SFH New Construction Advice

[Michael A.]

Experienced spec SFH builders - what is your best advice for someone who wants to build small properties in C neighborhoods that are gentrifying? I am an architect and have always wanted to finance and build my own work. I closed on my first rental in my city recently and have my sights set on this as a next step in my career. Really appreciate the insight.

[Marcus Auerbach]

Depends on your market prize levels. In Milwaukee I can't build for the cost I can buy, not even close. Typically new construction is twice the price of existing homes. If it doesnt appraise you cant finance it. Only A neighborhoods would make sense, but there the land is prohibitivley expensive.

[Michael A.]

@Marcus Auerbach I appreciate the insight. On paper it is all about the lot price to me right now. The small area I’m interested in working has flips selling in the $100 to $120 per square foot range very quickly.

I am simply chasing the desire to design and build my own simple work. If I build these skills in a lower risk scenario then I am hoping to not only take a small return away from it, but valuable experience as well that I can hopefully scale.

I am confident that I can build for just under $100/sf and sell in the $125/sf range. I am not sure that leaves much room for a return right now.

[Bryan Devitt]

@Michael A. Do you want to build a business or do you want to be fulfilled? You're talking about a pet project essentially that could cost you everything you own if everything goes wrong. Sure, best case you make 20% (standard for spec in my area) but what is worst case? What if labor prices jump? What if lumber jumps? What if all other materials jump? What if there are multiple break ins and tools are stolen? What if subs take the money and run? If those all happen at the same time, where does that leave you? If you can afford to lose your entire investment and still be good, go for it. If you can't, stick to investment properties and when you get enough of them, they'll pay for you to jump into whatever new venture you want and if you lose your money doing that, you'll get more next month. I have seen a LOT of people lose everything doing spec and none of them ever saw it coming

[Michael A.]

@Bryan Devitt Your perspective is precisely why I felt the need to reach out to this community. I’m 75% done with saving for my second property. Likely best to pursue that route as I expand my portfolio. And yes, my aim is to build a business and not necessarily amuse myself through pet projects. I also thought to myself at one point that it would be great to build a rental portfolio that one day could help finance new construction with its revenue. Patience is a virtue I suppose. Again, thanks for the input.

[Aaron Schump]

I vote to build. The advantages of your experience in practice can and should be leveraged. Most banks will take your architectural fee as credit. Think 20% down reduced to 10% less your fee. And/ or you could use the structure as your primary for 2 years after construction before you sell to negate the capital gains. Too many other ideas get into here... but there are many architects moving in the same direction. (I certainly am) A good place to start is James Petty's book, Architect & Developer: A guide to Self-Initiating Projects.  https://www.amazon.com/Archite...

[Bryan Devitt]

If you do want to build, wait for a downturn. Right now everything from materials to labor costs are at their peak and they fall dramatically during a recession. It might be a year, it might be 3 but instead of paying $100/sq ft you might be able to build for $70-80/sq ft or less. Then you might be able to build new and instantly make money turning it into a rental. If the demand is there you might be able to fill it and sell it as a turn key for a much larger profit 

[John Pierce]

@Michael A.

I'm considering buying lots in the city of Richmond where previous houses have been demolished and building new houses on them. I'm specifically interested in building new duplexes, but have never been through the Special Use Permit process in the city.

[Michael A.]

@Bryan Devitt Excellent advice here. My big takeaway right now is that unless you’ve structured something with good numbers it is best for someone with very limited funds like me to keep saving for my next buy and hold rather than taking on a higher risk new construction project.

[Michael A.]

@John Pierce I was preparing to help someone navigate this process last year for a lot split and new townhouse construction. Financing stalled their particular project however.

[Brandon Richey]

@Michael A. New construction spec builder here ! I only build specs, no customs. I would never build in a C neighborhood. If

Your banking on the lot price to make the deal all work it's not a great deal. It's better to pay market price for a lot in an area with a bigger spread than to build a corner cut house in a C area and home you can make a little spread . My advice build in A to B plus areas try to make your house not look like a spec. For example in all my spec I do 8 foot doors. That's a thing I do. TEXAS farmhouse with 8 foot doors, a vaulted ceiling with wrapped beams etc. it's the look that people put in the big expensive homes and I try and give the more moderate homes the same general look. I think specs are an article. If you go out and try to see how cheap you can build I think you will struggle. If you try to build a good house with some extras and some smart engineering to bring cost down and try to make 35k per house you can do it all day. Maybe find an awesome side job. I used to flip a lot and I'm slowly getting out of the flip world and entering just needs build specs along with rentals of course.

[Marcus Auerbach]

Originally posted by @Michael A.:

@Marcus Auerbach I appreciate the insight. On paper it is all about the lot price to me right now. The small area I’m interested in working has flips selling in the $100 to $120 per square foot range very quickly.

I am simply chasing the desire to design and build my own simple work. If I build these skills in a lower risk scenario then I am hoping to not only take a small return away from it, but valuable experience as well that I can hopefully scale.

I am confident that I can build for just under $100/sf and sell in the $125/sf range. I am not sure that leaves much room for a return right now.

You may want to confirm that number with a local builder - I don't know how you can build for $120; even if labor is cheaper in VA then Wisconsin, your material cost is the same, lumber has gone up so much, same for most other materials. My cost is about $205 for premium SF, but if you value engineer the building it can be done for about $150 to 160, plus lot, site prep and impact fees.

