How to Build New Construction Rentals - from sourcing land to building to leasing!
There are 4 Parts to This Training (4 Videos Below)
As you know, how many were on here last time when we got blown up by a tornado and got cut off about an hour into it? I think a lot of people were here. Hopefully that's not going to happen tonight. Hold your fingers crossed that we don't get another tornado in Richmond. And then hopefully we can go through the entire thing.
Today's rules. All right, we're going to cover a lot. This is going to go well over two hours based on the first time we did this webinar. I know how far into my slides I got and I know we're going to be over two hours today. So commit right now, fully focused, don't quit. I'm going to give you a huge value today and I'm not going to waste your time, so please don't waste my time by quitting halfway through and then emailing me five times asking for a replay. All right?
This is going to be different. I'm going to pause throughout this webinar and take questions because I want to make sure that you guys stick with me. I talk fast, I go fast. We're going to cover a lot of ground. But I want to make sure I'm not leaving people behind. So we're going to go fast, I'm going to try to pause throughout and take questions, and I'm also going to take some questions at the end, right? And we're going to do math. All right. So get your calculators out. All right? Take lots of notes. Make sure all your distractions are gone. Last time we did this, we attempted to do this webinar, I think it was game six of the NBA finals. I know all the other of you guys were watching that game instead of spending time with me, dammit.
So that's not the case tonight. Cleveland won. So there should be no major distractions. Okay. So what this is not going to be tonight. It's not going to be a surface webinar. Lots of fluff. Going to give you zero motivational quotes today. I'm not here to motivate you. I'm here to share my knowledge and hopefully that is going to inspire you, right? This is not a recipe for every market or every submarket. This simply does not work everywhere. It's not meant to work everywhere. It doesn't work in every part of the market. There is going to be in your market, certain neighborhoods or certain areas where doing this will make sense and other areas where this simply will not make sense. Hopefully one of the things I'll be able to show you tonight is a way to determine where does this make sense to do, right? And then what situations.
So this is not easy. It's not fast. It's not for everyone. It's probably not for you. This is not a wait to quickly make five grand, from your laptop in the next five or seven days with no money or a credit or experience or work, right? That's not what this is. This is real estate development, right? It's not for the faint of heart. It's not for those who get frustrated or discouraged easily. Real estate development can be fun, can be very rewarding. But man, it takes a ton of work. Those of you guys that are on here, I know there's a bunch of people on here that are experienced and they're already doing this, you know this is a lot of work. It takes a lot of planning, takes a lot of analysis. But what I love, love, love about this business is that there are opportunities to learn every single day. You will never, ever know everything there is to know about rehabbing construction and real estate development.
I've been doing this for, I don't know, eight years and every single day, right? I'm absolutely shocked by how much more there is to learn, especially as I made that progression from rehabbing to residential construction, now to commercial construction. The learning curve is crazy and that's what I love about this business is that you never stop learning. And I don't care how long you've been doing this, there are always people that know more than you, that have more experience that can teach you something.
So why are we talking about rentals? Well, rentals provide steady, predictable cashflow. I love rentals. My business now, I'm doing flips, I'm building spec houses to sell, but my business is focused on... Really all I care about is just building out my portfolio and building up my reliable, predictable monthly cashflow because it allows me to take time off. It allows me to travel, right? In the last five months I've been out of the country three times. It allows me the flexibility.
That's not to say that it's easy, right? Owning rentals, managing rentals, it takes work. It takes systems, it takes preparation, but it doesn't have to be a lot of work if you put proper systems and management in place. I've got a full time property manager who works on the for me, and his job is only to manage my properties. And ever since I hired a property manager a year and a half ago, my life has been a lot easier.
The cool thing is it doesn't take a lot of properties to replace your current income or create real, true, complete financial freedom, right? 15, 20 units if you're netting $400 a door. Netting means after your mortgage, after real estate taxes, after insurance, after your maintenance. If you're netting 400, which should be very realistic. If you're netting $400 per door, right? 20 units, 20 doors, you're now netting, putting $8,000 in cash into your pocket every month. For most people, that's enough to have a very comfortable life. I can live off less than that even now.
