BRRRR and new construction

[Marzieh Rostami]

Hello BP nation. I wanted to hear your thoughts on building new. Originally I was looking to BRRRR in a gentrifying neighborhood. Most properties in The area I am looking at are in extremely bad shape and need to be torn down. It is very hard to find homes with good bones that would only need little updates and face lifts. Many of them need everything replaced.

Slowly people are buying these homes which are mostly in the 1200 square feet range and building larger townhouses and selling them. I don't have enough money to build a big town house but I could possibly afford to buy a piece of land and build a house with the same square footage (around 1200 sf) this means my house would be much smaller than all the new construction around but I am planning on renting it once it's built and refinanced.

I am curious to hear your thoughts on this strategy.

[Mike Wood]

@Marzieh Rostami  To illustrate and example, lets say you buy the land for $150k, and you build a 1200ft2 house for $132k (=1200ft2 @ $110/ft2), ignoring finance and soft costs, your total cost would be $282k.  On a $/ft2 basis, your cost is $235/ft2.  Thats pretty high for the south.  In order for the bank to finance the project, you would need the value of existing house sales to be very near or above this valuation.

Now, lets look at the same lot ($150k) but lets build a 2,200ft2 house, using the same build cost (larger houses would be cheaper per ft2, but we will ignore that for this example).  The build cost would be $242k (=2200ft2 @ 110/ft2), and your total cost, again ignoring finance and soft costs, would be $392k. On a $/ft2 basis, the cost would be $178/ft2, which is lower and more likely to be in line with the existing house valuations.

I also doubt that tearing down a 1200ft2 house to rebuild a 1200ft2 makes any financial sense. If we assume your new build costs are $110/ft2 (just a bit higher than my area), you should be able to do a full gut renovation for somewhere in the range of $50-70/ft2, depending on how much of the exterior needs to be replaced (siding, roofing, concrete flatwork, etc).  If the house is as bad as you say, you should be able to purchase it for right around the land value.

Do you have any idea what a 1200ft2 house would rent for in your area.  Using your numbers, it would need to rent for well over $2000/month to cashflow.

Additionally, given your numbers, I doubt that a single family new construction rental will work.  I also would not be interested in investing so much money in an area that is a gentrification play, $150k for a lot is very high in my market, and we routinely have house values in the $150-$200/ft2 range.  I have not been able to find a property in my market where the land value is over $100k that will work with a new construction duplex on it.