New Construction vs Rehab

[Aaron Murphy]

I am attempting to BRRR a property and as I have become more and more educated on the process involved with the remodel I have run into a decision that I had not expected to.

In this market people seem to either do bare minimum improvements and operate homes at the lower end of the rental market or they do a complete remodel where they open up the floor plan and upgrade everything to sell. Because of this there are'nt very many comps for a more moderate rehab (i.e. upgrade of all fixtures refinishing of walls and re siding of house but without structural changes like removal of load bearing walls re-framing of roofs etc ) . Because we don't have comps for this level rehab it seems that to feel confident in recovering or capital through the refinance we will need to do a more extensive renovation where our ARV is in the similar space as the homes that are being flipped.

The rub is that the homes we would be renovating are extremely old generally older than 1920 and have been modified with unpermitted work over the past decades leading to all types of issues. for example we have encountered roofs framed with 2 by 4's rather than 2 by 6's and where the frame has been carrying extra load from sloppy roof layering. Upgrading them to be competitive with the flip market seems like it will be only slightly less expensive than doing brand new construction in the area. 

for example a home purchased for 30k may take 85k in rehab to bring in line with the flip market with an ARV of 160-185 . However new construction for the same property may cost 10k for a lot and 130k for the ground up construction. meaning that the remodel is 82% of the cost to build and have a brand new property which can have higher value

If anyone has encountered this or has thoughts on it I would really appreciate it. below are some of the questions that I have 

1. in some ways doing brand new construction feels more controllable than a remodel(because costs could balloon depending on what we find in the walls) . Would it be easier to do this as first construction project than a rehab/remodel? either way would be using a GC to manage the contract 

2. it seems like there is a way to accomplish something similar to BRRR using the new construction. I am thinking we could build the new property, sell it, 1031 exchange the proceeds into two rentals that dont need renovation and then either refinance or place helocs on those properties to pull out the capital to do it again. Its not exactly BRRR but on each cycle of this process the generated equity from the new property would be converted into equity in traditional rentals which create cash flow. Does this process seem logical and reasonable or are there reasons i am missing that this is less preferable than traditional BRRR

3. we have considered doing the moderate level rehab even though there are'nt comps. Thinking that we could speak with local appraisers to determine how they would evaluate this type of rehab without comps. Has anyone done a rehab like this in a market where there are'nt comps and how did it turn out? 

Thanks everyone in advance for your help. Feel free to ask any clarifying questions if this is unclear.