In some areas, again, why do rentals make sense, right? It doesn't have to be a longterm holding play. You're going to see some areas of your market that are gentrifying, that are in the path of progress, but you can buy properties where you're not necessarily going to be able to flip them right now to retail buyers and make a lot of money by flipping. You can get into the rental market, hold these properties as rentals while the market rises and when the time is right, go back and do another rehab and then flip them. Right? So even if you don't want to be a long term property owner, rentals in general make sense because they can be a way to hold property and ride the appreciation wave.
So why are we talking about building rentals? We're talking about infill development first. Not the other kind, right? And I asked this question last time, but how many people here don't know what infill development is? Do I need to explain this?
Andrew Hoffman says he has no sound. Switch. Okay. So a lot of people are saying yes, explain. Okay. So infill development looks like this. Ta-da! House here, house here. Buildable lot. This is a lot that I actually own. There used to be a structure here at one point. Then that structure got knocked down. At some point there were utilities running to the structure, but I don't have to develop this land. Right? I don't have to sub divide it. I don't have to get the city to bring utilities to the street. It's called infill because I'm infilling between the existing structures. Right?
And if you look down, if you go down the street, you can kind of see, boom, here is... You can basically go down the street and find additional infill lots. Here's actually where I'm doing my big commercial development, right? So this is still considered infill development because there's a structure here, there's a a structure here, but then here is the slot in the middle where you can basically put the structure in. You're not subdividing.
The other kind of development is when you go out and do suburbs. Infill development is very common in urban areas, right? You're not going out there and you're not developing entire tracks and subdividing entire tracks of land and bringing utilities to them. That's a lot more complicated. There's a lot of more costs involved. Here, you can buy a little lot and you can put the house on it. You can put a duplex on it. Make sense? All right, let's keep rolling.
Infill development. In many markets, why are we talking about building rentals? There is a lot more competition now for houses, for a cheap rehabs. All of you guys are out there hunting for houses, whether you're flipping, whether you're buying rentals, you're competing with other people mostly for houses. This is not 2010 anymore, 2011 where you can go and you can get foreclosures for pennies and dollar. Now a lot more people are competing for the same little rehab projects.
So if your bread and butter has been converting those cheap rehabs into rentals, like that was my bread and butter for the first four or five years, those deals are harder to find. But there's less people for now focused on infill lots. Now, over the last year, year and a half, two years, more people are starting to hunt for these lots. But still, there's less competition for infill lots than there is for houses. And so you can still get lots cheaper in certain markets and make your numbers work where you can build a rental property on it.
I love new construction because if you do the project correctly, you should have low two absolutely no maintenance for the first four or five years. I built properties two years ago and I maybe had one or two service calls in the last two years on these properties. Right? I don't hear from my tenants because you build a good quality product with correct construction processes and you only hear from your tenants.
In a lot of respects and you could structure it as easier than rehabbing. I actually am now at the point where I hate rehabs. It's going to take a lot for me to take another rehab on. I love new construction because it's more predictable. It's easier, it's more systematic. You take a set of blueprints, you hand them off to your framer and then three, four days, my framers will pull up a structure. Right? It's easier. There's less troubleshooting, it's more predictable. I can tell you right now, I can pull up a structure from when we're digging footings to when I'm ready for my tenants to move in, in four months. I've done that. It's very predictable.
The other reason I love rentals is because I get to build a really attractive high end product that I get to design from scratch. And that in turn attracts high quality tenants. I get to design from scratch units with great layouts and we're going to talk about this. I'm going to show you our layouts. We're going to talk about some principles, right? But I get to design great, awesome, comfortable spaces that people actually get excited to live in. That's why I love new construction.I
n big picture wise, it's just really rewarding to create something from scratch that wasn't there before, that's going to outlive you, that's going to impact how people live for the next 50, 60, 70 years now. All right?
