Owner Build House Hack?

Question

Hello everyone,

I'm exploring an opportunity to convert a duplex into a quadplex and would greatly appreciate your insights or experiences in similar ventures.

Background:

• Purchased a duplex in Roosevelt, UT for $210k, invested $20k+ in renovations.
• Currently valued at ~$275k with a mortgage of $197k.
• Planning to leverage the equity for a new project in Bear Lake, facing a housing crunch.

Proposed Project:

• Partnering with my grandparents, who have $300k cash and a half-acre lot.
• Aim to build a quadplex, estimated cost: $1,000,000; ARV: $1,200,000.
• My contribution: $50k cash, project management, and labor (potential savings of $150-200k).

Financial Breakdown:

• Total initial investment: $450k ($300k from grandparents, $50k from me).
• Required loan: $450-500k for construction.
• Post-construction plan: Either buy out grandparents or rent units for 2-3 years, offering them 5-8% annual return. Here is the RENTAL REPORT based on renting 3 units out and living in one of them.

Challenges:

• Qualifying for the necessary loan.
• Ensuring a profitable return for my grandparents.

Request for Advice:

• Feasibility of the project from an investment perspective.
• Suggestions on managing the financial aspects, especially regarding the loan.
• Any similar experiences or insights would be incredibly helpful.

I'm already in discussions with lenders, accountants, and realtors who see potential in this project. Your opinions and advice would be invaluable in helping me make a well-informed decision.

Thank you!

Vitaliy Volpov · Answer

Hey @Reagan Huefner,

I read this post and the one you posted before it on the same subject.

Before I give you my thoughts, just some quick context/background on me: I currently own 160 rental units.  I started with a duplex which I house hacked in 2011.  I then transitioned to non-owner-occupied bank financed deals and then onto BRRRR deals using private lender financing which allowed me to scale up much faster over the last 5 years.  My business partner and I have done numerous rehabs, conversions, additions of units, etc. to force equity and appreciation in our properties. We have considered new construction several times, but found it much more cost effective and a better ROI to improve existing buildings instead.  So, please keep all of this background in mind and take what I tell you with a grain of salt.

To me, given the amount of money you and your grandparents are going to invest into this new construction project, the ROI seems very thin.  Every single construction project I have ever done (and we've done dozens of them now) has gone over budget.  While I know that you feel strongly that you would be saving money by you GCing it and having you do some of the work, things can (and probably will) still go sideways.  If the overall cost of the project ends up being $200k-$300k more than what you planned, how does that affect your numbers?

Also, you mentioned financing.  Obviously, I don't know your financial picture and the lenders you are talking to will be more apt to give you an answer on how much you may be able to borrow.  But, the immediate question I have is, since you plan to owner-occupy the property when done, are you trying to get owner-occupied type of mortgage on the property?  If so, what have the lenders you have spoken with so far said about the minimum down payment you have to bring to the table?  As you probably know, one of the biggest benefits of owner-occupied financing is the much lower down payment requirement.  It seems to me that because you are going with the new construction route, with the bulk of the down payment provided by your grandparents, you would be missing out on this key benefit of the house hacking strategy as I bet the lenders are going to require a minimum of 20% down.

You mentioned that there is a housing shortage in the area and it sounds like there is no multi-family properties worth buying on the MLS.  While this is definitely a problem, it's actually not an insurmountable one.  Lack of inventory has been a feature of the current market almost everywhere in the country.  It has been the same for us in upstate New York where we invest as well.  Yet, we have consistently been able to find and purchase 5-6 multi-family properties every year for the last 5 years.  How?  We don't limit our search to the MLS.

In fact, I believe that if you're trying to buy something on the MLS right now, you've already lost.  Even if you find a decently priced property, you're going to be fighting for it with numerous other investors.  Winning bidding wars is not how savvy investors buy real estate.

