Where to get more information on building to rent?

Question

Hey guys!

I've been looking into the real estate side of investing for a while now, like watching youtube vids and getting input from a friend who flips houses for a living. The side of real estate i'm really interested in is rental income properties, passive income would go nicely with what I currently do for work and would be nice to own a handful of units to sit on and possibly become a full time landlord overtime(I know, its always too good to be true.)

However, the issue is that there's really no good multi-family properties around me for sale(I live in the chicago land/cook county for reference). My price budget is around $600k, and all the great worthwhile properties are usually above $1mil, while everything within my price range either requires a lot of work to put in, or won't have that great of a cash flow since all the properties are really old, in shoddy neighborhoods, and usually has the landlord paying for most utilities. When I did my basic little math, it looked like i'd have a greater cash flow if I built a new property and rented it out instead, since then I could attach each unit its own water or gas meter so the tenant would have to pay their own utilities.. Plus, in the areas i've been looking at (in the suburbs) have been in high demand for housing with the average rent being reasonably high. I wanted to start somewhere small, like building a 4 unit apartment building to start off.

So, my question would be is it difficult to get into building to rent? Right now I have around 100k in liquid cash I could put somewhere, with the ability of bumping it to 150k if really needed. My credit is solid, nearly 800 so it shouldn't be too hard to get any loans.. Of course I wouldn't do this straight away, I need to learn far more into it before even stepping my foot into the door, so where could I learn more information on the steps needed to take into doing something like this? Learning things like the type of loans I'd have to apply for, what sort of companies do i need to hire, do i handle the permits or does the construction company do that, etc etc... Or, another question would be, are their companies or something that do all this sort of work for you but work off a commission/percentage/flat fee sort of thing, just as long as they build the property for you? Or, if you have any better ideas where I should invest my money in, i'd be more than happy to listen! Thank you!

John Warren · Answer

@Faiz Kanash this is an interesting post for sure. Building to rent would have a lot more risk than buying something already built due to the high construction costs and lag time getting materials right now. I totally get wanting all your utilities to be tenant paid, but this isn't very common in Chicago due to the age of the building stock. Even the nicer areas tend to have central boiler systems and central hot water tanks.

Are you looking in areas that have a bit of a balance? I normally look more in working class neighborhoods. Look for the B- or C+ type areas to find cash flow. Chicago is such a great market, and there are so many great areas out there.

Rick Albert · Answer

I'm not seeing how building brand new is going to pencil out. I haven't built in Chicago but generally speaking:

-If you have no building experience, the lender may not give you money regardless of your financial qualifications.

-Did you factor in carrying costs? It might take you 9 months to a year to build and the lender is going to want to get paid during this time.

-Why not go after fixer properties and renovate? Maybe there is a hard money loan out there that works and then you refinance out of it.

-Can you alter leases later on? For example the ones where utilities were included, when lease renewal comes up, instead of raising rents you just say that they are responsible? You can explore submetering.

-For what you are looking to do, is there a demand? Just because you don't want to pay the utilities doesn't mean that tenants are going to be okay with it without a discount.

I'm not saying don't do it, I'm saying look into the details and I think you will find the right answer for you.

Jonathan Klemm · Answer

Hey @Faiz Kanash - Welcome to the Chicago BP community.  You'll finds tons of helpful people and resources here.

I actually think there are still decent deals and numbers here in Chicago if you have the right team feeding you deals.  Not sure which neighborhood/areas you are looking but I'd connect with some of the savvy investor-friendly agents here on BP like @John Warren, @Michael J Scanlon, or @Edgar Barbosa.

With the cost of construction (at least here in Chicago) I don't know where the numbers would make sense to build to rent.  Would love to talk to you more and see where that makes sense.  I have several friends (@Andrew Holmes is one of them) who are doing it down in Flordia, but the labor is much less expensive and the rents are higher.

Justin Fox · Answer

Talk to some local credit unions about a possible residential construction loan for a 4-unit and tell them you'll live in one of the units.  You'll probably need to hire a contractor.  Just stay involved, take notes about the permit process and order of operations and when inspections are done.  You'll be paying the subs so keep a contact list.  If you want experience, put your time and money on the line, only way to do it.

I would get a bid from contractor(s) based on your sqft, that it's two story, the number of beds/baths, roof type and exterior material, before purchasing and solidifying a plan.  I would preferably go with a contractor that provides a cost-plus bid approach.  I would then talk to some appraisers and ask what new construction residential is appraising for.  If the appraisals are covering the loan amount, cool, but does it CF at that price?  If it doesn't appraise, you'll have to decide if it will cashflow, is it enough and is it worth your liquidity?  The market can change a lot (especially now) over a year+ of the building process (material costs, interest rates and etc).

You'll need to talk to some local building material companies as well, see what lead times are on windows and other materials.

Get bids from a few contractors, if one stands out as being a deal too good to be true, steer clear.  You'll just get notified every line item that you went over budget and be out of pocket and pissed off the whole time.

Honestly, I would only do this if I had a majority of the cash required.  That way you could avoid carrying a large interest bill during construction to boot.  The #1 indicator for development success is the cost/prep of the land acquisition.  This is were cold calling and tax sales come into play.

Faiz Kanash · Answer

Update: sorry for any grammatical errors!