Build to rent and hold.

[Omasirichukwu Udeinya]

I am looking to make my first real estate deal and I have been learning and soaking all the information I can get access to. I was wondering if it will be a good idea to build a new structure for rent since it's a sellers market right now. Any thoughts?

[Nathaniel Schmitt]

@Omasirichukwu Udeinya

Build, refinance, and hold is definitely a viable strategy (I just completed a built in Atlanta last month). We bought a collapsed home, tore down, had an architect draw new plans and got approval from city, and executed the build with my contractor in about 9 months. We held a CP loan during construction and are now in the process of doing a cash out refinance to take advantage of the forced equity and massive appreciation over the last year. When the refinance clears I will be able to walk away with my initial cash investment, 25% in equity, and a pretty nice cash flow. So to answer your question, yes, building can be a "good" idea.

The caveat is that this strategy is much more involved and has a greater number of moving parts than many of the other popular strategies for first time investors. There are a few more loan products you must chose from, planning requires a great deal of care to avoid excessive holding cost (how long will permitting take, build timeline, labor and material price fluctuations, how many other projects is your builder involved with, current shortages in supply chains, etc.). In addition to all of this most banks will want 20%-25% of total project cost (land + construction) as a down payment. So for a modest Atlanta build where [Land =125K | Build Cost at $125/sqft for 1,600 sqft home (a low estimate in the current market) = $200k | Total cost =$325k you would be looking at a $65K down payment that would be locked up in the deal for about 1 year (assuming you refinance at the end to take equity out). 

If you have the capital to lock up and the willingness to learn and manage all the moving parts then go for it. Just know what you're getting into ;)