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

Tony:
Why renovate rental properties when you can actually create them? Maybe it’s time to ditch those old costly fixer uppers because today we’re unlocking the secrets of build to rent, the smarter way to invest in brand new rental properties. So today we are joined by Chad Carson, a build to rent pro who’s turned empty lots into profitable homes, and he’s here to show rookies exactly how to build their first rental from scratch. This is the Real Estate Rookie podcast. I’m Tony Jay Robinson, and please give a big warm welcome to Chad Carson. Chad, thank you for joining us today, brother.

Chad:
Thanks for having me, Tony. Great to be here.

Tony:
So Chad, I think the first big question, real estate has shifted, interest rates have gotten higher, affordability’s come down, people are looking for different strategies to keep growing their portfolio. Why are people ditching fixer uppers to go after Bill to rent instead?

Chad:
Yeah, I can just speak for myself. I mean, I still like fixer-uppers. I think there’s a place for ’em. I think there’s a lot of value there. But build to rent appealed to me for two main reasons. One reason one of the things in the market lately has just been the lack of supply. It’s just a little harder to find good deals. And I felt like when you could start with the dirt and you could build something on that dirt, you’re creating supply. So you’re creating something that wasn’t there before. And although there is still competition, I think there’s fewer people who understand the whole process of developing a piece of dirt, turning it into something you can build on, and then constructing a property. It’s not necessarily any more complicated than a remodel, but it’s just less known. So therefore, I think there’s also an opportunity there just from a competitive standpoint, just to get more deals.

Chad:
That’s probably reason number one. Reason number two is I’m a long-term landlord, buy and hold. I do have some short-term rentals as well, but the thing I like about the thing I always pay attention to as a landlord is maintenance. And so I’ve enjoyed putting some newer properties into my portfolio because you have many, many years to go before you have to replace the roof, replace the sewer line, all these things that tend to break and ruin your cashflow in an old rental new construction just has a leaner maintenance profile. So I think those two reasons, the competitiveness and then lower maintenance or the big reasons that drew me to it.

Tony:
I want to get into the tactical pieces here, but just for people to understand, and check me if I’m wrong here, Chad, but I think maybe a third benefit is that you have a stronger ability to build some margin into your deals. So just maybe if you have an example off the top of your head, a recent build to rent project that you’ve done or of the few that you’ve done, what was the overall cost? What was the actual land acquisition, the build, and then what did it appraise for at the end? What kind of spread were you seeing?

Chad:
Yeah, I’ll give the real basic numbers and we can dig into tactics if you want, but the value of the properties that we built. So we built five single family houses and I’m outside of Clemson, South Carolina. So I’m the upstate of South Carolina, a little town called Seneca. And we built those five houses are average cost of the construction and the lot altogether was about 232,000 somewhere in there. And then the value of that property was about 2 75. So in my case, there’s a little bit more to unpack there. I had a joint venture partner on this deal, so that includes me paying a profit to the builder about 20 grand or so. So if you had to look at it from a percentage standpoint, mine was about 84% or so of the value of the property is what my purchase cost was. So not quite as good as maybe the best bird deal you’ve ever seen.

Chad:
But if I were doing that, I think that’s one interesting thing to unpack with Bill to rent is there’s sort of three different levels you could buy on. You could be the person who develops and builds the property yourself. You could be a joint venture partner, which is what I did. I paid a builder basically a profit, and so I made a little bit less of a margin because of that. A third way I could have done is buy a turnkey from a builder, almost like retail price. So I think the more you do yourself, you could probably be in that 70 cents on the dollar, 75 cents on the dollar if you have a joint venture, maybe 80, 85%. And then if you buy at retail, maybe 90 to a hundred percent would be a good guesstimate.

Tony:
And I think that’s the key here is that today, again, interest rates, affordability, the traditional burr model has become a little bit more tough in a lot of markets across the country. But what you just said, being able to build at 70 to 75 cents on the dollar, that’s how you build in that margin to effectively get a perfect bur. Now selfishly, Chad, I’m also looking at bill to rent in the short-term space. Actually just had a call with a potential partner yesterday who’s done it a few times. We’re looking at doing one together. So I’m super excited for this episode, so I can selfishly pull as much knowledge from you as I can. But for all of our rookies that are listening, if you had to break down the build to rent strategy to just the few essential steps or the big buckets, the big categories, what would those categories be?

