The Beginner’s Blueprint for Building (Not Buying!) High-Return Rentals

22:43Yeah. So this will vary widely, right? Depending on what state you're in, because I'm going to talk about some numbers that are pretty inexpensive compared to other states, but this will give you a perspective. I think when you hear them that I think about them in soft costs and hard costs, soft costs, we talked a little bit about, but permitting fees, engineering fees, sometimes the, you'll have like utility impact fees. So you might have to pay an impact fee for the sewer or for the water. So those, those all fit under soft costs and And hopefully you can get all those, at least estimates on all those when you're building the lot, you're developing the lot itself.

23:16So that when you get the permit, all right, I'm good to go. I know what my costs are. So for me, the construction costs starts with this. You can just think about it from the ground up. So it's the grading. It's the foundation itself. So are you going to build a crawl space, kind of raised foundation or a basement foundation? Those are going to be more expensive. Many of the new construction houses these days that are less expensive are going to be on a slab, meaning on a cement, a piece of cement that's in the ground. That's typically what we're building these days. I like a crawl space if I can on a regular rental property.

23:49I don't know about you, Tony, just for a maintenance standpoint, but most of our construction properties are on a slab. That's been less expensive. And then from there, the costs are framing up the building, roofing, outside walls, siding, windows, all the systems, and then all the way to the finishes of the property. And if I had to summarize all that for us, I think the total construction on those hard costs were about$100 a square foot was kind of the rough number we had on our properties. And I've talked to a lot of builders in my area, even my area, that's pretty cheap. Like if I were to go buy a retail like turnkey kind of property from a builder at like full price, it might be more like$200 a square foot or so in my area.

24:31So$100 a square foot for the construction costs, plus then you add the land in. That's where it might be like$125 a square foot all in because we built about a$1 ,700,$1 ,800 square foot house. And we try to be really efficient with it, talking about floor plans. Our floor plan is a two-story house, pretty narrow. So it was like deeper than it is wide, had a little one-car garage, three-bedroom, three-and-a-half bath. But if you build a two-story, it's more efficient because compared to the whole square footage of the house, the roof is a little bit smaller than if you had a wide one-story house.

25:08And so everything you save on a smaller footprint, smaller roof, two stories, the cost of that second story is going to be a lot cheaper than the cost of building the first story. And so I think that's how we got some of our costs down, was just having a little bit more efficient layout of the property and doing that. But that ended up being a really – I was really happy with that overall cost of the building. And that, again, goes to having a partner who's doing this over and over again, has a relationship with subcontractors, has plans in place, knows his materials. That was a big part of that.

25:41Chad, that insight is super helpful, not only for rookies, but again, for myself. Is there a rule of thumb on land costs versus construction costs? land should be no more than X percent of your total project cost? Or do you take it on a project-by-project basis? It's like the 1 % rule or some of those other rules. There are rules of thumbs. You have to vary them based on the location, but I'll give you some of mine locally. For a rough rule of thumb, we try to be into the land for maybe 15 % to 20 % of the value of the property, the full value. I'll give you real numbers here. Let's say it was$300 ,000 was the full value of the property after you built it.

26:21That's the after repair value. So 20 % of that would be$60 ,000 in the lot. 15 % would be, what is that,$45 ,000 or so? So you can kind of see where I got to my numbers. Our property is worth about$275 ,000,$280 ,000. Our lot cost was about$45 ,000, somewhere in there. So that's a rough rule of thumb. I think if you start getting too much more expensive than that, if you start getting like 30%, 40%, it's just going to be harder, harder to make some of the numbers work in my area. Now, I don't know if I was in Southern California somewhere, maybe those numbers have flipped around. Maybe there's different, there's different trends.

26:55There's a lot of factors that go in, but the main number I look at Tony, it's just, it's just like with regular investment. When I build this property, how am I going to make money on it? Like that's, that's the bottom line. And, and for me, it's, it's the rent to price ratio. That's, that's one big deal. Like this property that we built that we had 230 ,000 an all-in, including the lot and the land. The rent was$1 ,900. So we have that rented now. So it's not quite the 1 % rule, but it's close enough for us on a good quality property and a quality location. That meets our criteria for a basic cash flow that we're trying to look for.