Bah-bah-bah-bum. Gregory says there are some spaces in your speaking. Is anybody else having trouble hearing me or we get to go? This is why I love doing live webinars because technology. Everybody's good. Okay, let's keep rolling. A lot of the ground to cover guys.
So when we talk about great quality, high end product with great layouts, great finishes, low maintenance, this is what we're talking about. Big kitchens, granite countertops, really nice cabinets, hardwood floors. I like to do oversized kitchens, right? Stainless steel appliances, lots of light, big open spaces, big living rooms, really nice big windows, cool light fixtures.
This unit we turned over today and my tenants moved in last summer, moved out. We have new tenants moving in basically tomorrow, next day. And everybody that walks into these units, they're blown away, right? Because this looks like something that should be on the market for retail buyers like a condo. But this is how we do rentals and it works. The numbers work, right? Really nice finishes. Either concrete floors, hardwood floors. We're going to talk about finishes down the line. Big closet spaces, lots of closet spaces. We either do at least six or 12 foot closets or we do walk-in closets, right? So we create really big comfortable spaces where people want to live for many, many years.
Tile in the bathrooms, cultured marble or granite. Vanities. Brushed nickel fixtures, et cetera. We'll talk about finishes more. So the other thing I like about rentals and new construction rentals is that you can get a bigger chunk of your project financed than if you were to go and buy that same property that was already built. You get much higher leverage than buying existing buildings. And we're going to talk in detail about financing probably in about 30 minutes when I get to it.
We're going to go through a case study tonight of how in one four month period I built six new construction duplexes, 12 units total, high end rental units. This added close to half a million dollars in new equity basically to my net worth, to my balance sheet. And, just a little over $5,000 in new net monthly cashflow added to my income.
And again, that doesn't mean $5,000 in rents. That means, through these six duplexes, I'm putting an extra five grand in my pocket after all my expenses, every single month, 60 grand a year in annual income, right? In four months, created a job's worth of income for myself. Pretty good. I'm leaving some cash tied up in my deals now, but that cash is generating over a 20% annual return. Where else can you find that?
Here's sort of the structure we're going to talk about. Tonight, we're going to cover the first three phases because talking about permitting and building and construction and leasing and management that could take up another 20 hours. So we're going to talk about sourcing land, we're going to talk about project design, and we're going to talk about how I'm financing these deals. All right? Everybody good so far?
Andrew says, can't hear anymore. Change to computer and speakers, Andrew. All right.
Then how much does it cost to build one of these? We're going to get to all of that. All right, we're going to really jump into some numbers here in a second. So let's keep rolling.
Sourcing and valuing plant, right? How am I sourcing land? Tax auctions. I love tax auctions and our local county here is starting to finally step up how often they're doing their tax auctions. Oftentimes, lots are owned free and clear, right? A lot of these lots are inherited. They're endowed through probate, they're gotten through divorce, inheritance, and they don't have mortgages against them. Typically, if a property has a conventional mortgage against it, you're going to be escrowing real estate taxes through your lender and your lender is not going to allow your real estate taxes to become delinquent because as long as you're paying your mortgage payment, you're paying your real estate taxes, you're escrowing that money.
So the properties that fall into tax foreclosure are often owned free and clear. And oftentimes it's land. It's things that people don't really care for. It's again, inherited. It's gone through various means. And people just don't want to pay taxes. So if you go the tax auctions, a lot of those parcels at the tax auction, you should be seeing land and usually those are less bid on than houses or buildings, right? Call your local county.
Now I don't know how it is in your market. Again, I'm not an expert in every single market. In our market, the list of tax delinquent properties, it's public information but it's not publicly available, meaning it's not readily posted on some website. So you have to make some connections with your local county people. Again, where I am in Richmond city, it's the Office of the City Attorney that's responsible for closing these properties. And there are some people in the community development in your local county that you can go talk to and I'm sure you can get this list.
