How to build in equity?

Question

Just curious if anyone knows anything about building in value? The market is pretty dry for our budget in the area we prefer to invest in so we are considering building. We’ve had discussions with builders and have an idea of what kind of sq ftg we could afford in our budget.

So we are entertaining the idea. I’d like to scale this business and use equity as a tool to do so (especially in the early stages of this).

My question is does anyone know how to build equity into str new construction? I know bedrooms and bathrooms are obviously a factor but what are the major considerations beyond that? Also, (from an equity standpoint) would it be better to build 2 smaller cabins (1-2 bedrooms each) - or one larger cabin (3-4 bedrooms)? We have already determined the smaller cabins would cash flow much better in our area. We have not built before - so there is obviously some naivete there.

Thanks again for any insight you may have. We haven’t settled on building - just exploring all options.

Leslie Anne Morris · Answer

Typically people who build get equity upon completion because they’ve built at a price per sq ft for less than what other surrounding homes are appraising for. So it depends on your market. Take a look at the area where you’re considering. Keep in mind a 3 bed / 3 bath isn’t a comp for a 1 bed / 1 bath. Also other considerations like acreage could skew comps.

John Underwood · Answer

The only way to build in equity is to end up with with a finished property that appraises for more than you paid for it.

Do this by getting a deal on the land or a deal on the construction costs.

Maybe doing some of the finishing yourself to save on labor.

Talk to an appraiser about what a property would appraise for when completed with certain finishes.

Michael Baum · Answer

Ok @Bill Denney, IMHO, you never rely on appreciation or even equity (as long as it isn't negative) to justify a poor performing STR.

If you build a house and you have maybe 5 or 10% equity, you are on the plus side. It should continue to increase in value as time goes on.

If you build a place and it brings in good cashflow, that is what you want. 20% return would be great and if you get that in this market, that is pretty excellent.

I guess you need to decide what kind of investor you are. Are you trying to be a developer to flip or are you in it for the long term with LTRs, STRs etc?

Your reasoning right now is as if you are a developer, not someone who is looking to hold the property and create long term wealth for yourself.

It isn't wrong to think about equity vs costs when building new, it's just not the end all be all for a project like this.

My 2 cents.

Bill Denney · Answer

Thanks for your insight. That makes sense. Do you think equity should be a disqualifier for the land? If I calculate everything and see that there is little-to-no-equity - but it still will cash flow well is it still worth it? Seems like good land in a good location won’t leave a ton of room for equity (at least initially) in most strong str markets.

Michael Baum · Answer

Hey @Bill Denney, so everyone here is right. It is worth what it is worth. Hopefully you are on the upside after construction.

What I might look at is improving it's appeal as a STR. Maybe build a 3/4. With all three bedrooms having an on suite bath and one general use bath. I could imagine that being a nice booking feature, especially in an area where you get multiple couples traveling together.

Also consider building it for ADA and easy access. We get a lot of inquiries about access to our lake house and it isn't very friendly. I could see it having an advantage over others.

Finally you can build it with durable materials like quality LVP flooring or tile throughout.

I can see those sorts of things increasing bookings as they would appeal to guests, but I don't think they would add extra equity in the end.

Andrew Steffens · Answer

Yes, there are other considerations but if they are similar to new build comps in the neighborhood it will be fine.  I am doing one in Tampa right now.I got the land for $80k and my ppsqft is $130 for 2500 sqft so my total cost is $405k + about $35k in holding costs and  so $440k and the value will be $680k based on very similar new construction sales within .25m.  Ill then refi at 75% cash out and end up putting enough money in my pocket to furnish the unit well.

Bill Denney · Answer

Seems pretty straightforward. Seems like the bedrooms and baths are a consideration but total sq ftg might matter more if the building price is right.

Andrew Steffens · Answer

It will depend on the market you are operating in but the math should be pretty straightforward.  See what price per foot new construction is selling for.  Then see what you can get comparable vacant lots for.  Then meet with several custom builders and see what they can build comparable properties for price per foot.  Do the math and see if you have equity.

How to build in equity?

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