27:29And also, I like that we have a margin of safety. We're in it for$230, but the property's worth$275,$280. So if we had to sell the property next year, we could still sell it, get our money back and keep moving on. So I think the combination of that rent to price ratio plus the discount from the full value, those are the two main numbers I look at. And the rest of them, you just have to work backwards to get to that number. I think another big question that rookies have, Chad, is the financing component. We're very aware of all of the different loan products that someone can use to go buy a property that's already standing, right?

28:05But when you're talking about acquiring raw land and construction costs, maybe slightly elevated risks. What are your favorite methods for financing build to rent projects? Well, I'm going to give you one that I'm using just to be real, but then I'm going to tell you what I would do as a rookie, because there might be two different things. We've saved up some money to the point where I've talked about this in other episodes, I think when I came on last time that you have these different stages of your business, you're in the starter rookie phase, then you get in the builder phase where you're growing your wealth.

28:34And then you get to this third phase where we are, it's more like the harvester phase where you have less debt. We've been paying debt off. Our properties are producing cashflow. So long story short, we're able to self-fund a little bit more of what we're doing right now. So we had cash to do this. We had saved up from other properties. That being said, we built five properties and we didn't have enough cash to build all five of them. We had enough to build two of them that we kept. And so the other three, we actually got private money, which is something I've used a ton of in my career. I prefer using private money instead of a hard money lender, which are very similar.

29:10A private money lender is basically an individual, another investor who has a little bit more lazy money, I call it, where they have some money sitting on the sidelines, but they don't want to do all the work that we're doing. So they're willing to loan money at maybe 7%, 8%. In our case, it was 7%. And they're just like, all right, cool. I'm going to loan a couple hundred thousand bucks, make 7 % for six months, and then I'll do it again. and I don't have to do all the work. That's awesome. Some private lenders will charge 10%, 12%, but somewhere in there, 7 % to 12 % is what I see a lot of private lenders doing.

29:39Hard money lenders, probably similar rates, or maybe a little bit higher. I'm not sure what you've seen out there, Tony, but maybe they charge extra points though, and it's a little bit more expensive because it's more of a business. Those are two options that a lot of people will see building houses use. The other that I've used also, if I were a rookie, I think this is what I would do. And what I did do when I first started building remodels is go to local banks and try to find commercial loans at a local bank. And the reason why is a lot of local banks are relationship lenders still. And so they have an actual person you talk to, you sit across the desk from them, and they actually come out of the property sometimes and they look at the property.

30:18Oh, here's what you're building. Here's what you're doing. They have local branches and they do construction loans and they do commercial loans. And so they will have a loan in their portfolio where they'll say, all right, we're going to give you some money to buy the land. And then we're going to have draws. Maybe they have like five, six, seven draws where every time you meet a milestone of the construction, they'll come out and inspect it, probably charge you a fee for doing that. And then they'll give you a check for that portion of the construction. And you can use that portion, that check to pay your contractors at that point.

30:49So I've done both of those. I do more private money or my own money now, but I would do a commercial construction loan probably if I had to do it all over again just to get it built. I couldn't agree with you more on going to the small local regional banks. And Ash and I talk about the benefit of doing that all the time. And actually, the very first real estate deal I ever did, it was a long-distance BRRRR. And I found a local bank to fund it. And Chad, they funded everything. They funded 100 % of the purchase and the renovation. And long distance, first deal, I don't really know what I'm doing.

31:27Before they would release a draw to the contractor, they would send someone from the bank to go inspect the work, make sure it was all done correctly. So for me, I'm like, this is great. I got someone that's checking in on the work, making sure it's done the right way, and I don't have to do anything. So yeah, I couldn't agree more to go after those local banks. And I think the private money is another great tool. I'm curious, Chad, for you, how are you structuring your private money? I know you said 7%, 8 % on the interest rate, but are you making payments throughout the life of the private money note?