I showed this last time we did it, but look. This is a list that I got from my contact at Richmond city and this is a list of tax delinquent parcels just in my county. All right? I'm going to scroll down. Look how many parcels this is. Are you guys seeing this? So it's over 6,000 parcels. And if you go to the very top ... Look. You can scroll to the right and you can immediately see. First of all, you can sort them by zip code right here. And then if you go to the top, you can quickly parcel out what's land and what's a building. Dwelling value, right? Zero. That right there tells you this is land, this is lot.All you do is you cherry pick the properties that you're interested in and send mail to these people, right? Contact them. Contact them before these properties fall into tax foreclosure closure. Because if these properties fall into tax foreclosure, these people usually don't get anything. Sometimes they don't even know that they're delinquent on their taxes, right? But usually, if you actually get in touch with these people, they should be pretty motivated to sell to you because they're going to get foreclosed on by the local county and they're going to get nothing. All right?
So that's for me, that's been a great way to source land. I'll show you guys another thing that I do, again, it's brain dead simple. I usually don't do large mailings, but in my county, our tax records are mapped. Here's literally, in Richmond city, and other than Ryan, anybody else from Richmond here? If you guys are now using the Richmond parcel map, guys are nuts. Anybody else from Richmond here that's used this before? If you go the Richmond Parcel Mapper and you click aerial view, ta-da. Look of that. It'll actually show you the map and you can immediately see, okay, well here are vacant lots.
Okay. I'm going to click on this vacant lot. Who owns it? Mike Crombine. I actually know Mike Crombine. I click on this and look at that. Here's the mailing address, here's the transfer history, here's the land. Here's how wide it is, how long it is. Total square footage of the lot. Right? Here's the zoning. We're going to talk about zoning more in a second. There is even the picture.
And so, what I do, because my development is very targeted to specific neighborhoods, I will literally do a small batch mailing campaign where I only send 40, 50 letters and usually I get a deal out of it. Think about that guys for a second. 40, 50 letters and you get a deal out of it, right? Because I do very targeted mailings. I literally go down this map and I click on specific pieces of land that I want and I send a letter to these people. Brain that simple, right? I bet a lot of you that are listening that are in other cities, your county should be able to do the same.
All right, let's get going. Tear down scrapers. You guys understand what tear downs are, right? It's really deteriorated houses that you can buy for the value of the land and then you tear them down. A bunch of people are still saying, couldn't hear. Paul could hear, but now everything is muted. Did I turn on ... Okay. A lot of you guys are having sound issues. All right, I'm going to keep going.
All right, so tear down scrapers, right? It's really deteriorated properties that you can get cheap and it's not worth saving them. I'll show you an example of that in the second. Again, direct mail, right? There's other places where you can go and you can buy lists of landowners, send them letters. Direct mail is the bread and butter. I mean there's no more proven way to get deals, right? Mailed tax delinquent lists. You can buy lists online. I'm a big fan.
There's two different sort of vacant property software programs and I've endorsed them in the past. We've promoted them and my clients typically lake and have had success with these programs. Find Motivated Sellers Now, that's Cam Dunlap's got a vacant property software. Now they don't break out land individually, but for finding tear downs and scrapers, that's a great way to find those leads. I just showed you how to go through online tax records, right? The key is knowing what to look for. And then of course networking, right? And this is why I always say focus on one market, get to know the players in that one market. Become known for doing deals in a specific city or a specific area and deals will eventually start coming to you in.
I'm getting, this is a big year, right? I'm getting a lot of my lots through wholesalers. Just this year I probably bought seven or eight lots through wholesalers. Last year I probably bought 10 or 12 through wholesalers because I would all day long rather pay a wholesaler his fee than do my own direct mail, answer phone calls, deal with sellers. All day long. I would rather pay a wholesaler whatever that fee they want to charge me as long as the numbers still work for me. Right? So if you guys are not networking with your local wholesalers, that's a big mistake, right? Talk to every wholesaler you can find.
So in this case study there is six lots. I'll actually show you guys where these are. One of the things again, that I like about what I'm doing is that everything is really close together, right? So this was within three blocks of each other is where we built these six duplexes, right? Very easy to manage, very easy to get to, and you the sort of gentrify build up one little area. And so each property you build feeds off the other, right?
