Build new or buy old for rental income

Land & New Construction
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Build new or buy old for rental income

Kim Kaiser
Gardiner, MT · Member since 2017 · 5 posts · 0 votes

New Here..

I am in the bozeman/livingston MT area.  A longtime close friend sent me to this forum.  We have been looking for deals in the area.  Here is were I am confused on what to look for.  Primary reason is for rental income...

 I search the foreclosures, fsbo listing for rental, multi use, commercial, etc.  I have taken these rental rates, and done the math on asking prices,,, and they are no where near a return.  this area is very very active, new construction going up everywhere,  recent article stated a 18.00 per hour wage minimum to rent, average rentals are 1100 plus for small places, big university nearby,  basically no such thing as a rehab for a steal,, area just so active, professionals are closely tuned in on "deals"  the area is small compared to big cities so hidden "gems" are more exposed to realtor investors with similarly interested investors....  so for example.. asking price   for new const condo,, 145k.  applicable rental rates would be in the 1200 a month range,, roughly 14,4 a year,, take out your interest and taxes,,leaves sound 11k,  interest on 20% down note, 10 yr, 4 %  is 14k note,,, which leaves you with negative CF... not to mention no return on your down payment.

We are in the VRBO markets at yellowstone.  My idea  was to build smaller homes in the scenic valley where we could put up smaller, one/2 bedroom cottages,, gross rents  are in the 200 a night rate for about 100 night season,  would be at least at good or better.. homes would be 700 to 900 sf.  more that one can be put on a track of 5 acres,,

my friend is very successful in RE.  and he explains none or very few of the big people do building and make it,,,, 

anyway, i think you get the picture,, build vs buy .  given the heavy activity, nothing sits out there long or not at all due to similarly realtor/investors with a tighter grip on market availability and the rents vs the purchase are all very similar to the example above,, so please explain where there value is,,

some sellers even tell you the gross rents, and they dont even total the 10% of asking, so explain how to make this work.  

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Patrick McGowen
Investor · Belgrade, MT · Member since 2013 · 135 posts · 32 votes
9y

@Kim Kaiser, consider joining our Bozeman Investor Club meetings (search for on meetup.com).  I think your analysis is in the right direction, there are pros and cons to building vs buying, which is better almost depends more on your experience and abilities.  If you have no home building experience, you are likely to be inefficient enough compared to an experienced builder the wholesale price you get by building your own is higher than the retail price buying from an experienced builder. 

You are kind of comparing apples and oranges and mixing/matching.  Building in Paradise Valley vs Buying in Bozeman, Paradise valley and Bozeman are two completely different markets.  Consider hunting for a purchase in paradise valley and compare.  Good luck

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  • Antoine Martel
    Investor · Los Angeles, CA · Member since 2016 · 577 posts · 240 votes
    9y

    I would recommend buying a property and not building for rental income. Normally building for rental income will not make much sense unless you are building a multi family. 

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  • Kim Kaiser
    OP
    Gardiner, MT · Member since 2017 · 5 posts · 0 votes
    9y

    That is what has been suggested,, and I understand that concept,, however, my concern is the math,  rental rates are 1000 to 2000 a month for 2 bd to 3 bd houses, or 1 to 2 bed apt.   thats what, 24,000 a year gross,  nothing in the area, new or old construction, for houses is under 300k, maybe condos, but that is it, , and when i say nothing, i mean nothing, (thats includes craigslist, hudhome searches) most single family residences go in the 300 to 340 range at am minimum,  now if you borrow, 20% or 340,, your at 272k  base note.  24000 wont even cover no interest note,, so what i am saying or asking,, where is the value,, where is the cash flow,, foreclosures hardly exist.   please explain the return with this math,, what am i missing,, 

    i can buy a 100k lot, build a 1000 sf house, be in around 20000, run off vrbo, and gross 18000, more if i rent out in note offseason, (winter) ,  so explain why this would not be a better deal,, can put up two houses, on same 5 acres,,be in 300,000  with 36k rent... 

