Build & Hold - A valid strategy to build a portfolio of income properties?

[Max Baender]

Hi there.

I am pretty new to real estate investing. Currently, I am trying to evaluate a strategy to build a portfolio of income properties in the Greater Atlanta Area.

This thread is to pick your brains and to get ideas/ feedback for a "general strategy":

So far, I have been reading about "buy and hold" and it seems like a pretty straight forward approach. However, I couldn't find anything about "build an hold".

I am currently working on getting my contractor's license in the state of Georgia.
Originally, I "only" wanted to build our own family home, and to get upfront experience I apprenticed with a local builder for about a year. I know that I don't need a contractor license to build me own home. However, as I learned some months into my apprenticeship, banks won't lend me any money if I don't have a licensed and insured contractor doing the work for me. So, why not getting a contractor license then, if I am "half way there" with my apprenticeship anyways?! I know that this will still take me quite some time, but let's ignore that for argument's sake.

So, here's the idea: 

A contractor has roughly a profit margin of 20% in each house he builds.
This means that when I finish building our own house, I have about 20% equity in that house right from the start. (I don't have to pay myself. Fortunately, my wife's income is sufficient for us.) Now, I could take that equity - as a HELOC for example (any ideas?) - and use that to finance the construction of the first income property. 20% is what a bank asks as down payment for a building a new construction. So from there on, the whole thing could snowball into a considerable portfolio of income properties as the profit margin/ build-in-equity could be used for the next one.

I know, I know... it sounds easy in theory and I know that I will face many challenges along the way. There are still many things I need to figure out (where, single/douplex/multi-family, etc, pp), but I don't believe everybody had it all sorted out when they just started. 

I want to take it step by step anyways: First the license, then our own home. Then I can take it from there.

It might be a bit pre-mature for this thread and please forgive me my naivety... But I guess without that and a good portion of excitement nobody would venture into new undertakings like this in the first place...

I'd be happy to hear from you what you think about this idea and approach.
Perhaps, you have some tips and some "watch outs" already for me to consider.
Any feedback helps.

Thanks so much for your time and your thoughts.

Best regards,

Max

[Mehran K.]

There are plenty of people that make this strategy work, but I'd say there are going to be a lot of moving parts to start out with :) It doesn't even have to be a spec build. Many times investors buy properties that can be rehabbed like flips, but instead of selling it, they refinance and keep the property as a rental. 

You'll need to learn what makes a profitable spec build/flip. At the same time you'll need to learn what makes a profitable rental, and be sure to analyze the deal as both. Does the deal make a good rental after it's refinanced?

My concern with this strategy is that 20% "rough" profit margin. There are so many factors that can affect that, the profit isn't always guaranteed. How much you buy the land for, how well you stay under budget on the build, the actual appraisal value when you either sell or have it appraised for a refinance/HELOC.

As a brief eye opener to get you thinking about some of the metrics, look up the 70% rule here for flipping, and the 50% rule as far as expenses goes for rentals. They're just rules of thumb, but you'll see what I'm saying :)

[Mehran K.]

Example of one of my deals where I did this exact thing with a rehabbed property. The appraisal came in below expectations and I wasn't able to pull out all of my equity. The property is still a great rental though!

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