And so ... Where's my slide show? So six lots in this case study. Two were off market. They came from a realtor friend. He called me up and said, "Hey, I know this guy is looking to sell." Boom. We made a deal. Off market. One came from a local church, There was a relationship with with the board of trustees and they were looking to unload. Two were attached to a commercial property I bought. Essentially I got those for free. And one was a tear down.
This is one of the pictures. This red building in the right, this was a building they bought that was in really bad shape. We did a historical tax credit project there and converted it to a restaurant and four apartments. And then, you see behind this fence? It came with this land. And so there was two buildable lots that came along with this building. I bought the whole thing, and again, this is not indicative of the market today, right? Because I bought this during the foreclosure crisis. I bought this whole thing for 60 grand, right?
So I got the building for 60, land came for free and I built two duplexes right here in this blue building, two attached duplexes and then tear it downs, right? I wanted this little shack, sent multiple direct mail to the owners. I spent six months negotiating with them. I bought this little house for $30,000. I paid another six grand to tear it down and then we replaced it with another duplex. So it's a pretty cool little mixed use corner I've got. It's a restaurant and then 10 apartments I'll right next to each other.
So let's talk value, right? It's all about what you pay for the land. If you don't buy the land correctly, there is nothing else absolutely matters, right? It's all about what you pay for the land. That's what we're going to talk about. So how do you figure out the value of the land? Well, you start with zoning. Every single time you start with zoning. What can you build by right? How many units? You got to figure that out first.
By right development means given the current zoning, what are you allowed to build in the space of land, given the current zoning right now without having to change the zoning? And when we're talking about infill development, little small lots here and there, it doesn't really make sense. What you'll find won't often makes sense to go and try to change the zoning in that lot or get exemptions or get acceptions. Go for special use permits, zoning variations. It's usually just not worth the effort. Right?
So for bigger projects like the one they just showed you where we're doing 27 apartments and five retail spaces, there we're going to build something that the current zoning does not allow and it's worth the effort to go and to change and get the zoning exemptions and the special use permit, right? Because that's a $7 million project. It's worth the effort. If we're talking about a $200,000 duplex, it's usually not going to make sense for you to invest the time and the money to change the existing zoning. Right? So your starting point should always be what does the existing zoning allow you to build?
Everybody with me so far? We're about to go into the numbers. Bum-bum-bum-bum-bum. And those of you that post questions I'm not answering now, I'm going to take at the end, guys. All right.
So again, smaller projects usually not worth changing the zoning. So look at the existing zoning because that will drive value. Get a zoning handbook from your local county and learn the zoning code, right? What are you going to look for in zoning codes? Zoning classification. Is it residential? Is it commercial? Is it business, right? Sub-classification within that zoning. So in my market, and I'll show you an example. We have R, stands for residential. We have everything from R-5 to R-63. In our zoning code, as that number goes up from five to 63 the density of what you can build goes up as well, meaning on the same size lot that's R-63, I can build more units, than I can on that same size lot that's R-6.
Look at permanent uses. What does the existing zoning allow you to build? Are you only allowed to build single-family homes? Are you allowed to build two-family detached, two family attached, commercial, mixed use, right? Retail.
Look at minimum lot area for each use. Example. It's going to say you need the minimum of 3,000 square feet to build a single-family house. You need a minimum of 4,000 square feet to build a duplex. Minimum lit width each allowable use. Again, I'll show you an example in a second, right? Be mindful of grandfathering. So it, again, in my market, we may have a rule that says you need a minimum of 3,000 square feet to build a single-family home. But if there used to be a house there, and this was a buildable lot of record going back to a certain year, then even if the slide is smaller than 3,000 square feet, if there used to be a structure there, I am grandfathered in and I can still build a house there.
This is what our zoning code looks like. This is the R-63. You can go in here and you can see. Look, minimum load requirements. For a single-family detached house for a lot that's zone R-63, you need 3,000 square feet. If you're going to build an attached house, single-family, you only need 2,200 square feet. Now, if you want to build a duplex, a standalone duplex, right, detached, you need 3,200 square feet, et cetera, et cetera. Lot width. You want to build single-family? There is not much of a lot with requirement, right?
