What I love about investing in real estate is that there are so many ways to make a significant amount of money and one of them is build to rent strategy.
There are literally hundreds of different strategies and ways to make money in real estate, and when I look back at my 10 years of investing I found that there are 6 major investing strategies that I use which allow me to acquire properties that have a significant amount of equity AND high cash flow.
So I decided to break down each strategy and share all of the nuts and bolts so that you can learn more about them, and you can decide if you want to use any of these strategies yourself.
The 6 Different Strategies I Use To Invest:
- Value Add Multi-Family
- BRRR Strategy
- Build To Rent
- Supported Living
- Out Of State Investing
- HELOC’s For Acquisitions
These strategies can be intertwined and used simultaneously.
For example, I’ve used the BRRR Strategy on a value add multi-family property. I’ve also used a HELOC to pay cash for land using the build to rent strategy.
I’ve even used a BRRR property on a value add multi-family and turned it into a supported living property.
In this post I am going to share the specifics on the Build To Rent Strategy. Below is a video that you can check out if you prefer to listen, and below are some highlights from the video.
Why I LOVE This Strategy:
- Ability To Recoup Initial Capital Investment
- High Cash Flow
- High Equity
- Easy To Rent Brand New Units
- Highly Desired
- Very Rare To Find 2-4 Units, Even More Rare To Find New Properties
Step 1: Find A Builder Or Find A Lot
Sometimes a builder will know of an available lot, other times builders just do the building part and will want you to find land on your own and then consult with them on building the structure.
The builders I’ve worked with didn’t step in until I had found a lot that was zoned for multi-family. Once I had a property then we met on site to discuss site challenges, excavation costs, overall building costs etc.
Wondering where you can find a builder?
There are lots of different options, one option is to ask around. I would start by calling the planning department in the city or county that you’re in and ask which contractor has submitted the most permits for multi-family properties. Some municipalities allow you to search permit records online.
You can also check out review websites such as Yelp, Angieslist, google or do a search on the master builders website for multifamily and it will list out the builders in your area.
Step 2: Determine What Can Be Built When You Find A Buildable Lot
You may have to pay a permit tech to do a feasibility study for you, or the builder may be able to help. Most permit tech’s charge $65 – $75 per hour.
Most all municipalities have a copy of their code online. If you are savvy in building code you can read about what is allowed and what is not in each different zoning class.
You can also go to the county or city in person and discuss your plans with a planner to get a better idea.
Step 3: Create a preliminary budget
You’ll need to account for the following expenses:
- Course of construction insurance
- Builders fee
- Excavation expenses/Site prep fees/drainage
- Utility connection fees paid to the utility district
- Actual building costs ($80 – $200 per foot depending on what is being built and the area)
- Loan fees
- Professional services expenses (engineers, planners, designers)
Mitigation fees (parks, schools, roads, traffic)
Step 4: Speak to Your Bank about construction financing
Once you have a property under contract, a builder ready to go, a budget and some preliminary plans you’re ready to apply for a construction loan, if that’s part of your plan.
Construction loans are typically one year loans, are interest only (5-7%) and may have an origination fee or two.
I always use the same local bank for all of my construction loans, and I submit the plans and the budget along with an updated financial statement. They order an appraisal based on the plans, and they will finance 75% of the total construction costs so long as the property appraises at 75% of cost.
If the appraisal comes in lower than anticipated, you may have to bring in more capital. Each bank is different so make sure to get the specific requirements from your bank.
The loan is then paid out on draws, and you have to provide invoices and the bank will send a representative to the site to make sure the building is as far along as you say it is. Then they will give you the amount on your budget line items to continue building.
Step 5: Refinance To A Long Term Loan
The construction loan is only good for a year, so as soon as you receive certificate of occupancy you should be starting the refinance process.
The new lender will order a new appraisal and apply a 75% max Loan To Value Ratio.
Sometimes the construction lender will over to convert the construction loan to a portfolio loan, though it would be less expensive to get a conventional loan if the property meets the conventional loan requirements (4 units and under).
Build To Rent Strategy Tips
- If you can keep your total project costs at or under 75% of the after completion value you will be able to recoup your initial investment
- Utility connection fees can be costly. Make sure that you have a good idea of what the costs to connect to the sewer and water services are before you move forward. You’ll have to pay connection fees to the utility district (you do get credit if you’re tearing down an existing structure and replacing with new) and fees to an excavation contractor to run the new pipe.
- I always negotiate a flat fee for the builder to build the structure and offer a bonus if the project comes in under budget and/or on time or completed quicker than anticipated.
- I pay based on a draw schedule with the final draw being upon issuance of certificate of occupancy
- In many municipalities a duplex is considered a residential property and are often allowed in single family zones. Most of the time anything above a duplex is subject to commercial standards which may be more expensive.