32:00Do they just get paid back once you actually sell or refinance the property? What are the other terms like on the private money for you? Yeah, it's varied over the years, but ideally as a borrower, what I'd like to have is I'd like to pay, just have the interest accrue. So meaning I'd have no payments, but then six months from now or three months from now, whenever I pay them off, then I would just pay all the interest at one time. So just to give you real numbers, let's say I borrowed$200 ,000 and I was at, well, it'd be hard on the math. 7 % would be 7 ,000 a year, 14 ,000 a year. So it might be like 7 ,000 over six months is the interest I would owe them.

32:34And instead of me paying monthly, I would pay that at one lump sum at the very end. That's what I would prefer as a borrower. Now, as a lender, if I flip that around as a lender, when I make a loan, I usually require them to make payments because I want them to feel it a little bit. I want them to have a little bit of pain and like, all right, I still got this loan going on because I've seen sometimes where builders or developers, they get so many properties going on and they just kind of float too many properties at once. I want them to have the... And I also want to know if they're getting in trouble as a borrower, I want to know the day they miss the payment because then I can go help them fix it.

33:07You don't want to let a problem sit. So it's going to depend on if you're a borrower or lender, but the terms of interest rates, a big term. The payment of whether you make payments or have it accrue is another big term. Another one that's kind of a little wrinkle or nuance that is, are they charging you interest on the full amount or are they charging you on just the amount you've drawn out? That's because if you, like the very beginning, if you only draw 50 ,000 bucks to buy the lot, if you only pay interest on the 50 ,000, that would be less interest for you as a borrower than if you pay 7 % interest on the full 200.

33:40And that's negotiable, right? I think as a borrower, you'd rather pay less. The lender's probably going to say, no, no, you pay 7 % on the full amount because I got that money sitting in the bank. You can get kind of complicated with that stuff. But the main point is interest rate, payment, and then also think about worst case scenario. This is the thing that's helped me survived for 22 years as an investor, is things might not go right. We might get to six months and I haven't finished the project, or I can't get a loan yet. My refinance loan hasn't worked out. Have a game plan for what will happen if you can't pay them off.

34:14Can we extend it? Will I need to charge a fee for that? Lender is not a bad thing to talk to lenders about worst case scenarios, because trust me, they're already thinking about that. Every lender I've ever known, including myself now that I do some loans, we are very pessimistic. We're thinking about those things. We're already thinking about it. So as a borrower, if you talk about the worst case scenario, you're actually speaking the language of the lender, whether it's a bank or a private lender, go ahead and go there, discuss it and say, I'm not planning on this happening, but if it does happen, let's talk about what would we do in that scenario.

34:44Up next, Chad, I want to talk about keeping construction costs low, maximizing profitability and the lessons you've learned around managing contractors, because that can sometimes be the biggest headache. So we'll cover that after a break to hear a word from today's show sponsors. You know, when I first started sharing my real estate journeys online, I didn't have a website. I had a spreadsheet, an Instagram account, and no idea how they'd ever connect. I remember thinking a real website was going to cost me thousands of dollars and take a developer weeks to build. So I kept putting it off. Then I found Hostinger.

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39:51But now I want some more tips about how to really make this strategy work. So what is your advice on finding and selecting the right contractor to actually make sure that this build is successful? I think this is one of the trickiest parts. It's been one of the hardest parts for me as an investor over the years is finding good team members and keeping them consistently. The way we've solved this problem is – and this is a little bit difficult if you're a small investor – is to find people you can use over and over again. And so my builder partner, he's building a lot of houses, and he's building a lot of multi-unit apartments as well.

40:25And so if you want to find the good subcontractors, keep them busy. Give them work. And so that's one answer for somebody who has a lot of volume. For those of us who only do one or two here and there, that's not always the solution. So I think in those cases, we have to be pretty patient with our schedule. Understand that we have a trade-off here. If you want to get somebody to come out there right now and do the work right now, the person who's not busy is not the one you want, right? They'll jump on it right now, but do you really want that person? Whereas the person who is super busy, who's got like three projects lined up, you're gonna have to get on their schedule like way ahead of time, plan this out.