If you want to build a two-family and detached, you need the minimum of 27 feet frontage to the street. That's how why the lot must be right? Minimum yard setbacks, other large requirements. We'll talk about this during the design phase, right? Permitted principle uses. This tells me that I can build single-family houses. I can build two-family detached and attached, I can build multi-family, I can build live work units, et cetera, et cetera as long as I also meet these requirements. All right, you guys with me? Should we be pretty straightforward.
Karen, Kelly, if you're hearing this, you're typing all sorts of crazy things into the chat box. Like it just looks like you're pressing in your keyboard. I would appreciate it if you stopped because you're like cluttering up the comments. Hopefully you can hear me, Karen. Kelly, there's a lot of just crazy characters that you're typing into the chat box. Please stop.
All right, let's continue talking value. You have to know your maximum dollar per door that you're willing to pay. This number should include your new utility costs and site work. So how much are you willing to pay for land per door? Meaning, if you're looking at a piece of land where you can build a duplex, you need to have a number in mind in your head that you're not willing to go over per unit. So if you can build two units there, you should be able to say, "Okay, I don't want to have my cost basis in land be more than $15,000 per unit, which means I won't pay more than $30,000 for this lot."
So I'm going to give you a couple of rules of thumb to follow when determining value. The these rules are really meant to protect you. Your land should cost a maximum of 15 to 20% of the after repair value of the property, right? Or in this case, after repair value is not necessarily the right term because you're not repairing anything, you're constructing. So you could call it whatever you want. The value of your property when built should, let's say, let's say it's $100,000, your land should never cost you more than 15 to $20,000 or 15 to 20% of the after repair value. So if you're building a duplex whose value is going to be $250,000, your land should never cost you more than 50 grand. Now this includes your utilities. This includes running from the street to the property, your water, sewer, gas.
Now here's the problem, you're not always going to know what your cost of new utilities is going to be off the bat, right? Sometimes you're going to look at an infill lot and the only way to find out if there is viable sewer and water running to that lot is to dig it up. And that costs money, right? You can get your county to go out and map, right? You can get them to map whatever laterals. When I say laterals, I mean, imagine buried in the street you have a big sewer and then you have a water main, right? And there used to be house on this lot 20 years ago, 10 years ago, five years ago. Right?
And so there used to be utility connections running from the sewer and the water main to that lot. But you're going to have to dig up your lot to find those connections and then you should camera, that's your line. And you're not always going to invest that money before you actually buy the land. So you basically need to go in with the assumption that my new utilities are going to cost X and back that out of your dollar per door number. Does that make sense?I generally won't pay more than $20,000 per door for a rental and I almost never pay that much in my market. If you're buying a scraper, if you're buying in the existing house, it's actually easier to find your utilities because you can go into that house even if it's gutted, and you can find an existing sewer connection coming in and hopefully you can find the existing water connection and again, then then I would still camera that sewer line to make sure it's good.
I actually, now, for my rentals, I run all new laterals all the way through the main. I invest that money now. If you've ever dealt with rental property where tenants have backed up sewer and there is like a foot of crap in the kitchen and you have to put your tenants up in the hotel for 4, 5 nights while you dig up the entire front yard to replace the sewer line. Ask me how I know this and ask me how many times I've had to do that. I'll give you a hint it's more than one.
I've learned my lesson the hard way. Now we are running all ... And again, because I'm operating in the market where even if there was a house there, these laterals, they're 20, 30, 40, 50 years, right? So I'm running all new water and sewer laterals now all the way to the street to the main. It costs me money up front. But guess what? I sleep like a baby at night because I'm not going to have a backed up sewer again. I'm certainly not going to pay for my tenants to stay at a DoubleTree for the next week. Never going to do that again.
So, ballpark ARV. How do you figure out your value of your property before you build it? Again, I'm going to give you some rules of thumb. Take your rent. This is where we get our calculators out, guys. All right? So take your rent, take your projected rent, multiply it by 12 and then multiply it by 65%. So we're going to assume for a new building, that your operating costs are going to be around 35% of your rent roll. And that should be pretty accurate. If you want to be conservative, assume that your operating expenses are going to be 40.