If I were you, I would hustle like crazy to reach out to owners of existing multi-family properties that fit your criteria and see if they would be interested/willing in selling their property to you for the "right price."  We have done this in all of the classic ways: driving for dollars, post cards, skip-traced phone numbers and cold calls, networking with local wholesalers, referrals and word of mouth, etc.  It definitely takes a lot of effort and persistence, but the results speak for themselves.  Instead of paying $100k over market on the MLS or spending $1 million on new construction, if you try (but really try!) finding a deal off-market using all of these methods, you may be very surprised by the outcome.

There are many owners out there who are older, who don't want to be landlords anymore and who don't have real estate agents to advise them as to what "market" values might be.  They may have owned their properties for the last 30 years and they may be 10 years, or more, behind on understanding what their property is worth.  They probably haven't increased their rents in a decade and the proprerties will probably need some work (e.g. upgrading kitchens, baths, and flooring), but it will be a hell of a lot easier, less risky, and less expensive than a brand new construction build.

So, if I were you, what I would do with your grandparents $300k is to use that to buy an existing 4-unit.  If the prices (even off market) for 4-units in your area are much more than $300k and that amount by itself is not enough, what I would do is look for an opportunity to do a seller-financed purchase with the owner.  Say you find a 4-unit, talk to the owner, walk the property, and after some discussion and rapport-building he tells you he'll sell it to you for $600k.  Say that the property needs $100k in renovations but, based on your research, after remodeling and increasing the rents, it will appraise for $850k.  That's $150k in potential free equity!  What I would do is offer to pay the owner $150k as a down payment and have him seller-finance the remaining $450k.  In that type of structure, $150k of your grandparents' funds would go toward that down payment, $100k would go toward the renovations, and $50k I would keep in reserves.

Once all of the work is completed, I would then go to one of the lenders you're talking to and refinance the property and get all of the money invested back out, pay off the seller-financed portion of the loan ($450k), pay off your grandparents' loan, plus interest and have myself a nice 4-plex that didn't require me to put any of my own money into the deal.

Oh yeah, and in this scenario, notice how I didn't need to sell my nice duplex in Roosevelt, UT.  That property is still in my portfolio and is still generating income and building equity for me.

I know this scenario may sound like wishful thinking to you, but, believe me, this is 100% possible and my business partner and I have done this exact thing dozens of times now.  There are obviously a lot of details that I'm glossing over: (a) what to say to the off-market sellers to get them to work with you? (b) what if the seller has an existing mortgage? (c) what should the terms of the seller-financing look like? (d) what should the terms look like between you and your grandparents; should they be equity partners or straight lenders with a 2nd position lien in the property? (e) what will the terms of the refi loan be? (it might depend on whether you choose to owner occupy the property after rehab or not), etc.  But, all of these questions have answers to them if you put forth the effort to find the answers.

Before the nay-sayers in the comments say that my business partner and I are just lucky to be in a market that allows us to pursue this strategy or that we're somehow speacial and that others can't do what we do, I would challenge you to try it.  What's the worst that can happen?  You will lose a few weeks or couple of months of time and maybe a couple of thousand of dollars that you spend on marketing and skip-tracing services?  It doesn't sound like you're ready to start the new construction project yet anyway, since you still have to sell your Roosevelt duplex first.  That alone will take a few months, right?  So, why not try what I'm suggesting in the meantime?

Anyway, you obviously should do what you feel is best and I can be completely off-base.  I do not know anything about the Bear Lake market or any other market in UT for that matter.  And, maybe you would rather put your time and energy toward doing what you know and already feel comfortable with.  I can totally understand and respect that.

If you want to chat any further about my suggestions, feel free to DM me.  Whatevery you end up doing, I do wish you the best of luck and hope it works out!

Vitaliy

Ryan Thomson · Answer

@Reagan Huefner I would consider connecting with a construction lender and using the land as collateral. If the land isn't enough, you'll have to come with some of that cash to get construction started!