All Forum Posts by: Michael Keller

@Michael Keller So my caveats are: a.) I'm not a builder and b.) I'm not an investor in Texas.  So basically, this is more of theoretical thoughts that practical knowledge:

1.) I'd never invest in a town that could only sustain 5 new rentals.  It just doesn't make sense to me.  The population is too small, there's no reason to move there, there isn't any growth, etc.  So if the market can truly only sustain 5 new homes, I'd run away, that's just me.

2.) I'll guess that the reason it can't sustain 5 new units is that $950 might be the upper end or peak of the rental range.  If you could rent for $600 and compete with existing homes you wouldn't have the "sustainability" issue.  Your new product would basically create issues for anyone with older/inferior product.  So that would put you at the peak of a market that isn't growing.  It's not a place I'd want to be but your mileage may vary.

3.) One of the reasons that I don't build where I invest (despite cheap land) is that there are a lot of unforseen headaches. But if you talk to people it's not exactly an accident that there are 3 main builders within city limits. Go outside of the city limits and there are less restrictions, more builders, etc. It's a small micro-example but trying to get to know 10 towns, their desires, maybe odd permitting processes, etc. could be a bad ROI (by that I mean: time) for your friend.

4.) Because of those first three I'd be focusing on a market or submarket where you could build 50 homes and have that new product not be at the top of the market.  It's more local, easier to navigate permitting, easier for construction crews, etc.  

5.) What would be more interesting is for you to provide data on what it costs to just buy a plain ol' boring home in the market and what it would rent for.  What's the advantage of building?  Why not just rehab?  It would certainly take less time, might cost less money, ensure that you're in an area of the town where people want to live, etc.  

Small towns are small for a reason.  People do not live there.  Depending on the size of the town you could have difficulty finding tenants especially tenants who are willing and able to pay more to live in new construction housing than what is currently available.  

Also with prices that low and the renter percentage being so high I would worry about tenants having stable employment you would want someone with $3,000 per month in income (3x the rent).  A $100,000 loan at 5% over 30 years is only $550 per month which many people with your desired income for the rental should be able to afford.

Just something to think about.

Kevin Martin What payroll? What light? He lives on his truck and his 16 y.o son that will help him build does too.
Michael Keller All the concerns voiced out here is a lender concern, if you are hitting road blocks in the financial section, these might be the reasons why. I couldn’t even build a detached garage for $50/sf. Soft construction costs, utility taps, drawings (re-platting included), etc part of the 50k construction cost, is unheard of. We get it that you are trying to verify the scenario only, but shouldn’t you cover all scenarios before you verify a transaction and cover all the behinds and pitfalls? Let’s say you’re mid building, builder finds out he’s going to lose and bails out, what is your backup? What’s the next builder bid?

.@Michael Kellerinteresting post here as we are doing something similar but different. I have a few questions..

1. Do you know this builder and how did he come to the price of 65k

2. Is the 65k and “all in” price to build or just vertical construction? Are they 2/1 or 3/2?

3. How is the contractor making his money in this deal? Does the 65k include is overhead and profit?

4. Did you say replatt? This might completely kill the deal if the zoning doesn’t allow or the city makes you do crazy things. Do the lots have Utilites or do you have to bring them in? Road frontage/access? Ect, etc

There are many many things to look at when you get into deals like this; you are basically becoming the developer. Or you are just the “money guy” and have to trust the builder and his knowledge and capabilities 100%. 

The builder is probably thinking he can build it at $50/sqft his cost of labor and material times 5 houses which comes out to 75k. At the best best best case after he counts all his trips to Home Depot and all the unknowns in construction he will come out to $60/sqft and probably closer to $65/ sqft. He will make 25k at best before overhead for 8mnths of work and think he actually made money because he was able to make payroll and keep the lights on.

@Michael Keller I agree with others, that $65/ft2 is way, way low.  If that price is possible, i doubt the rents would that high, as the finish must be so low that it will turn off most renters other than Section 8 renters.

Unless you have some secret source for cheap materials and free labor I don't see how you can do this for 65k. What is the cost of the lots? Free?