I started my real estate investment portfolio using duplexes. The difference is I jumped in on the new construction end vs buy and fix up. When I first started investing (blindly) right before the crash of 2008 (and got totally crushed) I tried a fix and flip that was way over my head. This scared me for years so this time around I decided I would start by just buying something turnkey and renting it out. I decided to put in some offers in Houston, Texas on some duplexes instead of single-family properties because double rent is always better than one. I just don’t like the idea of 100% vacancy with single-family when someone moves out. I figured I could reduce my risk by 50% by having at least two units vs starting with just one.
All my offers were getting outbid or not accepted so I decided to reach out to the builder of a property that I lost out on and asked directly, “Hey, how much would it be for me to just build one of these myself?” When she (the builder) told me how much it cost, I was all in. I could save myself in excess of 70K+ just by building instead of buying retail… Game on! But now I had to figure out how the heck I was going to get the hundreds of thousands to build from the ground up.
I will say I had a bit of an advantage because I’m also a licensed loan officer and my parents own a mortgage brokerage (called HK Lending… Shameless plug). So I understand the lending part of real estate really well. I started going through our loan programs and guidelines and calling underwriters that did new construction to figure out how in the world I could execute this. I discovered that new construction is a totally different beast when it comes to lending. New construction funders are really nervous about building from the ground up because so many things can go wrong. They will usually only give you up to 65%-75% of what the future value of a new build will be worth. The other obstacle I had to overcome was the amount of reserves, and capital they want you to have upfront just to get the loan. They will usually only cover about 70-80% of total project costs. This means I had to come up with the other 20-30% of total project costs, plus closing costs, plus interest payment reserves, plus the funds to kick off the project. New construction loans require that you start the project with your own funds then get reimbursed via something called a draw. The capital requirements can become a huge barrier.
SIDE NOTE: If you are wondering how I got the funds to even think about approaching this route I will need to cover the details in another post. Essentially I used business credit cards with 0% interest, liquidated the money using the HELOC that I had on my personal residence, then used the cash as my skin in the game. So don’t let anyone tell you buying a house is not a good idea. It enabled me to access equity and start investing… 🙂
Once I solved the capital issue the next hurdle was finding a program that would let a rookie start with new construction. Almost all programs required that I have at least 1-3 prior builds. This was very frustrating. I lucked up and stumbled onto a unique program that was new and allowed new investors (like me) to build their first deal as long as I had the capital. I was in the game! Timing and persistence led me through the door. This was literally 4 months before it felt like the world almost came to an end with the start of this crazy pandemic caused by some crazy mysterious disease known as Covid-19. I could have never seen that coming. To be continued…
I’m a loan officer with HK Lending so if you would like to explore new construction as well. Reach out to me at firstname.lastname@example.org and I can help walk you through the process of getting approved.