I have looked into building a duplex in the city and for a 3/3 with 2 baths each and a garage we were at $360,000 plus lot and landscaping. Bigger bedrooms and living room would have pushed us to 380k, but that's well worth it, because it's cheap square footage. A tear down building on the east side is at least $100 to $150k, cost of demo and site prep maybe $20k. So all in $480 to $530k. Rents in the area are usually $1,500 to $1,700, but for new construction you can probably push it to $2,000 per unit.

Not a very attractive bottom line, to start with or the first 5 years, especially considering the time it takes and construction risk. However, with deep enough pockets and time to wait, I would say in ten years with moderate appreciation and rent growth it will be worth it. That's the beauty of rental model, with time the numbers get better.

[Matt Groth]

Originally posted by @Marcus Auerbach:

Originally posted by @Michael A.:

@Marcus Auerbach I appreciate the insight. On paper it is all about the lot price to me right now. The small area I’m interested in working has flips selling in the $100 to $120 per square foot range very quickly.

I am simply chasing the desire to design and build my own simple work. If I build these skills in a lower risk scenario then I am hoping to not only take a small return away from it, but valuable experience as well that I can hopefully scale.

I am confident that I can build for just under $100/sf and sell in the $125/sf range. I am not sure that leaves much room for a return right now.

You may want to confirm that number with a local builder - I don't know how you can build for $120; even if labor is cheaper in VA then Wisconsin, your material cost is the same, lumber has gone up so much, same for most other materials. My cost is about $205 for premium SF, but if you value engineer the building it can be done for about $150 to 160, plus lot, site prep and impact fees.

I have looked into building a duplex in the city and for a 3/3 with 2 baths each and a garage we were at $360,000 plus lot and landscaping. Bigger bedrooms and living room would have pushed us to 380k, but that's well worth it, because it's cheap square footage. A tear down building on the east side is at least $100 to $150k, cost of demo and site prep maybe $20k. So all in $480 to $530k. Rents in the area are usually $1,500 to $1,700, but for new construction you can probably push it to $2,000 per unit.

Not a very attractive bottom line, to start with or the first 5 years, especially considering the time it takes and construction risk. However, with deep enough pockets and time to wait, I would say in ten years with moderate appreciation and rent growth it will be worth it. That's the beauty of rental model, with time the numbers get better.

 Doing similar work here, building a duplex right now to hold.No margin on c neighborhoods, and unless your market is very different, 100 per foot is a dream.  If you sell at 125, but the market dips 5 percent, or construction is plus 5 percent, it is a loser.  I would so build and rent, or do a or b neighborhoods. Cheap lots are cheap for a reason.

[Scott Schultz]

I Just started building a Spec I will live in for a couple years and as soon as i prove concept and have my numbers verified (when complete) I plan to build another on the lot I own next door,  My calculated build cost will be $125/sq ft (for just main floor finished, that will drop to $85/sq ft with my lower level finished, thats with me doing a ton of work myself, for example, I am the GC (Licensed) , I am the HVAC Contractor (licensed) and I will be doing all the tile, finish work, cabinets, flooring, ect. and for my house I will do the lower level framing, electrical, plumbing, and finish work after occupancy. If I hired that all I would be in the $150-175/sq ft. I got my lots at tax sale, and sold 1 of the 3 in a row, I have also run into snags. like my sewer connection was 17 feet down, so I had to get a big contractor in to dig deep with steel plates to prevent soil from falling in, cost an additional $9K I did not plan for. Weather has been difficult as well, because Im not a production builder subs push me back to accommodate their regular clients. my foundation walls are up, and should be back filled this week with framing starting soon. fortunately in my location the value of the completed project is worth quite a bit more than cost, so I should be ok, but that would not happen in a C area. I would doubt the finished value would be even equal to the cost to build. much less have built in equity. 

[Anthony Rosa]

Is it worth it considering the cost of vacant land or do you have to buy an existing property to knock it down?  Not sure if it would be worth it unless its MF or class A area.

A friend of mine bought land and had a beautiful pre-fab home installed after the foundation and utilities were set. He went pre-fab route because the price was better than on site stick built and there were no setbacks do to the weather. 

[Scott Schultz]

@Anthony Rosa When you say Pre fab, are you talking about Modular (built off site to UDC) or Manufactured (built off site to HUD code) most municipalities will not allow Manufactured, and many subdivision covenants do not allow any home to be brought in, they must be site built. generally the only savings with factory built homes are time, the cost is pretty much on par with site built vs equivalent Modular, Manufactured the same floor plan will be about 15% cheaper, but your resale will suffer dramatically, as Manufactured homes tend to depreciate over time.

[Anthony Rosa]

Originally posted by @Scott Schultz:

@Anthony Rosa When you say Pre fab, are you talking about Modular (built off site to UDC) or Manufactured (built off site to HUD code) most municipalities will not allow Manufactured, and many subdivision covenants do not allow any home to be brought in, they must be site built. generally the only savings with factory built homes are time, the cost is pretty much on par with site built vs equivalent Modular, Manufactured the same floor plan will be about 15% cheaper, but your resale will suffer dramatically, as Manufactured homes tend to depreciate over time.

Modular home, permanent home placed on a foundation and no subdivision.  My friend said he saved about 12% going modular as opposed to on site stick built and saved a couple of months on completion date.  He bought 3 acres of land in NY (50 miles north of NYC) and the home was built in PA. Its a beautiful 3500SF colonial with an unfinished walk-out basement.

[Scott P.]

I like the idea of building new versus buying old.  15-25 years ago, in my area, the price of new was almost as low as the price of existing.  At the current time, new is more expensive than exisitng, which makes sense to me but makes it hard for a starter person like you to build new and rent or sell.

I would lean towards trying the new build since you'd learn a lot for future use.  Just keep it small and don't over extend your finances.