Chad:
Yeah, I think you could divide it into the land and the construction of the property itself. I think that’s one good distinction. The land was actually honestly one of the bigger blind spots for me because I’ve bought a lot of properties over the years. My MO is kind of the small and mighty investor, but I’m a little bit on the bigger of the small mighty side. I have a business partner and we have about 35 properties, a hundred units, and almost all those are older units, but we had never built from the ground up until we started doing some of these projects. So getting a piece of dirt and understanding how to go to the city basically and do all the municipal laws and the regulations, you got to figure out where can I build, how much can I build? What are the setbacks? Which for those who’ve never heard those words, that’s basically how far from the line that you can actually build the property.

Chad:
You can’t build, in some cases, you can’t build all the way up to the line. You have to be 10 or 15 feet from the line. So there’s just a long list of things that you have to either you have to learn yourself or more likely you have to hire an engineering and surveying company. That’s who we’ve hired to help us survey the property, help us go to the city and say, all right, can we build this? Where can we build this? How much can we build? What size property? I think that’s the thing that is a wild card. If you’re in California for example, it’s notoriously really difficult. It takes a long time to build from the dirt and go up. If you’re in South Carolina where I am, it’s a little bit easier, but every city is a little bit different. So every town, every county.

Chad:
So just getting the dirt developed, it is almost like a flip project. You’re having to go through the process adding value to the dirt itself. And what the end product is, is you have permits, you have a piece of paper that says you’re allowed to build. Here it is from the city, the signed off by them, and then you also have a survey and hopefully some markers that say, here’s where we’re going to build. And then you can go to the second part, which is pretty similar to a remodel where you hire the contractors basically to do each step, to dig the foundation, to put in, to build the construction of the property, and then all you have all the plumbing, the electrical, all those things that probably people have heard about. But those are the two sort of pieces of how they fit together.

Tony:
And Chad, let me ask what comes first at least, or what came first for you? Was it, Hey, I’ve got an idea of the property that I want to build. I know I want to build this duplex or I want to build this A-frame or I want to build this whatever. Do you come up with the idea of what you want to build first and then go source land that works for that idea, or do you do it the other way around where you find the land first and then say what’s the highest and best use for this piece of land?

Chad:
I think I did the second. So I think my investment philosophy, and this is important because I think building is just a strategy, but it fits on top of the exact same investment philosophy that I use with any old property. And so for me, a good deal looks like two things. Number one is the buy box. So what location, what does the lot look like? Where is this property essentially? Is it in demand? For me, I like to do infill subdivisions as opposed to building out in the middle of nowhere. And that’s important because a lot of new construction land, you could go buy some cheap land out in the country somewhere, but what I really want to do is be I want to be where all the schools are. I want to be where the greenways are. I want to be walkable to stuff.

Chad:
So that’s the number one thing I look at because people buy a location and yes, they want to know what the property looks like, but I think that what you said makes more sense. You fit the property, you fit the building and the construction and the layout to the lot itself, and you can’t get some cookie cutters over time. Here’s a house design I like, here’s a duplex design I like, and then you try to fit that in different places. But for us, in our example, my builder partner is always sniffing around finding lots and deals. And so together we bought this land that was actually about six acres and a lot of the land was a little bit more tough to develop because it had a lot of topography and hills, but we had this five, basically five lots that were right along the road where the sewer was, we’d have to put an extra sewer because there’s already city sewer there and that’s a big cost when you’re building. And so we could grade these properties for about $40,000 per lot and all included do our permits and everything. And so we were able to basically get our lot cost about all in purchase of the property plus all the development to about $40,000 per lot so that we can keep our total construction cost down. And that’s what we started from. And then we picked a house design that my builder had that made sense.