I don't really subscribe to the rule of 50%. I think if you're running your new builds at a 50% operating expense, you're severely mismanaging your property. So for now, multiply by 65% right? So let's assume you're going to build a duplex. Each unit is going to run for $1,300 a month, multiply it by two. You get $2,600. Multiply it by 12 to get to your annual rent roll, and then take 65% of that to get to your net operating income.
Now, you're going to divide it by your cap rate. And again, you have to know your market cap rates. When we're talking duplexes, they're not always going to trade based on cap rates, but this should be sort of a good ballpark way to determine your value, right? So assume your market cap rate is 8%, you're going to divide your net operating income by your cap rate and that's going to get you to your value.
Is everybody with me? I don't necessarily have time to explain cap rates right now, but is everybody kind of following along here? James Wartman what's up man? Good to see you here. Sounds great. Yes, everybody is with me. Okay, good. Leon. Where do you find market cap rates? Look at comps, right? And again, when we're talking about duplexes, they're not always going to trade based on cap rates anyway. When we're talking about four units, six unit, 10 unit buildings, yes. Now they're trading purely based on the NOI and cap rates, right?
But look at comps. Sometimes when we're talking about duplexes, they're going to sell to just somebody who's going to live downstairs and rent out the upstairs. And it's not always going to trade based on cap rates. But, look at your comparable sales or just use a common sense number. I think for a new construction building in a attractive high end market, six to 8% cap rate, it should work for you.
So based on this, the max that I would want to pay for land, absolute maximum is 20% of that number and that should include my new utility costs, right? So that gets me to $50,700. And that should already include the cost of running utilities to the street. If I have to drop in a new water meter here in my market, that costs me close to six grand just for the water meter. If I have to pay for a sewer connection, I have to pay to dig up the lot, dig up the street. Now they're making us freaking repave the road. It's crazy, right? Whatever we have to deal with, it's not what you're going to have to deal with in your markets. You really have to go out and figure out what are the costs that are going to be associated for you to run new utilities to your property.
But based on these numbers, my maximum per door then I'm going to be willing to pay is $25,350.
All right, let's keep rolling. We still got a ton to cover. Don't quit on me guys. And what I like about this method, when you're talking cap rates, when you're talking about net operating income, this method completely ignores financing, right? So we're not even talking about financing yet.
Another simple way to look at numbers. Your total cost basis between purchasing your land, your soft costs, which are your architectural fees, permits, holding costs, financing costs, and then your hard construction costs. Your total cost basis should never ever, ever, ever, ever equal more than 100 times your gross monthly rent. So going back to my previous example, if my gross monthly rents are 1,300 times two equals 2,600, your poll cost basis should never equal $260,000.
Now, ideally, and here's another example, I did not have to go back to the previous one, right? So if my gross monthly rents are 2,500 bucks a month, your cost basis should be well under 250 grand. And if you want sweat equity, you really want to be under 80% of that number. So 80% of 250 is ... I used to be able to do math in my head when I was smart. I can't anymore. $200,000, right? So for this property, your actual cost basis, if you want some nice sweat equity going into the deal should not be over 200 grand including your land.
Now, are we talking about single-families or are we talking about duplexes or are we talking about the four units? For the purpose of this case study, for the purpose of this webinar, we're talking about the duplexes. It's much easier. And again, it isn't my market. I can cite the few other scenarios where this won't necessarily hold true, but in my market, and I think in most markets, you will find that it's going to be easier to make your numbers work for a multi-family than for single-family.
Here, if I build a 2,400 square foot duplex, I can get about $2,600 in rent right now. If I build a 2,400 single-family home, I'm not going to get more in the 15, 1,600 bucks a month for it. Now, if I build a four bedroom, four bath house near VCU, which is our college, that's the exception to the rule. I can charge five, 600 bucks per room and I can get very similar to this $2,600, but that's the exception, right? Where I'm building most of my properties, if I build a 2,400 square foot single-family house, I'm not going to get anywhere as much as if I build smaller units and charge more dollars per square foot.