40:59You might have to be a little more patient as the little one, you know, small investor who's just doing one project at a time. But in the end, it's gonna be faster. Like I've gotten there. I've touched the fire and gotten burned by the person. Oh, they're ready. They're cheaper. Let me go with that person. I think the rule of thumb here for me is go with a more high quality contractor who's busy, even though they're busy because they're busy for a reason, like they're doing good work and get the referrals from those other builders. So I think that's the, if there is a trick, it's that, is that there's no shortcut on those contractors.

41:30You just got to get the good ones. And I'm nodding my head vigorously because I've made that same mistake as well, where we had two rehab projects. Our usual crew was tied up with other projects we had going on. I was like, I want to start these now, you know, we close in a couple of weeks and first warm body, they were able to get in there. We had to fire them, I think a month or so onto the job property still sat. Then I had to pay someone else to come back and finish it off. Right. So it didn't cost me more. So sometimes patients, even though it feels more expensive on the front end, it can save you a little bit on the backend.

42:00So I think we know what to look for, but I guess, what is your recommendation to actually find those folks? Like if I'm a rookie, maybe I don't have a big network right now. I'm doing this for the first time. where should I actually look or go to find these contractors for the build-to-run strategy? Well, BiggerPockets is a good place. I think any community, if you can go to some of the local boards, local parts of the forums, or if you have another local meetup, I'm just a big person-to-person referral kind of networking is the big value to me. So I met most of my subs from other contractors, other property managers, other fix-and-flip people.

42:37They're going to be a little bit guarded with their contractors because they're trying to use them too. But if you can just, if you can go to construction sites, talk to people, go to meetups, talk to people. And what you're talking to them about is like, Hey, I'm building, here's my plans. I'm building a house. Do you have a good framing crew that you really like? You know, I'm looking for a good framing crew. Do you have a good roofing crew? Like have some specific questions and show that you're competent, show that you're, you're, you're ready. Like I think if you, if you show that competence to another investor, another builder, I think they're, they're willing to share at that point, But referrals, referrals, referrals.

43:09That's the name of the game. And the other thing I was going to add, though, too, about our prior conversation, how do you be efficient with your construction costs? The contractors are a big part of it. But the other part that I think my builder really has dialed in is going back to the point you made earlier about having a cookie cutter building, a plan that you build over and over and over again. Because it might be cute to do this little custom thing with the roof and do this little you know, let's do a little wing on this property and let's change the blueprint a little bit. But, you know, what that means is you don't know as clearly what your supplies are going to cost.

43:42Like my builder partner has like a list right here of every sink down to the, like the nails and the screws and the flooring, like every single material they have. And that stuff just gets delivered to the property, right? It's just, it's there. He uses the same stuff over and over again. So I think part of this with the contractors or with the materials is just efficiency of being organized and not wasting time and space and energy going and trying to do something novel. Like that's what you have to do with a remodel project because every house is a little bit different, but the more you can custom, not customize, the more you can make it consistent over and over and over again, it's just going to make the flow of the whole job easier.

44:18You're going to make more money and it might not be quite as like, it's not going to be on the front page of like design magazines because you're, you're typically building entry, entry-level house, you know, but it's going to be, it's going to make a better investment typically. Yeah. So I guess on that point where you talk about not having the HGTV front cover type property, how do you ensure that your rentals stand out without pushing your costs too high? Yeah, I think it was picking and choosing a couple features that are going to be really nice. So for example, in these properties we built, the location was good.

44:48That's the number one amenity. But number two, we had higher ceilings on the first floor. That was something that's a little bit more of a value add. If you go to some starter homes, it might just kind of feel a little small. Even though the space was not that big on the first floor, the windows were bigger and the first floor ceiling was a lot bigger. It was taller, maybe a foot or two taller. That made a huge difference. When I walk into the place, it just feels like a more valuable property. It feels like a bigger property. So if I'm a starter renter or a starter buyer, that's going to make a big impression on me.

