To Build or Buy Investments?

This week we closed on our first investment property build, ending a nearly two and half year adventure. Two and half years you ask? Please read on. Successful rental property investing like most things, is a math problem, it either works or it doesn’t. Fortunately, the math should work out on this investment in the long run, but it certainly has been one heck of a journey already…

A few years ago we bought a duplex which included a quarter acre vacant lot. We purchased the place at a great price and it is performing well on the rental market. In spring of 2019 we started talking to builders about constructing a near identical duplex on the vacant quarter acre lot.

Home builders provide cost per square foot as a rough estimate on the construction. As we spoke to different builders, the costs were coming back nearly $50 per square foot over what we were targeting. What I found is most custom builders really don’t want to fool around with a ~$200K duplex made of contractor grade materials. They had much rather spend their time on the $500K+ custom homes. I understand their point.

About to give up on our plans, we came across a company who specialized in building on your own land and gave them a call. When I inquired about construction costs, they responded they did not build any homes over $80 per square foot.  They had me at hello!  Again, this conversation took place in the summer of 2019.

The company used our existing duplex to draw up the blueprints for our new construction.  We secured new construction financing and a little over two years ago, in November of 2019, we went under contract with the builder. 

The initial planning and design phase went pretty smooth but when it came to execution the schedule quickly went off the rails. Scheduling a competent surveyor and a geologist to lay out the build and septic plan proved challenging. It was mid 2020 before we could even get the required permits from the county for the build.

A global pandemic in early 2020 also certainly didn’t help things. Thankfully, many of the materials were procured before prices skyrocketed. The foundation was finally poured in August 2020. At points during the construction, progress would move very rapidly. For instance, framing and roofing was completed in a week. Then the structure would sit. And sit. Untouched for months.

The superintendents assigned to this construction were nice but very young and inexperienced. After about a year and a half of delays, the CEO of the company eventually took oversight of the project personally which helped push things along.

I won’t go into every mistake, miscue and gaff that made what should have been a 6-9 month build last over two years and run about 10% over budget. Needless to say, for my military trained mind this endeavor was very nerve wracking.

What was the root cause for the ridiculously long build? A global pandemic, poor project management and quality control as well as a unique socio-economic environment where demand for workers far outweighs supply are all likely suspects.

Regardless, the finished product is as planned and we’ve got a list of prospective tenants ready to occupy soon. Rents have skyrocketed during the build and the new units will demand a premium. Are we losing return on our investment in the near term? Absolutely. However, in the long run, the math works out and we should come out pretty well.

To put it in program management terms, performance was (eventually) met but cost and schedule were completely blown. Which brings me to the crux of this blog- you get what you pay for. We went with the lowest bidder and the schedule suffered for it.  An old saying in the acquisition world goes you can have it quick, good and cheap…pick two.

Would we build again? It depends. Timing is everything and even though the build took for what seemed like forever, the timing was quite by accident, superb. Most of the materials were procured at pre-inflation prices so the overall cost of the build was substantially less than what it would cost to build today.

The property appraised much higher than what we built it for, giving instant equity. We were able to also lock in a great interest rate on the permanent loan and even get some cash out. Not sure we could do the same in 2022.

Rents also increased dramatically over the past two years due to a lot of reasons making the property more profitable. If the property was completed on time, the rent would be lower. Lastly, existing real estate prices have gone through the roof in our area recently. We could not purchase a comparable property already built for what we paid for this construction.

All that being said, I think we are definitely more lucky than good. I’m not sure I want to press my luck again. I’m a bit anxious by nature and this build was a very trying experience. If schedule delays and a host of other problems near daily are something that might cause your anxiety to peg, building might not be the best option!

Even though I got several more grey hairs as a result of this endeavor, it was a tremendous learning experience. If we do ever undertake another build, we know the questions to ask and what to look for, whether building another investment property or our dream home. We will definitely be a bit more deliberate in choosing a builder and more directly involved in project management of the build!

The commentary provided in this blog and in my books are for informational purposes only and not intended to be a source of financial or investing advice.

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