New SFH construction valuation

[Aidan Nguyen]

Hi everyone,

My wife and I have been in the STR space for a while now and are looking to shift towards long-term rentals. The market in Sacramento is pretty competitive, so we've been thinking about purchasing infill lots to build new SFHs to add to our portfolio. I've done a ton of reading/research and have learned a lot of useful information, especially from many of the posts here on BP, so I'm grateful for the tons of knowledge made available within this community!

Our plan is to purchase an infill lot with cash and take a construction loan out for the build. The issue I'm running into with the lots I've found, and I've looked at several different areas within and surrounding Sacramento County, is that the numbers don't pencil out. 

For example, this available lot at https://www.zillow.com/homedet... is listed for $159k. Accounting for $25k in building permits, school zone fees, etc, would already put it at $184k. We'd consider building a 1500 sqft home on the lot @ $250/sqft, so that would total out to $559K  ($375k build budget + $184k purchase/permits). I ran some comps around the area and the average price per sqft on home sold within 12 months is $336/sqft (average price sold of selected homes was $405k). So taking that figure, the after build value estimation would be around the ball park of $504k, which would put us in the negative.

So my questions are: Am I approaching this wrong or are my figures off? Are new home/builds valued differently? Assuming the response may be that the lot is over priced; therefore, I would need the seller to reduce the selling price by 55k just to break even in this situation, but I dont see that happening. So would I need to resort to wholesellers to get a better deal on lots? Lastly, with rates being so high, would this even be a good time to explore this idea? Even when I'm looking at purchasing to rent LT, the area rents typically don't cover the mortgage expense.

Any insights is greatly appreciated and thank you in advance!