45:19So you spend up a little bit on things that make a big impression. Kitchens and bathrooms are the same. People always say that's where you want to spend your money. And so if you can go a little bit nicer on an appliance or two or on some countertops, you're not going to go over the top, but you're going to pick and choose some things here and there. And I think, number one, if you have a great location, that's going to do a lot of the job. If you get them in the house and they're wowed by one or two things, they're going to overlook, or maybe the closets have some standard closet fixtures. They're not the most fancy stuff.

45:50Or maybe it's nice LVP flooring, but it's not like the highest end LVP. So you can go like quality, but you don't want to go the cheap, cheap stuff. But you're going to have to pick and choose where you spend on the quality. And if you do that selectively, you can still give a little bit of a wow factor, even on an entry-level house. Chad, I appreciate all the value that you've shared today. And I know you've piqued the interest of a lot of our rookie listeners on the build-to-rent strategy. And like I said, it's something Nash and I both have talked about. And I'm hoping to maybe kick my first build to rent project off before the year's over as well.

46:24But I guess last piece of advice, like what, for Rickies that are considering build to rent, what mindset expectations should they adopt for long-term success with this strategy? I think you got to be patient. Like when you do anything new, it's going to be, there's gonna be a learning curve. So we've talked about land development. We've talked about building relationship with contractors. We've talked about land plans. There's gonna be a lot of new here. is if you're a new investor, plus you're doing a new strategy, just be patient with yourself. Give you some time to learn this thing. You know, I'm a big, I'm a big believer in partners.

46:55So don't be afraid. Like I have this philosophy that like, if I were going to like a county fair and I wanted to eat a pie, like I'm in the South, I like to eat pies, right? Sweet potato pies, pecan pies. Like, you know, if I wanted to, if I had this pie was on sale, but I didn't have any money, I would be willing to like give, if Tony had the money and we were willing to split the pie, I'd be like, hey, Tony, you get this pie 50 % off, I get a pie. And the point is, I could split the pie with you, Tony. And I find so many times where I want 100 % of this pie, and I'm going to do either nothing or get 100%.

47:25And as a rookie, I think sometimes you've got to be willing to either make a little bit smaller profit margin or give away something in exchange for something. And if you do that, there's plenty of pies out there. There's plenty of opportunity. I believe that more than ever, even with interest rates changing, even with prices, like for the person who's willing to like divide up your pies, whether it's the money partner, the builder partner, even with your tenants, giving them good value, there's tons and tons of opportunity. And I think that's an abundance attitude. That's a thoughtfulness of that.

47:57There's so much out there that I'm going to treat my contractors, my tenants, my partners really well. And maybe that means I make a little bit less on this right now, but over the long run, I'm going to eat for the rest of my life and I'll never, never go hungry. And that, that, that attitude is like served me super, super well. Chad, I can't think of a better way to close out this episode than, than that advice. So I appreciate you sharing that. Always an absolute pleasure having you on the real estate rookie podcast. Where can folks go to learn more about Chad Carson? I hang out a lot on YouTube.

48:28So if you're watching on YouTube or listening to podcasts, I have a coach Carson podcast. There's all about real estate investing and kind of the nuts and bolts of the small and mighty style investing that I do of, you don't need a thousand units. You could do it with two units, five units, 10 units. And so I just, I break down a lot of X's and O's there on my YouTube channel. So just search for Coach Carson on YouTube or your podcast player. Well, Chad, thank you again for joining us today. Rookies, that is it for today's episode. Again, my name is Tony J. Robinson. You can follow me on Instagram at Tony J.

48:56Robinson or follow the podcast at Real Estate Rookie. If you're listening on podcast players, make sure to subscribe there. If you're on YouTube, give us a follow and subscribe there as well. And we will link to Coach Chad Carson's YouTube channel in the description of this episode as well. That is it for today, guys. We will see you on the next episode of Real Estate. Ricky. Push your limits. Train with precision. See the results. At Equinox, that's high performance loving. Everything you need to lock in and unlock your potential at Equinox. Start today at equinox.com.

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