Tony:
Yeah, Chad, I think it’s interesting with development because you can do it either way where you find a really great piece of land and then say, Hey, what is the highest and best use for this piece of land? Or you’ve got this cookie cutter plan that you’ve already built and developed and you just drop that in different places. I know a developer here in Southern California who built the same exact floor plan probably 30 times within our same county, and he just kept dropping it in different lots because it was working for him. Katie Neeson, who’s a friend of the BiggerPockets Real Estate rookie podcast and she’s out in Texas, but she’s got town homes as she likes to build throughout her city and throughout her county. So it’s cool that you can kind of do it either way, but I think going back to the point that you made, how do you pick the perfect piece of land for a development project? You touched on a little bit about what you’re looking for, but if you have to tell us how do you pick the perfect piece of land for built to rent?

Chad:
Yeah, good question. I think the location, like I talked about a little bit more, I think the demand of that lot is the most important thing. Where does it sit? For example, this lot that we built on is about a quarter mile from the downtown area of this little town called Seneca. So being close to some kind of amenity is really nice. Also, convenience to jobs. So all the things that you would think about with a real estate investment, your tenant or your buyer is going to want to live there, so what’s important to them? Well, job location, convenience, location, close to some amenity, this a lifestyle amenity. So I think that’s number one. Number two is the physical lot itself. When I talked to my builder about what he asked the same question to him, which kind of lots are we looking at? And he said, you want ’em as flat as possible, would be ideal, but not too flat.

Chad:
If you had ’em too flat, the water won’t run off the property. We’re in an area of the country in South Carolina where it rains a pretty good bit. So perfect would be a slightly pitched lot that is flowing to the back. It’s not below the road. So if you have, I’ve seen houses and I’ve had houses where the roads up here, the houses down here, what’s going to happen to water when it comes off the road? It’s going to run right to your house. And it’s not impossible. You could get sump pumps, you could get drainage systems, but in a perfect world, you’d have the lot sitting up a little bit above the road, relatively flat and so wouldn’t because one of the biggest costs of developing a lot is grading. I mean just to get those big bulldozers out there, mobilization costs and all that stuff is really expensive.

Chad:
So what you really like is very limited time of grading, already having it flat already having the sewer access and the water right there at the road. That way if you have to install sewers and the lots, that’s going to be another extra cost. And so all those costs add up. It’s kind of like remodeling a property. Any extra thing you have to do, it’s going to decrease the profit of your lot or the viability of your lot. So if it’s on a road that has sewer, if it’s in a good location, bam, that’s great. That’s the kind you want to work on.

Tony:
So Chad, let me ask, those are all great points, but how can a rookie who’s never done this before get answers to those questions of, Hey, is it going to cost a lots to get this piece of land graded? How close is the nearest utility? How easy will it be to tie into the sewer? If I’ve never done this before, what’s the best, most effective path for me to get those answers?

Chad:
I think that’s why we partnered with a builder, honestly. It’s like if you don’t know something, can you borrow confidence that knowledge from somebody else? And I feel like that’s always the answer it’s been in my career. If there’s something, I don’t know whether it’s financing or fixing up something or can you either pay somebody to help you as a real estate agent for example, or in my case, hey builder, you got a ton of expertise. How about we put up the money and that’s what we did in our case, we’ll put up the money. We do have some expertise as well, but we’ll joint venture by adding some value, if you’re a rookie, you got to figure out where can I add value to this equation? Because there’s no business deal that’s ever been done where you can just go in and get a free ride.

Chad:
You have to figure out how you can asset value, and sometimes that’s money. In our case it’s money, but if you don’t have any money, I’ll go back to when I first started my career. I bet you’re probably the same way, Tony, if I didn’t have any money, I could provide hustle and I could provide sweat equity. I could go run and just pick up materials for the builder or something. Or maybe they have five other projects going on and you could just help coordinate some things for them for free if you’re creative on how you add value. I think there’s ways to get those answers that we’re talking about. So how do you figure out where the utilities are? How do you figure out where the property lines are, the survey lines. So that’s one answer, joint venturing. The other is just if you just ask a bunch of questions, I’ve found people at the local city inspectors, local city zoning codes, people, a lot of them have been builders before they got that job that this is a little bit more cushy job than it was at going out and constructing the houses.

Chad:
They know a ton and their job is to serve the public and help people answer questions. So if you’re willing to go make an appointment with ’em, call them. You can learn a ton about the zoning, about the utilities, about what the requirements and just ask ’em like, Hey, what are the places where a rookie like me is really going to get hung up? Can you help me out here? I’m going to try to do it the right way. 99% of the time they might be busy, but they’re going to be generous with their knowledge and I found that to be the case in many, many times.