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  • Mike Wood
    Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
    9y

    @Kim Kaiser Building vs buying all depends on the prices for existing houses in your area.  You can also not be looking at buying someone else's new construction homes, as you are paying full retail.  If your existing home prices are high, it is possible to build new rentals for less than you can buy existing houses (with similar features).  But you need to do the full development, so that you are not paying a developer. In my area, I am able to build new construction duplexes that have build in equity when completed.  Around me, we have areas that sell in the +$150/ft2 range for existing house stock, and I can build for around $100-120/ft2, so it can work.

    Based on what you have in you last post, it does not make sense to buy houses in your market a current prices. If your serious about short term rentals, make sure you do some research and make sure that there is not pending legislation coming that may limit them.  Most cities have been very slow to react to short term rentals, and alot are now passing laws that severely restrict them, I know my city just passed very restrictive laws on short term rentals and has started to enforce them.  If your property does not work as a long term rental, I would caution against investing in it.

    As for your question about two house on the same land, you need to check your zoning.  Most local zoning will limit you to one building on each plot of land. You may be able to subdivide the land, but that will be dictated by zoning.

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  • Kim Kaiser
    OP
    Gardiner, MT · Member since 2017 · 5 posts · 0 votes
    9y

    Bozeman is currently restricting vrbo air bnb activity,, my interest was in a rural mountain valley about 20 minutes away,   the home depot guy that owns the falcons, owns 12k acres in this valley , but that is beside the point,, the county has restricted the area to 5 acre minimums, unless special circumstance,  lots go for 80 to 200k, depending on size, location and views, whether on yellowstone river, etc..i know of two tracts,,,80k,  i can build,, (self contract) the cabins,, 600 to 900 sf,, for 100 t0 120 furnished...i can be in under 200 for one house,, two on one tract 250, and each can generate 15-18k on a 5 month season, more, if i put them up for winter use.  The valley area has not restricted short term rental.. except to require a commercial fee of about 2k for a permit,,

    in bozeman, i just requested info on a 3 unit house/garage thing,, they want 600k.  i know from searching craigslist rent info,, 1000-2000 a month is about average from 1 bd studio to 3bd house.. i see absolutely no way to make that work, and the problem is, most are that way,, 2800 monthly rent,, 2 units,, asking 355k,  my business partner and friend has tried to explain it,, I'm just not getting the concept,,  my dividends on stock give me 3%!!  Im not stupid, i know math, i used to be an appraiser, but the math, to me,, simply doesnt add,, so please, someone enlighten me so i can understand.  I read and listen to the podcast,, but i simply haven't heard the one that gives me the insight to say,, ah ha!! now i get it,,, 

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  • Laura Kusto
    Big Sky, MT · Member since 2017 · 19 posts · 8 votes
    9y

    @Kim Kaiser - I hear you! I live in Big Sky. I'm just getting started but I was reading your posts here just nodding my head. It's tough. I hate to say it but all these doom-and-gloom forecasts of a downturn are what have me half-hoping the skies will part a bit and there will be some opportunity. Although Big Sky and Gardiner aren't far as the crow flies, those darn mountains make it hard to meet up... but I'll throw it out there that it'd be great to meet a fellow Montanan investor who lives in the rural YNP vicinity at some point!

    0Reply
  • Patrick McGowen
    Investor · Belgrade, MT · Member since 2013 · 135 posts · 32 votes
    9y

    @Kim Kaiser, consider joining our Bozeman Investor Club meetings (search for on meetup.com).  I think your analysis is in the right direction, there are pros and cons to building vs buying, which is better almost depends more on your experience and abilities.  If you have no home building experience, you are likely to be inefficient enough compared to an experienced builder the wholesale price you get by building your own is higher than the retail price buying from an experienced builder. 

    You are kind of comparing apples and oranges and mixing/matching.  Building in Paradise Valley vs Buying in Bozeman, Paradise valley and Bozeman are two completely different markets.  Consider hunting for a purchase in paradise valley and compare.  Good luck

    1Reply
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