When does it make sense to build instead of buy?

[Alec McGinn]

Hello BP, When does it make sense to build on an empty lot for cash flow? I’m asking because there is a vacant lot next door to me and the owner tends to become tax delinquent frequently. Ideally, I’d love to obtain the property and get a duplex or 4-plex built on it. Is building favorable for cash flow?

[Allan Smith]

You can definitely cash flow on a build. Just make sure you buy it for the right price. I can think of a couple advantages (like the build I'm finishing up, tenant moves in this weekend):

1. Buy the lot in cash, and the bank will likely finance all of the construction costs, and roll it into a long term loan once build is finished.

2. Create equity for yourself. This build will cost me a little under $100k, rents $1200, and appraised at $145k, for example.

3. New houses have the least maintenance you can find!

Of course, this does depend on your local market. If there's a flood of extra houses, existing houses will be much cheaper than paying someone to build. Also, if you have a market with a lot of construction, build prices will be high and may take away from your ROI. Please also consider the zoning of the lot as it may only be possible to build a single family, limiting what your gross rents would be.

To answer your question simply, it makes sense to build on an empty lot and rent when you can buy it cheap enough!