New Build to Rent -- Is it a pipe dream?

Question

This would be my first venture into real estate so I'm not sure how to go about figuring out if this will work.

I would like to build new houses to rent.I'm unable to do any of the labor and quite a bit short on cash.

However; I have 4 acres of unimproved land in an unincorporated part of a north east suburb in the Dallas area.

2000 sq ft houses sell for around $190 sq ft and rent between say $1700-2300.

In addition to building the actual houses it seems like this would require a lot of other large expenses for example a road (possibly gravel), electricity, water, septic systems, fiber, and cable services installed.

I get the impression, if this was a financially viable strategy there'd be more talk on Bigger Pockets about it.

When does building new houses to rent even make financial sense?

Where to go to learn more about doing this?

What's your opinion on new builds to rent?

Scott E. · Answer

Is it a pipe dream? Yes.

The cost of everything (land, labor, materials) are just way too high right now. I'll save you the time - As your first venture into real estate you're not going to find anywhere where the numbers make sense to develop single family homes solely for the purpose of renting the homes out.

Pick a different strategy for now. Consider this business model 5-10 years down the road.

Bruce Woodruff · Answer

@James Hamling The OP started with this:

I would like to build new houses to rent.I'm unable to do any of the labor and quite a bit short on cash.Does that still work in your world?

Bruce Lynn · Answer

The numbers as presented don't make sense.   Nice thought, but no way.

You're right...as a developer you will likely have to pay for streets, curbs, water, sewer, power access, depending on what county you may have to get zoning approval.

You're probably better off flipping the lot to someone else who is experienced doing this.

The majority of developers at some point get shirtless and pantless and these numbers tell you why.

Many many investors split up all these ideas.   Buy/Sell Land, Develop, Build, Rent, etc.....don't feel like you have to combine them all.   Lots of different expertise to roll them all into one project.

James Hamling · Answer

Well @Alvin Bittner, according to some of these replies I am apparently living a "pipe-dream" because I am doing it, and we are making $ hand over fist.

I think it's safe to assume none of these pessimistic replies are either in the game or gave it much thought because one of the big advantages is elimination of the cap-x/maintenance factor. The new-con units we build/buy have 10yr warranties, so we have this beautiful window of zero costs for such, that matters.

Next, we do strategic placements and enjoy not only general market appreciation as a whole, but forced appreciation. In a world where people are pumped about making $400/$500 per month on there properties, we are clearing $2k too as high as $4k. Ever gone to the closing table on an existing home purchase and have seller say they will give you $40k then and there if you just sign the property back over to them? Well, seen it in new-con build-4-rent.

Just like any strategy it's not a silver-bullet "perfect" strategy for any and all, but to say it's bad, lol, that's just plain ignorant.

Generally speaking we enter with a goal of net-0 on cash-flow for 1st year, into 2nd. With our placements as of recent and rent appreciations, we have been enjoying cash-flow net positive off the bat, although not the norm, a couple hundred negative monthly on cash-flow can be expected, so it's not for those who "need" that monthly income. It's more a focus on "Pyramiding", the equitable returns, for a 3-5yr window to consolidate gains and re-deploy.

Now, I am betting many will say "see, loose a few hundred at start, OMG, what a horrible thing", which is completely blind to the fact that with correct placement it's in an ascending market, and what happens there, rents go up, often considerably, and again equitable gains. I will happily "loose" $200 per month to gain $2k in a piggy bank, that's a 10X factor buddy. And it isn't really a "loosing" of $200mnth when your paying down mortgage right, getting a $2k mortgage payment for $200, again, I see that as yet another 10X factor.

So let me ask you, if you got a brand new property, had to do 0 work, got an A+ tenant because it was a new home in a hot trending area (if area wasn't "hot" why would builder be developing there?) and for first year it cost you $2,400, the second year $700, and the 3rd year you pocketed $1,500, AND you had $117k in equity, how would you say that did? Is it a horrible deal? That's the correct focus on build-4-rent, equitable gains in short term, cash-flow in long term.

But hey, what do I know, I'm only doing it....

Point is, to answer the question, yes build-4-rent can be a great strategy, like many others, and it can be done wrong also, just like any other strategy.

Pete Harper · Answer

Using your numbers at $190/sqrft for 2000 that's $380k. To cash flow you'd need to rent for $3500+ a month. Sounds a bit lean to me

Have you priced out new construction for comparison? Classic Make vs Buy.

Bruce Woodruff · Answer

There is no money in this game at this point in time. You will be underwater right from the start. Even if you had your own cash I would not do this.....

Maybe you can find a builder to partner with - you provide the land, he does the rest. But then your land better be in a very desirable location....

Nick Belsky · Answer

@Alvin Bittner

I got to go along with @James Hamling here.  I am funding new builds way more than a year ago and I help with the perm financing too.  Investors are making a killing right now.  To say otherwise is simply not accurate.  I am doing GUC for investments in 7 states right now and cash flows are solid by nearly any investor's metrics.  Plan for the worst and fight for the best.

Materials are an issue in some markets, yes.  But work with a builder who knows how to keep costs down and get the builds done in a timely manner.  You definitely don't want to get stuck in the short term, high interest loan with no materials on the ground.  You mention East Dallas... I know a fantastic builder in Blue Ridge who is looking for a new project to tackle... He's been building 6-Plexes at low costs and getting strong ARVs on them once completed.

Let me know and I can make an introduction.

Cheers!

Nonkhane Nonnie Saycosie · Answer

Keep in mind everyone is on their own journey, and not equipped with the same set of "tools".  Mindset is key; keep pushing until you find your niche! Check out BP podcast episode #599.  This mind-blowing episode opened (for me) a whole new mindset, and shifted my REI paradigm.  Hope this helps, and keep pushing.  You got this!

Colton T. · Answer

I would avoid @James Hamling's advise like the plague. There is no new build-to-rent projects in North Texas clearing massive amounts of money in rent from the jump. Even if you own the land free and clear, 4 acres is not enough land to get any economy of scale going for your development and you'd be spending a fortune on the planning, zoning, materials and development to only bring in what the market demands in rent. You might be able to build 20-25 townhome units on it, if you're lucky. Now, you might start making reasonable cash flow 5-10 years down the road if rents continue to skyrocket in the area, but it's a long-term game and it's not something you can afford unless you have several years of costs saved up ahead of time. Plus, why not wait until materials/labor become more affordable again and save the cash flow headache.

I would either hold, sell the land or subdivide and sell smaller lots for a pretty penny. But the type of project you're hoping for is best suited for an experienced developer who wants to build a community for a slow-growth REIT or private equity fund.

Lauren Sennet · Answer

Hi Alvin, a way to start this would be to get a construction loan for your own personal residence. Get preapproved for a mortgage, see what kind of a budget you can plan for and start looking at builders/architectural firms that you can work with.

The value of the land is your down payment/collateral so you shouldn't need to bring much cash to the table.

Though I'm not familiar with your specific market, "affordable" housing is so scarce in many places you could always sell some of your first new builds to grow your resources and fuel the LTRs you're looking for.

Build your primary residence. Start building your next primary residence after a year in the 1st build. Sell the 1st house (preferably after 2 years of ownership to avoid the tax bill). Move into the second house. You could keep doing this but at least you'll have the cash from the sale(s) to give you additional options for investment loans moving forward.

It's worth exploring the possibilities. Good luck!

New Build to Rent -- Is it a pipe dream?

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