What's your opinion on new SFR construction in the East Bay?

Question

Hey there,

I own a vacant lot up in the Montclair hills and am wondering what your opinion is on starting new construction of a higher end rental?  I see the economy slowing down a lot, prices falling and construction costs still high.  Would you start new construction now?  I'm sure I would ask 4k-5k for rent, as I like to build nice homes, but should I tie up so much credit as the economy slows?  Are their easier ways to build on a vacant lot without tying up my lines of credit?  Thanks for your thoughts.

Kathryn M. · Answer

If you decide to go ahead, my newbie advice is to go with an architect/team (surveyor, civil, structural, Title24 etc) very experienced with Oakland City requirements.... could literally make years of difference to permitting process.

Account Closed · Answer

If you own the lot free and clear, you should be able to get a construction loan with a low down payment - that will free up your lines of credit.

Construction is ultra risky right now. Construction costs are skyrocketing and most good contractors in the Oakland area are months out. You would definitely be able to flip it once completed, but getting it constructed might take 9-12 months - who knows where the market will be then.

Also, your lot is up-slope which is going to add the cost significantly. (think 2x-3x of what a flat lot would cost)

William Yeh · Answer

As covered, building costs in the Bay right now are out of control. Everything we see hitting the market and all of the cranes in the skyline are deals coming to fruition that were years in the making. I echo your thoughts on the job market slowing down which is pulling down the rental market in the core Bay Area. That said there's still a massive shortage of homes for sale in general in the Bay which may work in your favor. Unless you have a high degree of confidence that the market in your area will look good a few years down the road, this deal may represent a high degree of risk. And good luck on entitlements!

DG A. · Answer

@Barry B. the loan I'm talking about does require that you income qualify. That particular loan does not have a pre-payment penalty though. So, you could build and then sell without any trouble as far as I understand.

US Bank does have business loan products for spec builds, but that requires a larger down payment and comes with a higher interest. I never looked into the business loan, I plan to use the owner-builder / owner-occupier loan instead.

Barry B. · Answer

@Sam Stout I have lived in Montclair for 20 years. I was planning on doing some construction but cannot find a contractor at a reasonable price, which means cutting into profits on your project, it has never been this crazy. Like pointed our earlier, about dealing with the city, specially with all the extra regulations in the hills, it can be a challenge. Get someone who is local and experienced. For my last project I had hired an architect from San Francisco and it turned out I knew the regulations better than him (did my homework) ;)

@Daniel Gonzalez Was wondering about your lot and construction loans idea, with 30% down for lot and 10% for construction do the banks give a loan against the project or do you still have to verify income to qualify?

DG A. · Answer

US Bank has the best low down payment options I've found. You can get in for 10% down on construction costs, and they'll even help you finance the land (30% down for land acquisition). Once you've built you can pull out money up to the 90% LTV mark.

I'm considering doing a spec build in Richmond CA or East Oakland CA. I'm specifically interested in doing "entry level" / starter homes, because (I think) the demand for those rarely drop. We have almost no starter-home inventory in the Bay. The tradeoff is you make less money per deal than on higher end spec builds.

Matt K. · Answer

What would be the time frame for a starter home also what kind of $/sqft you seeing? I've looked at similar deal smaller home on smaller lot...

Sam Stout · Answer

Thanks for your input.  Definitely a unique situation in the Bay area for building...and I'm not sure the work is really worth the reward.  Ugh...Maybe just put it on the back burner and focus on multi's....Anybody want to partner on a new construction to lighten the load?

@Daniel Gonzalez I'll look into US Bank.  Thanks!

What's your opinion on new SFR construction in the East Bay?

Most Popular Reply