If you are intimitated on building to rent, that’s fine. But please know, in my experience, its like everything else in real estate, you just have to start. Follow the steps and learn as you go.
I have owned rental property for over 17 years.
In the past, I have bought properties that needed some slight cosmetic upgrades and repairs. This helped me buy the property at a discount. I did most of the repairs myself (gaining instant equity :-))
Then I rented the property out and made a decent return.
This is what 90% of what landlords do.
Something has changed in the last couple of years where this formula doesn’t work.
My friend and fellow landlord Brandon Turner made the BRRR acronym famous.
The formula works!
However, in my area, properties simply don’t cash-flow using this techinque.
At least they don’t cash flow as much I need them to.
Which leads me to how I got into building rentals.
A year ago, a wholesaler I know approached me with a property.
Side note, I personally call every wholeseller and tell them what area I am interested in. I let them know if they send me that detail without blasting it to everyone, I’ll pay whatever they are asking – and make a decision within 24 hours. This is very helpful.
The property actually had a house on it, but needed to be torn down or rehabbed. The numbers didn’t make sense to rehab it and I would be stuck with an old house on a large lot.
Contents
Demolition
The first step was tear a house down.
My son and I watched a lot of youtube on this and thought it would be a blast if we did this ourselves. I have a friend with an excavator and we went at it!
Note, before this I had to acquire a land disturbance permit and file an erosion plan.
I have to say that this was the most fun I have had in a long time – especially fun “working”!
I actually had a vacation scheduled so I hired someone to complete the demolition. Note, once a house is demolished you should spread seed and straw for soil erosion.
Surveying and Subdividing
One of the biggest things I learned in the whole process was how criticall a good surveyor is and how much they do.
I planned on subdividing the one lot into 3 lots.
Because I was subdividing into more than 2 lots the city wanted to make me submit a formal engineered stormwater plan. I got them to waive this since I was only going to build on 2 and sell the third lot.
The surveyor sent me the following 2 options:
I went with option 2 because thats what made the most common sence to keeep using the existing driveway.
Hiring A Builder
An entire book could be written on how to hire a builder.
I hired Evan Green with EPG homes. The main reasons I hired him was that he was recommended by several people he has worked with before. He also had built 3 houses up the street from this project. I was extremely impressed with how they ended-up looking and how fast he finished them!
He built 3 three bedroom and 2 bath houses in 3 months! He started the process first week of January, was finished in March, sold in April!
I really value this kind of speed. To me it shows you know what you are doing and you have dedicated subcontractors.
I did briefly consider two alternatives that you might want to consider:
Alternative 1: Build the two houses myself. Yes, I paid EPG Homes a flat fee so on paper this might have saved some money. However, this money saving would be radically offset by the increase in time it would take because I don’t have dedicated subcontractors. Aside from not having dedicated subcontractors, I didn’t have the slightest clue with how to build a house and coordinating all the subcontractors. I also didn’t know anything about building codes and passing inspections.
My builder put something on facebook about a year ago that said basically a good builder will pay for themselves with lower pricing for materials (since they buy in bulk) and more reliable labor. This proved to be exactly true for me.
Another alternative that I might explore in the future is 84 Lumber. They have a process where if you get a foundation poured or crawl space installed they will handle the rest. This is definitely not a once size fits all solution, but if you have a normal lot and want to use one of their house plans this would work really well. I have some friends who have used them for this and have nothing but great things to say.
Layout
Once I decided on the house plans and specific roof lines things went pretty fast. Well, after it rained for 6 weeks it went fast 🙁 !
The surveyor actually goes out and sets the pins regarding the layout of the house. I have seen it where the builder does this and I’ve seen this where the excavator does this.
Excavation
I actually had to get my footers pumped-in which added $600 to my overall bill. (Don’t worry – there’s a way to see all my numbers – keep reading). I had to use a concrete pump truck because there was a slight hill in the driveway the concrete couldn’t make it up in the rain.
I was surprised at the dirt-bill and how much the excavation cost for the footers! The reason was, there was actually a hill on the backside of the property that we had to cut into (more on this later).
Getting Dried-In
Ordering the lumber package, roofing and windows on two houses definitely maxed-out some credit cards and led to a couple of free nights at a resort in Flordia for the family! I paid for the materials using credit cards and used a construction loan draw to pay for the labor.
Lights and Countertops
Thankfully, this is one area my wife took charge. Because we had plenty of time in-advance my wife was able to save a lot of money buying all our lights on Amazon. She got granite for the bathrooms and quartz for the kitchen. The reason was, she got a great deal on the granite because it had been returned.
Flooring
Since I was overbudget and the city was wanting me to build a retaining wall (since I cut into a hill) my builder searched really hard for discounted flooring. I really wanted to install the flooring myself to save a lot of money. However, I just didn’t have time and I wanted to keep progress going.
I ended-up buying engineered wood and my total cost was $2,682.22. This was for two 1,150 sq ft houses. My labor was $2,600. Therefore my total flooring cost was $5282.22.
Painting
This was another area I planned on doing myself but my contractor got some great prices I went with his subcontractor. His crew did a great job and some other punchlist items.
Landscaping
The city wanted me to seed and straw my new yard. Me and the kids did this on a Saturday and it was pretty fun. Instead of a $1,800 bill it was more like $200.
Certificate of Occupancy
Getting a certificate of occupancy was the last thing I needed to get these rented. This is where I am very grateful I hired a great builder. The city (in my opinion) was really picky (i.e. boards in the slats of the stairs?)
Should I Sell or Rent These Houses?
How do you decide if you should sell or rent a house out? Like a lot of personal finance questions, the answer isn’t totally mathematical. It has to do with your risk tolerance, debt and a lot of psychology.
The market is crazy hot right now and maybe I’ll regret not selling. However, I decided to rent, because I am very bullish on the area and homes in teh area are selling for a very low price/sq. Ft. that I think will increase radically over the next couple of years.
Things I Was Successful At
Buying the lot right – this was the biggest reason I knew I was going to have some equity.
Doing my own landscaping
Buying flooring direct
Things I Failed At
Excavation bill was out of control
Retaining Wall required by city
What to do now?
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