Tony:
Chad, I want to get into the critical process of securing the plans, the approvals, the budgeting, and really revealing exactly how to follow all the steps you just laid out. So we’ll cover that right after. A quick word from today’s show sponsors. Alright guys, we’re back here with Chad Carson and we’ve identified the right land, but now chat, let’s actually talk about getting these things approved and the cost to go into it. Now you mentioned California being maybe a little bit of a tougher place. That’s where I’m located in suburbs of Los Angeles. I’ll probably, I don’t dunno if I’ll ever want to build in this market, right? I told you before we’re looking at building, but we’re looking at doing it in potentially Arkansas, Kentucky, some other states where it’s a little bit easier to do that. But in your experience, what is the secret to getting your building plans approved quickly and hopefully with as little stress as possible?

Chad:
Yeah, even in California, I think these rules will apply and one of those is just understanding what the local municipality is looking for in the first place. And this goes back to having conversations with those local zoning codes folks. The people who are going to be your building inspectors, they’ll pretty much tell you where people normally go awry. You could ask, Hey, what kind of process? Do you have a checklist? What are the plans I need to have? And very often what they’re going to say is you need to have an engineering drawing or a survey drawing of your lot. You need to have those plans. And they’ll usually give you a preliminary feedback. They’ll say, Hey, that looks okay except for this setback and this thing, you need to fix those things. And either you could do that or if you’re hiring an engineering survey company, they could go and have that conversation with you and the engineering survey company, they know how to speak the language of the developers and inspectors.

Chad:
So I think that key team member is one of the, if you’re going to do this for the first time, either you have your builder joint venture partner or if you’re doing it yourself, having that engineering company, I don’t think I’d want to do it without that. Maybe the second or third time you could do it by yourself, but that company is really helpful. That team member is really helpful to help you get over the humps of getting approval for your project. And really what you’re looking for at that point is all the land regulation developments, there’s a whole series of laws and codes in every town. And again, the different, California’s a little bit more strict, there’s impact fees, sometimes there’s environmental steps you have to go through that’s going to be on the checklist. They’re going to say, you got to go to this commission to get this approval, you got to go to this thing.

Chad:
And so getting that kind of checklist and understanding of the lay of the land with the laws is the key. And then you then take your piece of land, you take your drawings for your property, your house, your blueprint plans, and then you file a permit with an application to get a permit. And that’s that piece of paper. That’s like the big deal. Once you get the permit to go at various stages, then you’re in control at that point. But it’s getting the approvals and the permits, that’s a long process. And so I would say if you’re a rookie, understanding that process, getting a team member will be the biggest hurdle that you’re going to want to make sure you get taken care of.

Tony:
And it’ll vary, like you said, dramatically from state to state, from county to county, from city to city. But I think even from employee who’s reviewing your plans to employee who’s reviewing your plans, so Jad, I mentioned before that I know a builder here in Southern California who has literally dropped the same house 30, 40 times across our county here, and he’ll go in again, same exact property, same exact plans. He’ll go in, maybe he’s building three lots. He’ll submit plans for all three lots, same exact plan, but it’ll go to three different plan reviewers and he’ll get back different sets of notes depending on who’s reviewing it, which makes no sense whatsoever because in theory they should all be looking at it the same way. So for all the rookies that are listening, just know that yeah, it’s going to be a process. So I think get it approved, but Chad, your point of like, hey, trying to get as much information upfront about what they’re looking for can make that build process and approval process a little easier.

Chad:
I think that’s a really good point is every single inspector you talk to might be a little bit different, but one thing, even in a tough place, if you’re trying to get approvals in California or big cities around the country, sometimes they have certain programs that are easier. And I know one of the trends that has been really interesting in California for example, is just the A DU accessory dwelling unit policies that a lot of the state and also a lot of municipalities have, and I’ve heard that sometimes they’ll have certain plans that are pre-approved or like, Hey, if you do this plan, we’re just going to green light you and go all through. So this is where just really digging into the local city asking questions. If you could find out if your builders had 30 plans approved that are just a cookie cutter, that’s really valuable to know because then going outside that cookie cutter is going to make your process a whole lot more difficult. So those are the little wrinkles that if you can learn ’em, whether it’s an A DU, whether it’s a regular build construction property, both those are really interesting opportunities, you just have to know is your city more on board with those and is there a process that GreenLights those kind of projects?

