build cost, less the cost of land.  Does that cost exceed the estimated valuation based on existing home sales?  Sure a new unit will appraise for more, but not crazy higher % when looking at $/ft2.

Lastely, what does rents looks like for the units you are thinking of building.  I dont like any property that can not rent for monthly rents less than 1% of the total costs.  If your example, if your total costs are $230,000, than I would need to see total rents at least $2300/month.

If everything checks out, spend the time and effort to get building plans and actual construction estimates.

@Ashley Zhang  I am not in your area, so I can not help with your costs.  I will say there are lots of areas where building new rental units does not make sense.  High land costs is definitely one of those areas (in your scenario, land costs = $27.77/ft2 of building area).  I would guess that rental grade build would be less costly than you have noted, as its not a custom home, but a rental property.  

If you can keep your costs below 1% of rents, you can make decent money, much less than that and the margins get thin and not likely worth the time.  In your scenario, your costs at $850k for $3600 in rents, or 0.5-0.7% of rents, way too low to make sense.

@Manny Garcia If you remove non-cash costs (cap ex, vacancy, repairs & main.) you would bring in approx. $775 per month, which definitely allows you to save for the those things. I would generally agree with others, that with all costs factored in, your getting less than $100 per door. and thats not so desirable. Additionally, with a SFR at only $500, I would be concerned that you're buying headache tenants with these units.

I assume you're insurance costs and finance costs are based on your own research, as both seen extremely low given the value of the deal and the specifics of the deal (I assume its a commercial loan since you have 4 properties in a portfolio, which I would expect higher rates).

@Philip Hernandez Your not really giving anyone much information to provide feed back to you.  If the city has pulled the certificate of occupancy (i.e. condemned), you will have to bring everything up to code and that means full permits and inspections.  Additionally, most cities do not take such drastic measure for properties that only need cosmetic repairs.

I can tell you from doing gut renovations, it would be nearly impossible to renovate a multifamily (2-4 unit) building for less than $50/ft2.  Even a moderate renovation (new kitchens, baths, flooring, paint, etc) will run you over $25/ft2.

Assuming each unit is a 2/1, I would guess the size of the 4 plex is 2,800 - 4,000ft2.  If I assume its a gut renovation, your looking at $140-200k to renovated the property.  If you have major structural damage, you will be looking at more money.  

Depending on what the city has flagged the property, it may be a difficult project to even get approval to rebuild.  If zoning changes have happened, they may not even let you rebuilt it as a 4-plex.

When doing such a project, the lows are cost overrun from unknown issues (structural, plumbing, etc) and problems with the city and getting permits and approvals. My last gut renovation (on a 2/1 duplex, 1600ft2 total) started with a budget of $75k and ending up costing $100k due to cost overruns and unforeseen issues.

@Candace Hall First and foremost, building investment properties take a lot of capital.  Most banks require at least 25% cash/equity on the total build costs (NOT FINISHED HOUSE VALUATION), and could be more with no experience.  For example, if the land is worth $50k, and your building a 2000ft2 duplex at $110/ft2, and you have soft costs (design, surveys, permits, etc) of $10k, your total cost would be $280k, which most banks will be looking for 25% cash or equity = $70k, which means you will need the land (free and clear) and another $20k in cash.  If your land is worth less, than your cash required will be more.  Since you have no experience with new construction, its going to be hard to find a bank to loan to you for a construction loan, as they are taking a huge risk.

Your post says you want to build to rent, but then says you want to find someone to build "their" portfolio.  If you are not interested in building for yourself, than just sell the land.  Not sure why you would want to force involvement in a new construction project for someone else.  As someone that has built 5 new construction duplexes, I would never be interested in partnering up with a land owner, I would just buy another piece of land for myself.  The land is the cheap piece of the puzzle for 2-4 unit construction.

If you want to build for yourself, you need to find a builder that you can work with and is able to do the project.  Given material prices and labor shortages, right now is a tough time to start building new construction rentals.

@Cornelius Jamison  In NOLA, most tenant do not bring there own washer/dryers.  If you include them, you can charge more rent.  Given what you have said, I would provide them.

I would check out apartments.com for tenant management.  It used to be Cozy.co before the parent company of apartments.com purchased them.

I would not waste money on security systems.  Why spend your money on it, that will only reduce your profit.  If you tenant asks about putting in a security system, let them on their expense.  I have 12 units, get lots of questions about tenants installing a security system, which I allow.  How many tenants have installed security system in the apartment, only one (1).  

Same with smart locks.  I can only imagine how many calls you would get asking to be bring keys to let a tenant in because the battery is dead in a smart lock or some other issue (and I have smart locks on my personal home, just none of my rentals).

@Aris Alexiou  That make zero sense.  Walk away and find a builder.  Your taking all the risk and willing to give up 50%?  That's just stupid.  Since you clearly have to capital, just hire a builder and own 100% of it.  I also think this guy is giving you a load of crap, his GC fee (based on his numbers) is 35%, which is just crazy talk.  I would not expect any more than 20% on a custom build, when you are funding the entire project.

@Yeury Galva If you are financing the property, there is significant saving to having the property in your own name. Typically any property in an LLC will require commercial financing with higher interest rates and short terms (read higher monthly payments). With that said, you will have to comply with your lenders requirements. If I were to do a BRR property with hard money or a construction loan from a bank, the property would need to be held in an LLC for the initial ownership and renovation, but then I would put it in my personal name at the time of refinance. That way the long term loan is an typical low interest, long term investor residential mortgage.

Sure there are advantages to holding property in an LLC with liability protection, but for there are increased costs if the property has mortgages.

@Trevor Bond Since I know that zoning drives what can be developed, the simple answer is yes. Zoning is one of the first things I look at when investigating a property. In my city, if the property is not zoned for what I want to do (typically 2 family dwellings), its a waste of time to consider it, as changing the zoning is almost impossible for me. I suspect the same in other cities. I assume that you are thinking about purchasing a SFH with the possibility of adding a unit to the property. This is something that your city should have well defined and published.

@Stewart Campbell Based on you numbers, I have to assume this is in a very marginal area, and those rents are most likely section 8 rental rates.  If your familiar with section 8 rentals in the area, this may be good opportunity for you.  

I suspect that if the property is truly a class C rental your cap rate would be in the 5-7 range, but if this property is a class D rental it may justify a much higher cap rate.