All Forum Posts by: Mike Wood

@Trevor Bond you just have to research what the zoning is for each city your interested in. Even in cities that have areas that are zoned only SFH's, they typically have areas for commercial and multifamily. Some high cost areas are changing zoning for ADU's to add density to previously zoned SFH areas.

You can typically find zoning on your city's website or by calling the zoning department.

@Joseph Phillip I also agree that the house your talking about us too large. I would recommend building a duplex, and focus more on cash flow. Waiting 8-10 years to get a return, while potentially having no or negative cash flow is not a scalable business.

Focus on what renters need, not what you think sells.

@Patrick Bavaro if you never rent it. You can't 1031 it. If you cash out refi it, your interest rate will be higher and your max LTV will be 80% or lower on an investment property. I'm surprised you got such a construction loan with a 10% down payment on a house that is not intended to be your primary residence.

I agree with others, for that rent amount, I won't keep it, I would consider selling it.

@Douglas Gratz  First off, I think using hard money for a build is way too costly and risky.  I would only recommend using a commercial bank with a construction loan.  Second, you need a builder/general contractor. I think you will find it is not possible to act as your own GC for such a build in your town/county on a new construction project that you do not intend on living in.

I also question your costs, as you have indicated that you plan to build a 5000ft2 house for $750k, including land, soft and hard costs.  Are you truly including all costs?

As for you first steps, your builder/GC should be letting you know.  For me, the first three things that happen on my builds is 1) site prep, survey, foundation/piling marking and temp power installation, 2) foundation/piling driving, 3) start of framing.  Item 1 could be done by the owner and owner selected subs, items 2&3 are typically handled by the builder/GC.

@Andrew Kiefer Unless you plan on living there, all the construction loans will be commercial loans at first.  2-4 unit building can be refinanced (paying off the short term construction loan) into 30 year investor residential mortgages (better rates and terms), with 5+ unit full commercial loans when refinanced (higher rates, shorter terms).

I would focus on rental properties.  If you think that means a 4 plex, than build a 4 plex.  Why spend extra money on a townhouse if you don't intend on selling.  There will be more costs with rowhouse development than with a 4 plex, as rowhouse will most likely need to be built such that each unit is on its own plot of land, or at least the land could be split up for individual owners.  If you need to sell, just sell the entire 4 plex.  Personally I would recommend duplex construction to start.  Lower entry point, and easier to learn the process.

I also think you might find issues with locating properties that are zoned for larger multifamily, but I dont know Texas and have heard that zoning really is not a thing there.  In my area, maybe 20% of the land is zoned 2-family, 5% upto 4-family and almost none is zoned 5+ unit, and any that is are huge plots that support 100+ unit buildings (with the price tag to match).

@Andrew Kiefer  I think your talking about apples and oranges when you ask about 2-4unit and 5+unit builds. With my banks, I need 25% of total costs for a construction loan, which on 2-4 unit builds is manageable, but 5+ unit builds the amount of capital required gets big fast.

I totally disagree on getting plans first.  I doubt that you will find the right piece of land for a project, if you have already set what the building will be like.  I always find the land first, determine its suitability for my needs (zoning, valuations, rental rates) then develop the plans to suit the lot.  Doing it the opposite way will likely waste time and money, and require you to find a unicorn lot for you predesigned build.

If you strategy is to build to rent, than you should focus on that. Why muddy the waters with some spec builds?  I would recommend starting with smaller builds.  Its unlikely that you will find a bank to fund a construction loan on a 5+ unit without some build experience.  It will be alot easier to get a bank to fund a $250-400k 2-4 unit than a $1.1m 10 unit, just less risk for the bank on the 2-4 unit and much more exit strategies for the bank in the event of a default.

@Nate Ferrari First and foremost, check with your local city/county to see if the property is zone for duplex properties, if not, don't bother. Mail delivery is the least of your problems. If the property is zone duplex, your local city/county will be able to issue you a new street address for the second unit very easy. I have converted one (1) SFH to a duplex, it was zoned properly for a 2-family house and the house needed a full gut anyway.

If you do an illegal conversion, the city could make you removal all of the changes, you likely will never be able to sell it (as most buyers would find out that the conversion was not legal, as well as a host of other problems.  You could also run into issues with insurance coverage with an illegal unit. You will also be forced to pay all utilities for the property since you will not be able to split the utilities with only one address.  Why take on the risk.

@Jacob Souers I would sell it.  Run the numbers on the cashout refi, and you will see that you may be cash flow negative on this house.  

Unless you lie about you residency, the max LTV on a cashout would be 75%, which puts you with a mortgage of $435k (getting only $45k in cash), non-owner occupant properties have higher interest rates, so you likely in the 3.75-4% range for 30yr. That puts your P&I payment at $2000-2100, leaving $1400-1500 for taxes, insurance, repairs, capex, vacancy, and cashflow. My guess is that will leave you very little for cashflow.

If you sell it, you will net around $135k to move into other properties.  Assuming your moving the money into multifamily (2-4 unit) properties, your buying power is $528k, but on properties that will cash flow much better than an expensive single family.

@Clement Familusi I have several up/down duplexes.  Based on the limited information, I would think that your downstairs tenants have an unrealistic expectation on noise.  I would have a conversation with them in person, discuss the expectations and be prepared to let them out of the lease if you are able to find another tenant to take over the lease with limited vacancy.  You will not be able to fix the problem, and the fact that the downstairs tenant is banging doors and hitting the ceiling means it will not get better.

I have had a tenant once in my downstairs unit of one of my duplexes that had a similar experience.  I offered to let them out of the lease, and they jumped at the chance.  They did nothing but complain, and I was happy to be rid of them.  

There are alot of people that understand the differences in living in multi-family housing and those that do not, best to move on before you loose both tenants (assuming you want to keep the upstairs tenants).

@Stephen Dallas  While I am not scared of major renovations (my last two projects have required renovations that were close or excepted the purchase price), I would be more concerned about the cash flow.  I think your expenses are too low, and if you adjust properly, its likely to be close to break even for you.  What is the value of the property as it is, could it be sold? I would personally put the value that it could be sold for in the calculator, while it is not a cash cost, it is something that may be able to be turned into cash.

Are you rehab costs realistic? Cost currently are crazy high in most places and given the size of your estimate, as 20% change would have dire consequences ($36k swing is alot of cash).  Also, do you have the means for such a large project, banks will likely be very skeptical of a $180k reno on a AVR of $270k (~66% of AVR, when most banks dont like to loan more than 75% AVR on a construction project).