This article is part of our “Ask an Investor” series with Jerome Fazzari and Lorna McManus of GreenPen Investments. After working on dozens of properties, they are now here to answer your questions about real estate investing, home renovations, property management, and real estate in general.
Have you ever built a home on an empty lot from the ground up? How long does it take and what are the average costs?
In general, if you have a conforming lot (25 by 100 feet, in Jersey City) and you want to build an average 2-family like those pictured above without anything custom or upgraded you should expect to pay around $125 per square foot and take 9-12 months to complete. These houses have been built in practically every neighborhood around Jersey City. Although not very exciting, the plans have been approved countless times and there are several contractors that are very familiar with their construction.
Unfortunately, there is a shortage of contractors (or an abundance of work for them) and keeping your crew working on your job can be a challenge. Everyone likes to get paid on time. Paying out of pocket instead of using a construction loan to fund the contractor’s installments can keep work flowing smoothly.
Building inspectors are very busy right now and may take 2+ weeks to schedule inspections. Making sure everything is correct before they come out will ensure you won’t need a re-inspection (which could delay your schedule over a month).
Change orders are a huge area for increased time and cost on any construction job. On a new build especially, you should know exactly what you want before applying for permits or starting work. Change orders slow down the whole job and your contractor may have to charge you a premium for the work because it makes planning difficult.
Lead times for materials are also important to keep in mind. If you are building a very standard house most materials will be stock items that can be ordered and picked up the same day. If you are doing anything custom (windows, doors, cabinetry, etc) it can take up to 8 weeks to manufacture and deliver. If you manage the build and the contractors correctly, you will hit your deadlines, if not, the costs will creep up and your timeline will get stretched out.
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What are your thoughts on cash flow vs. buying for appreciation? For example, Journal Square seems to really be on the rise, but is it worth it considering the rents are typically not going to cover all expenses including PITI (if bought conventionally).
Cash Flow vs. Capital Gains. Many investors are divided about this topic-which one is better than the other? Personally, we lean in favor of cash flow for several reasons, but there are some disadvantages as well.
Here is an example:
In 2009 we had an opportunity to buy a large run-down commercial building in an A+ location for just over $1,000,000. It was vacant with no tenant prospects in sight and buying this property, at the time, would have put us out of the “buying business” for quite a while. So we passed on the deal. Throughout the next few years, we bought other properties that cash flowed well. We were able to leave our jobs and dedicate ourselves to real estate full time, buying, renovating, selling and renting other properties. The market improved greatly and Jersey City became hugely popular for investors, companies and new residents. Our properties and cash flow increased steadily in value but the property we passed on is easily worth 10-15 times what we would have paid for it back then. We would have made more money with that one property than all the other properties we worked on, but if the market didn’t appreciate like it did we would have been out of business and possibly bankrupt or working 100 hours a week at other jobs trying to carry a giant vacant building on our backs.
Predicting the future is hard work, the trends are visible and any real estate broker can point out what areas will likely increase in value. But how long will it take? That’s really the key question. There could be another mortgage fallout, a natural disaster or any number of factors locally or globally that could derail any real estate appreciation.
Having said all of this, we think that cash flow and capital gains are both important. We focus mainly on cash flow, about 75%, leaving 25% of our portfolio in capital gains/appreciation/flipping (we don’t own mutual funds, stocks, etc.).
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I have a project in Downtown Jersey City that I need help financing. Do you know if any institutions that may want to build this project with us? It is a multi-million dollar project.
Construction loans for a new building are one of the harder types of loans to qualify for since you are asking for a loan against the future value of a building that has not been created yet. The borrower’s track record and balance sheet are very important and the equity requirements will be somewhere around 40% of the total cost, depending on what the project is. If you own the land outright there is potential to get a developer to partner with you-they would supply the experience, balance sheet, and some additional equity and you would get a piece of the profits (most likely they would want to buy you out).
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The information provided in our “Ask an Investor” series is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs.
