What do I need to to build a rental property?

[Dan Golby]

I have an opportunity to buy a lot that I would like to build a duplex on. Currently there is an old duplex on it but it is pretty rough shape and basically needs to be knocked down.



My question is how much capital will I need to build a rental property?



I realize if I bought an existing structure I only need 20% but I'm assuming I will need more money in order to build. I'm hoping that the fact that there is an existing house on the property will make it easier to build on than just raw land.



I'm estimating the total cost of the entire project at $600-650K and I only have about $120K available for down payment so it may be a little too expensive for my budget, but why not think big??

 

[Thomas Beyer]

Some banks lend up to 80% on construction projects, but most would lend a lot less, say 50%. It is primarily a function of your overall networth. Ideally you can invest your own money and bring in a joint venture partner who is willing to add cash and co-sign a construction draw loan. In most cases a better ROI is the purchase of an older home to fix-up to sell or fix-up and rent, or just rent without major additional $s invested. Building new to rent makes sense only in exceptional circumstances even if you can get a 75% mortgage at 3%, and less so if money costs a lot more (8%+ ) or if more than 25% down is required.

 

[invst4profit]

In my mind the primary factor to consider is "what rent can I expect to receive" when the project is completed. Dollar for dollar the best return is likely maintaining or renovating a pre existing building rather than building new.

Return on investment should be a investors primary concern if the intent is to hold and rent.

 

[housingrental]

You should talk with a mortgage broker

Cash required will vary depending on the exact location / project / owner / plans

There is often cash available, but the cost and terms might not be what you need to make the build economical

 

[Dan Golby]

Thanks for the great feedback. I've always wondered why you don't seem to hear of people building to rent, if anything a developer does the building then investors might buy directly from them....let them put up the big money I guess!!



It sounds like I definitely don't have enough down payment, and my net worth is would be about the same as the cost of the project, so I just can't see anybody giving me the money!! Plus it would leave me so short on cash that it would probably ruin me.....so that plan is cancelled.



My desire to build simply comes from the fact that I can't find something perfect, or close to it when it comes to a rental. I bought a brand new suited house 1 year ago from a builder, and it has been very good, but there are always the little things that you wish you did differently.



There have been some new listings lately, I will just have to keep looking, the right one is just around the corner I'm sure.

 

[renatusus]

The municipal planning department will have information on all the new
development that is coming or has been zoned into the area. If there are
many new condos, business parks or malls going up in your area, it is
probably a good growth area. However, watch out for new developments
that could hurt the price surrounding properties by, for example,
causing the loss of an activity-friendly green space. The additional
condos and/or new housing could also provide competition for your
renters, so be aware of that possibility.