Build to Rent

[Nate Barbee]

Note to everyone, listen to BP podcast #168 guest starring Cameron Skinner. I had shifted my research a couple months ago to lots/land for development opposed to battling the red hot North Texas market for deals. Keep in mind I'm a buy and hold investor. My land development strategy wasn't clear. These were the questions constantly churning in my head.. Do I buy 100 acres, develop the land (without building) subdivide and sell? Buy 20-40 acres on the outskirts of town, subdivide into smaller tracts and build single family homes to sell? Or buy a lot within the city, build property and possibly sell or rent. Good news, this week's BP podcast has directed me to a clear path to start the real estate development process. I'm strictly researching lots within towns or cities east of Dallas, TX to build a single family home, or duplex to rent. Has anyone gone through this process lately? Any recommendations or problems you encountered along the way? I still work my day job which supplemented the down payments for my first 4 rentals. I'm looking to shift into real estate development full time. Nate Barbee (432)634-0656

[Tommy F.]

Nate

I have some feedback for you regarding land development. Disclaimer, I am not a developer by profession, but I own 9 acres I've tried to develop so I can share some lessons. 

My intent was to build a house on the land for my family, but that backfired during the financial crash. I had to move on to other things, but kept the land. I'm a buy & hold investor renting1 single family house and 1 townhouse in the Charlotte metro area and trying to make the move into bigger things, so BP is a great place to learn. I, too, listened to BP 168.

I assume you've run the numbers (land cost to improvement cost) and you're confident about the value of the finished product and rents it will bring. I have some lessons learned and things you should consider and/or research. Some of this stuff you may or may not know, so I'm just laying it out as if you know nothing and it's in no certain order.

You need to find out the zoning. Can you get density increased? At what cost? Getting land entitled can take months maybe years. You must appear before town planning staff, then planning board, then town commissioners, and it all takes time, and they often want things such as road widening improvements in the area of your development, contributions to the cost of street lights, they want impact fees, and if schools are overcrowded they may make your project next to impossible.  Also, just because you want to build doesn't mean surrounding neighbors want it. In North Carolina, landowners with contiguous borders to the proposed development are allowed to file a protest petition which can derail the developer temporarily and maybe permanently. Also, citizens get to attend town hall to speak for or against your project in an attempt to influence commissioner's vote.

Back to zoning - does the zoning allow for clustering, if so, how many acres are required to cluster? Often there is a minimum, i.e. 10 acres. Clustering allows you to maximize acreage even if some area is not good for building. Example, imagine a perfectly flat 10 acre tract. If you have R40 zoning (1 house per acre) then you still may not get 10 houses due to streets which is another subject, then setback requirements, and easements/rights-of-way. You may only get 9 lots on 10 acres. If you have 10 acres of marginal land (hills, creeks, etc) you may get even fewer than 9 lots unless clustering is allowed. Imagine 10 acres of which half is buildable and half is not. Clustering allows you to use the entire 10 acres square footage in your calculation for total buildable lots.

I mentioned creeks, consider other wetlands, and or 100 year flood areas, low-lying run-off areas. Retention ponds for storm water run-off, again often tied to subdivision size.

Major sub-division, minor sub-division (what are limits?) Major may be 25+ houses - aside from the obvious differences, street size requirements can change depending on the number of houses, curbs and sidewalks may be required for major sub, but not for a minor. Streets may go from 22ft wide to 24ft or more. Street lights may be required. The town may require you to purchase a performance guarantee bond to ensure you pave the streets and install lights after all the houses are built.

Connectivity: town planners may require sub-division to be connected to others via streets or walkways or both, often tied to size of development, and street size. Street size may open door to cut-thru-traffic.

Sewer or septic: Is sewer available? Do you have direct sewer access? If not, can you get an easement? What is the land topography? Will sewer gravity feed or will you need a lift station? Will public works require you to contribute to cost of infracture for the greater area? What are the tap fees per lot to access sewer? If sewer is not available, does the land perc for septic? If so, there are set-back/reserve areas required for the drain fields which cut into buildable area (see clustering). If septic perc is sketchy, then you may need an advanced septic system which is more costly.

Water - County or city water?  If not, you're drilling wells and hope water is down there.  Wells have to be offset certain distances from septic fields (imagine that) and that cuts into building area, see clustering.

Speaking of costs, assume you get the land sub-divided into buildable lots, and you're building one house at a time. Well, the tax assessor comes along a changes the tax value from that raw 10 acre tract without entitlements to a much higher tax value on each separate lot. Depending on how long you hold the land, those tax bills will eat away at you. And then the finance costs, yes, there is money to lend everywhere, but for raw land you will pay a premium to finance it because it's inherently more risky.

Trees - they are beautiful but can be very costly.   A conservation study may be required to study on the trees.  Hence the reason developments may be clear-cut and it's done before all the other steps so there are no trees to study, and it makes building easier.  

It all sounds easy, buy land, build house, rent it, get check in the mail. It may be that simple for the right piece of land and it can be that easy for those who know what they're doing and have the financial resources to get there. Don't get the cart before the horse, do your homework. Good luck! I hope to see a post about your success.

Tommy