Our Strategy starting out - Build to Sell

[Leilah Davis]

Hi all! I'm new to real estate investing and figured I'd start a thread to document the journey. Feel free to offer input/advice as I'm looking to learn from those more experienced and successful than myself. 

A bit of background - My husband has 9 years of experience in construction. He's the director of operations for a large general contractor with 52 employees under him at the moment. He has also dabbled in real estate investing, which he began before I met him. He bought his first home, the home we currently live in, about 7 years ago. It's a duplex and he rents out the other half, which was enough to cover his mortgage and bring in a bit of extra cash each month. About 3 years ago he bought his second property. It was a complete distaster (it had been abandoned and was completely infested with pigeons. I mean pigeons and pigeon poop EVERYWHERE. Pigeon nests and eggs too...) But he fixed it up and has had both units rented out for the last 2 years! He's been very lucky with great tenants in all three units. 

Meanwhile, I have 5 years of experience in a completely different industry. While I love the industry I work in, my current job is horrible and I'm ready to start the journey towards financial freedom. I've quit my job and will be leaving mid-December. I don't make very much at my current job, and we can afford to live on my husband's income for awhile, so we've set a pretty low bar goal of $30 - $40k in the next year through REI.

So here's our plan: I'm currently getting my real estate lisence and hope to have that by January. We're looking for en empty lot in downtown New Orleans (where we live) to buy and we plan on building a house to sell. We've run the numbers and we think we can make about $30 - $40k in one new construction deal. Not as much as we had initially thought, but it's something! We currently have enough that we can do the deal entirely with cash. If that goes well, we'll roll the cash from that deal into the next one and do it again. After that, depending on how those two deals go, I think we'll want to pick up the pace a bit. Even though my husband has more experience in REI, this whole thing is really going to be my baby. He'll help me along the way, but I plan on doing the majority of the grunt-work (finding the deal, finding the contractors, managing the project, finding the buyer etc). I'm also interested in pursuing wholesaling on the side, although I haven't done as much research about that.

It seems like most of the investors on BP invest using the BRRR method or they are wholesaling. I've hardly come across any investors who spend their time building new construction homes. What's the reasoning behind that? Although the two properties my husband currently owns are cash cows, he doesn't have any interest in doing that kind of deal again. He doesn't like the risk involved in buying a property and not knowing what type of issues you might run into. He also doesn't enjoy being a landlord so much. He's the type of person that is never going to feel comfortable hiring someone else to do the work, when he knows it would take half the amount of time and half the amount of money if he just did it himself. So he always ends up doing the work himself, which is pretty much the opposite of "passive" income.

So this is where we're at! The biggest thing for me right now is to focus on finding a good deal on a lot to buy in the next few weeks, get my real estate lisence, and learn more about wholesaling to see if that's something I can try my hand at. (And meanwhile still working 50+ hours a week at my day job, yikes!) Can't wait to hear from everyone on thoughts, insights, opinions, etc. :) 

[Mike Wood]

@Leilah Davis I think the reason you dont see alot of small mom and pop new home developers is two fold, 1) amount of capital required and 2) its alot of work to GC your own new build. I will elaborate.

On the capital side, unlike your scenario, most people done have $150-300k sitting around for new construction funds.  This means that you need to borrow the money, typically in the form of a new construction loan.  But those that offer new construction loans, typically require alot of capital (~25% of total costs) and experience. They banks or lenders find that type of loans crazy risky and if you have zero experience, they will be very unlikely to give you a loan.  The duration of a new construction build is also much longer than a rehab.  My builds take anywhere from 5-8 months after ground breaking. Thats a long time to have your capital tied up in one project.

On the work side, to do new construction requires tons of pre-work needed just to get to the point that you can start construction.  This included finding the build lot, developing a rough idea of the what to build (size, beds/bath count, finishes, etc), running comps to determine the area can support new construction, checking zoning and city requirements, etc.  Once you have found the right lot, you then need to secure it (purchase or put it under contract) and start the house design process.  The design process could be purchasing house plans online or working with an architect or house designer.  Just that process can be a ton of work.  This is all before you can even start construction.

Once you have the building lot and building plans set, you can start planning on construction. This includes getting bids from general contractors/builder (if you live in an area where none licenced people can not act as GC for there own new construction bids) or get bids from subcontractors.  On a rehab, the contractors/subcontractors can walk thru the house and take measurements and see what they are bidding, on new construction, they only have a set of building plans.  Alot of good contractors just can't understand how of bid new construction (I think they struggle to understand building plans).  I have had a vinyl siding contractor tell me that he would not bid a new construction job until after the house was framed and sheathed after providing the building plans to him.  

Additionally, just because there is not surprises with the build, there is still plenty of ways to go over budget on a new construction project.  Allowances in build contracts is one that can really drive the costs up.  If you dont do a good job in the planning/bidding phase, you can easily miss or under estimate allowance items.  For example, lets say that you originally plan for some basic flooring and put in a material allowance of $3/ft2 for flooring and the house has 1,500ft2 of flooring required.  After you start construction, you decide that the market requires hardwood flooring for your build to stay competitive and now the costs are in the $10/ft2 range, which means that you just added $10,500 to your build (over the allowance).  There is also the potential for change orders, once the build starts and you realize that the build plans aren't what you wanted or something just needs to change.

Now for some specific's of your proposed build.  In New Orleans, you would will be able to act as your own GC of this build.  All new construction must have a General Contractor pull the building permit.  This will mean that your going to have to include the GC costs in your build (assuming that your husband is not a licensed GC able to pull permits in the city).  Also, there are lots of areas in the city that can NOT support new construction pricing.  Prices have been increasing quite fast and alot of contractors are very busy right now.  In our city, its hard to keep costs (land + build) under $100/ft2, so in order for the deal to work, comps need to be north of $125/ft2, which is not everywhere.  In the area's where the comps are high, the land costs are also high, which often makes the deal not work.  

You did not mention what your budget was, but I assume its in the $150-200k range for a smaller 3/2 house.  Assuming that you have included all of your costs (land+build+holding+sale) in your numbers, $30-40K is not a screaming deal, but may be do able.