If you build it will they come?

Question

I live in CA and everything out here is overpriced.  I have found that if I were to purchase the land and then build I might be able to get more value because I can build higher and put more units into the lot.

My question is whether people would consider building your own rental property a better or at least a viable strategy as opposed to trying to talk unrealistic California owners down in price.

Daniel Y. · Answer

Hi Charles,

I am in the same boat as you. Here is my opinion on the whole situation. As far as land and building goes, I would either buy land, subdivide, and build SFH to sell.

I would not try to build rental properties here. The reason, super capital intensive, strict regulations that will lengthen the time the money is tied up, and importantly there is already very strong competition here. Irvine Company, I am sure you have heard of, has a large present in the Orange County area. There are also a lot of other companies that have bought land and build in prime places. If you want to build to rent, I am not saying it's impossible. I am only saying that you will find okay to good deals due to competition, and it will take a very very long time, probably not even in this life time, for you to make your money back.

The other thing is, it will take a long time for you to build everything. You do not know how the economy of OC, or our nation, will change in that time. EVERYTHING is overpriced in OC, and this pace and pricing is bound to burst sometime.

Just my 2 cents.

Jay Hinrichs · Answer

@Mike Reynolds  our building permits and SDC charges on the west coast are more than it cost you to build a home in TExas.. I spend between 50 and 90k before we break ground.

you guys have it made in the shade when it comes to building as cheap as you do.

for pure vertical 100 bucks a foot is bare minimum and in CA its probably 150 to 200

Jay Hinrichs · Answer

@Scott McMillan  SDC = System Development Charges.. in many jurisdictions on the west coast this is for ... Sewer tap  Water Tap  off site storm mitigation.. Park fee's School Fees and any other fee's they can think of.. then you have your building permit fee IE plan check and the actual building permit that is usually 2 to 3k. depending on size.. so all in this can run a low of about 15k to 50 to 70k depending on jurisdiction

Perk test is a Peculation of the soil  test  IE  how quick will water be absorbed.. in heavy clay soils this can be an issue along with very high ground water.

Tom Cafarella · Answer

Hi Charles,

My strong inclination would be to say no, you would not get a better value there.  Highest and best use for many multi unit buildings ends up being to sell them as condos and my guess is that you would be competing with developers(like myself) who build condos and will be willing to buy based on the resale of a condo rather than a rental price.

The other issue is that if you have never done a deal like this before, I would highly recommend you not doing a big new construction project as your first.  Between carrying costs, building expertise needed, zoning, permitting, etc. there is a lot of room for things to go wrong.

Getting good deals on multi familes right now is definitely tough as the price to rent ratios in hotter markets make it more difficult to cash flow.  However, if you are able to get to seller’s directly, you can still get great deals anywhere in the country.

Mike Reynolds · Answer

@Jay Hinrichs We used to have a state licensing agency TRCC but it went away because the powers that be thought it was  unnecessary. I think at its best we had 3k contractors paying fees for the year. That's about all your going to find that have insurance here residential wise anyway. That's why I got out of it in '08 and just do my own stuff now.

I hear you are doing a lot of spec work though. That does seem to be picking up nicely right now.

Jay Hinrichs · Answer

@Mike Reynolds  Texas is simply another animal...

were we get killed is SDC charges IE systems development charges.. water sewer storm parks schools  these are 25 to 50k per lot... depending on which city... CA can be double that.

then you have to buy your lot.. our cheapest lots are basically 100k per.. so your in the land 125 to 150k before you have done anything.. then there is cost of capital...

Now we can build here for 85 to 90 bucks a foot for vertical.. 9 foot on main 8 second story.. Slabs are unheard of its all pier and post.. builder grade finish's .. Hardy plank siding.. asphalt roofs.  standard lot size 5k sq ft.

If you get in an area that has no sewer ( generally the county)  septic's run 10 to 40k  depending on the system you have to use.. And in some areas of CA like Sonoma county you can only do a perk test if they have had a certain amount of rain fall in the year.. the drought play heck with many who had to wait years to do a perk test.

So that's the bottom line..

And like in Palm Springs  higher end homes there are 400 to 500 a foot to build .

Mike Reynolds · Answer

@Charles Oglesby It depends really. I have a friend that is also a contractor and he only builds his own. He does only section 8 and can build one (1000 sq. ft.) with his crew for 50k +/-. He buys struck off land in C- areas. I am a builder and prefer to buy depressed houses in semi rural areas and make them better.

What would you pay per sq. foot in Orange county to have someone build you one? Take that and run the numbers and see what it would bring. Its my guess it would be close to the same as buying one turnkey. But with building one at least you would know what you had.

Scott McMillan · Answer

@Jay Hinrichs  I've enjoyed reading this conversation.  Can you define a few terms for me?

What are SDC charges?

What is a perk test?

Thank you!

Mike Reynolds · Answer

@Jay Hinrichs Yes I have heard. I have never built on the west coast. I just never got the opportunity yet but it would be fun I think. Now that same house my friend builds would cost someone else around 90-100k. He doesn't factor in the OH or profit on those builds. I told him he was wrong for that but he just cashes his checks and smiles lol.

Most parts of Texas don't even require a perk test for septic tank unless you are around Austin areas. That's changing but slowly.

If you build it will they come?

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