Now, where do you go to get your rental comps before you get going with this? There is a ton of places. We'll go to Craigslist, go the Zillow, go to Hotpads, go Rentometer. Pay attention to square feet, pay attention to finishes, right? Pay attention to how old are the properties you're comparing yours to. Look at their onsite amenities. What utilities are your rental comps, including that you're not going to include? Make sure you're comparing apples to apples to determine what you'll be able to charge in rent once your product is finished. All right?
For my case study, my cost of land, again, that commercial building I bought came with these two lots and cost of land was zero. Can be bad, right? The house next to it, I paid 30 grand for, I paid another six grand to tear it down. So 18 grand per door not including utilities, Lot a block away, I bought for 29,000. So, I paid 14 five per door not including utilities. And then I bought the two other duplexes I built. I paid 44 grand total, so 11 grand per door. So on average, may six lots cost me right around $10,000 plus my cost for utilities and site work. So again, when I say I won't be 20, I really try to pay much less than that.
I can't stress enough guys, if you buy your land correctly, it gives you a lot of flexibility and freedom to design your project correctly, to build it correctly. If you over pay for your land, I guess it's that old adage, you make your money when you buy. It can't be any more true. You make your money when you buy. You have to buy the land correctly.
So, site selection. Let's talk about site selection. Whenever possible you should be selecting flat lots. Doing site work, scraping the lots, hauling and grading, and hauling away dirt, building and retaining walls, all of this is going to add massively to your costs. Uneven lots will always require a bigger foundation, a taller foundation, which means you're now spending more money on your block, you're spending more money on your labor.
There is really no upside to buying lots that are not flat. And again, ask me how I know this. Look for lots with existing water and sewer running to them. Again, most of your counties are going to have utility maps and you can get a map from your county. Here in Richmond, we actually also have something called Miss Utility, but I don't think they mark water and sewer lines if I remember correctly. But you can get your county map that will map your existing utilities. But then again, depending upon the age of that property or how long ago the old property was scraped from that lot, even if you have existing utilities running, then those lines may be collapsed.
But it's something you really need to research, preferably before you buy the land, right? If you really want to do your homework, go map these out, dig them up. And especially for sewer, you can camera it. It'll cost you a couple of hundred thousand bucks, but if the land is prohibitively expensive, where you know you're not going to be able to spend a lot of money on utilities and the only way for you to be able to buy that land is knowing that you're not going to have to run the new sewer line to it, spend a couple of hundred bucks, dig up the existing lateral in camera it and see. Make sure it's good to go right. If you're scraping the lot, then again, it's easier to find existing utilities. You can go into your crawl and find where your sewer comes in and you can go in and you can camera that sewer very easily. Same thing with your water connection.
But again, if your lines are 15 to 20 years old or older, even if they're decent now, if you're buying the land correctly and you can afford to replace them with good quality lines, I'm doing that all day long right now because I'm going to hold these properties for long time and I would rather have that peace of mind. I get to amortize whatever I spend now over the life of my financing instead of having to be cash for it in five years when that line collapses. Make sense? Is everybody kind of following me here?
DON'T HAVE THE REHAB VALUATOR PREMIUM SOFTWARE YET??
WHAT TO DO NEXT?
Share This on Social Media Please!
Click one of the buttons below
Leave Your Comments/Questions Below
Did you enjoy this? Get value out of it? Have questions?
Build Your F.U. Wall (How and Why):
BRRRR Deal Analysis Training:
Should You Flip or Rent?
BRRRR for Multi-Family / Apartments:
Download Sample Funding Presentation:
Get Rich Slow (a blog post):
How to Build New Construction Rentals:
Project Management Case Study:
ARV Calculator: Comps, ARV & Offers
BRRRR Explained in Detail:
Land & Ground Up Development Training:
Project Management Tools for Real Estate:
Build to Rent Detailed Training: