New Construction Rental Property

[Treza Edwards]

I have 2 empty lots that I want to build 2 rental properties on in Decatur, AL, but there is not a lot of new construction in the area. I am not sure how to analyze the numbers. I probably can get 1500-1800 per month rent for a 3 bedroom, 2 bath (appx 1200 square feet) and can build for 174,500. I need help analyzing if this would be a good deal. There are new construction homes about 2-3 miles away going for 190-200,000 but I think they may be a bit larger than what I am building. Used houses in the area sell anywhere from $75-125 a square foot.

These are long term rentals that I do not plan to sell.

I am reading the Rental Property Investing book and implementing the method that focuses on cash flow and that strategy states you need to have $300 cash flow per month, per property. I am not sure if I can put zero for capital expenditures, since it is new construction.

I have never built anything, only purchased already built properties and I need some advice.

Thanks!

[Doug Smith]

We've built, ground-up, several homes and my mortgage company finances tons of new construction projects. What you spent on the land/lots can go towards your down payment and, if you've owned the land for more than 6 months, you can use the value of the property toward the cash injection requirement. Most lenders will vary how aggressive they will get based on the experience of the operator (you), but I don't know any that will lender to someone who's never done a spec build like you're contemplating. You might want to consider using your equity in the land as your contribution to a partnership with someone that brings that sorely needed experience to the table. You can usually get a lender to go 85% of cost or 70% of the As Completed Value for such a project. If you plan on holding, it's then a much easier task to roll it into a DSCR loan. The bottom line is that you'll want to learn from someone for the first handful of deals and progressively take more and more on yourself until you can fly on your own. I wish you luck!