To build or to buy - my STR questions?

Question

TLDR: I'm considering the decision whether to build an STR or to acquire a pre-existing property and convert it into an STR. Any thoughts are helpful.

I'm considering two options for my first STR that I will own (I already do STR arbitrage and management so I'm not a total newbie)

(1) Buying a "buildable lot" then contracting with a builder to build an STR

(2) Acquiring a "Decent house" that needs light cosmetic work and then converting over to an STR

For context, I have limited experience in construction, so work will be done through GC/contractors either way.

Building seems like an attractive option to me currently as I believe I will have "instant" equity with the potential to refinance out the initial capital, but the total project will take much longer to complete. However, I also know that building carries risks and comes with its own headaches.

Acquiring a house that needs light cosmetic work, seems less complex, but I don't anticipate having a lot of equity, to begin with since there will be little value added in the acquisition process.

Any help is appreciated!

Tyler Solomon · Answer

Building early on in a portfolio can drag out your scaling time as you are much further away from cashflow. In my opinion, finding a flip with good value add opportunity is a better option, unless you are already strapped with cash flow! As @Leslie Anne Morris mentioned, once you have a surplus of cash flowing rentals paying you monthly, then it makes a little more sense to choose the build route!

Bob Willis · Answer

@Easton Hill - I see you are from Phoenix. The market here is SATURATED with STR. I cannot overstate that fact. With that said, a STR could still be very successful here if it STANDS OUT! I mean large, luxury location. Not trying to throw cold water on your plans, and if you are looking in other areas ignore my response. Best of luck either way.

Mack Lengel · Answer

@Easton Hill This is a good question… I run into with clients looking at STRs in the Smokies.

I say it depends on your goals, if you’re looking solely for cash flow and want to snowball your portfolio as quickly as possible then you’ll want to look at existing properties. You can always force appreciation with the BRRRR strategy. Financing is twill be easier here too.

I personally love the building side of things, especially in our market you do run into the “instant” equity you mentioned. You can get into a property at a lower price point and have control over your property every step of the way. Construction loans are can be a bit hard to work with compared to an investment loan.

I do a lot of turn-key lot/cabin packages and then tend to be a good middle ground in my market. You take advantage of the pros that come with building without having to be your own gc and micromanage a project.

Pro tip: if you’re looking to do both, start with the build. Running into this now with a client… he bought a property earlier this year and isn’t showing the properties income on his taxes yet so qualifying for the construction loan is pretty difficult.

Hope this was helpful for you!

Max Ferguson · Answer

Building could take far longer and would be much more of a headache in my opinion. Buying a property to be "turn-Key" could happen as early as a few days after closing, where building could have various setbacks, more additional costs, and opportunity cost of waiting instead of having a unit that is already cash flowing. There are factors that could make your situation different but for what I am seeing, I would focus in on something already built.

Andrew Steffens · Answer

@Easton Hill This will depend on the numbers.  You will need to have an example property for renovation and the whole picture of costs associated with new build.  We have new builds and 100 year old houses in our portfolio (some very close to each other) and you will not have much if any bump in rental rate for new construction versus existing.  Let the numbers be your guide

Nick Belsky · Answer

@Easton Hill

Financing can be a challenge either way.

For GUC, experience is a large factor.  You can always team up with a builder or someone with experience to help qualify for the loan.  For max leverage, most lenders like to see at least 5 completed GUCs in the past 3 years.  There are still a lender or two that I know of that will allow only 1 completed GUC as experience, but they knock the LTC and LTV ratios way down.

For purchasing, use a lender that uses AirDNA to base the DSCR from.  This will help you get more reasonable leverage and makes the process very easy (IMO).  I do not own or operate any STRs, but work with several investors who do.  Way more work to get setup building versus buying, but how much you are willing to take on is up to you.

Cheers!

Ricardo Hidalgo · Answer

I would build only if it was in an exclusive area or very desirable lot with a features that was scarce to the area. Typically new construction in beach towns will offer a 20-30% equity position after completion.

Sean Bramble · Answer

building is only worth it if you’re willing to wait for it and are:

a) able to build well below appraisal value (i.e., gaining immediate equity), and/or

b) able to build a compelling enough hospitality product that it outperforms the competition on a revenue per square foot basis (i.e., boosting cashflow).

”B” is why I’m personally interested in building. If you do enough market research you’ll find comps all over the US that outperform the competition on a revenue per square foot basis. And since the cost to build is often driven by the size of the structure, there is an arbitrage opportunity to be had for those building deliberately with the customer in mind.Bonus points if you’re zoned commercial, and can monetize your cashflow by selling the property at cap rate after a stabilization period. Lots of upside if you’re willing to deal with the headache, but way more that can go wrong. Decisions decisions. The ultimate “marshmallow test”.

Terrell Garren · Answer

I bought and rehab'ed my first 20 of so SFHs 2008-2019.  Competition pushed purchase prices too high for that a few years ago.  I made new construction work by getting my GC license and taking the cost out of the equation.  I could not make the #s work paying a GC to build new.

Martin D. · Answer

I've looked into building my own home on an exquisite lot. I got it under contract. My budget was on point. And then I started inquiring with contractors and everything blew out of proportion!

I released that lot and went on to buy a house. One month later after a bit of rehab, it was ready to produce income.

Unfortunately, with labor shortages, supply chain issues, material inflation, now is not the time to build!

Hope this helps. Good luck!

To build or to buy - my STR questions?

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