Tony:
I think people are excited. Now, Chad, about the idea of build to rent, we’re talking about all the benefits that come with it, but obviously what it really comes down to is the cost. And we talked a little bit earlier about the cost versus the actual appraised value, but what actually goes into building a rental from the ground up? You talked a little bit about the land acquisition, but what are some of the other soft costs, hard costs that go into building something from the ground up? And if you think about maybe a recent project, just what are the ballpark figures around those costs?

Chad:
So this will vary widely 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 ’em, I think about ’em in soft costs and hard costs. So soft costs we talked a little bit about, but permitting fees, engineering fees, sometimes you’ll have utility impact fees, so you might have to pay an impact fee for the sewer or for the water. So those all fit under soft cost 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 so that when you get the permit, alright, I’m good to go. I know what my costs are. So for me, the construction costs starts with, you could just think about it from the ground up.

Chad:
So it’s the grading, it’s the foundation itself. So are you going to build a crawl space raise 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 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. I don’t know about you Tony, just from 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 a hundred dollars 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.

Chad:
If I were to go buy a retail turnkey kind of property from a builder at full price, it might be more like $200 a square foot or so in my area, so a hundred dollars a square foot for the construction cost 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 17, 1800 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 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 you have, 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.

Chad:
And so everything you save on the smaller footprint, smaller roof, two stories, the cost of that second story is going to be a lot cheaper than the cost of the first 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 ended up being, 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 relationship with subcontractors, has a plans in place, nosis materials, that was a big part of that.

Tony:
Chad, 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? Like land should be no more than x percent of your total project costs or do you kind of take it on a project by project basis?

Chad:
It’s kind of like the 1% rule or some of those other rules. There are rules of thumbs. You have to vary ’em 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, like the full value. So 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. That’s the after repair value. So 20% of that would be 60,000 bucks in the lot. 15% would be, what is that, 45,000 or so? So you can see where I got to my numbers. Our property is worth about 2 75, 2 80, our lot cost was about 45,000 somewhere in there. So that’s rough rule of time. I think if you start getting too much more expensive than that, if you start getting 30%, it’s just going to be harder to make some of the numbers work in my area.

Chad:
Now, I don’t know if I was in southern California somewhere, maybe those numbers are flipped around, maybe there’s different trends, there’s a lot of factors that go in, but the main number I look at Tony is just like with regular investment when I build this property, how am I going to make money on it? That’s the bottom line and for me it’s the rent to price ratio. That’s one big deal. This property that we built that we had 230,000 all in, including the lot and the land, the rent was 1900 bucks. So we have that rented now, so it’s not quite the 1% rule, but it close enough for us on a good quality property and a quality location that meets our criteria for, we had a basic cashflow that we’re trying to look for. And it also, I like that we have a margin of safety. We’re in it for two 30, but the property is worth 2 75, 2 80, 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 ’em, you just have to work backwards to get to that number.

Tony:
I think another big question that Ricks 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? But when you’re talking about acquiring raw land and construction costs, maybe slightly elevated risks, what are your favorite methods for financing bill to rent projects?

Chad:
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 if I was 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 and then you get into 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 cash flow. So long point, 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.

Chad:
That being said, we also, 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. A 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.

Chad:
That’s awesome. Some private lenders will charge 10%, 12%, but somewhere in there, seven to 12% is what I see a lot of private lenders doing. A hard money lender is probably similar rates or maybe a little bit higher. I’m not sure what you’ve seen out 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 I 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 sit across the desk from them and they actually come out of the property sometimes and they look at the property, oh, here’s what you’re building, here’s what you’re doing.

Chad:
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 5, 6, 7 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. So 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.

Tony:
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 burr 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. Before 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. Yeah, 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 seven 8% on the interest rate, but are you making payments throughout the life of the private money note? Do they just get paid back once you actually sell to refinance the property? What are the other terms look like on the private money for you?

Chad:
Yeah, it is varied over the years, but ideally as a borrower, what I’d like to have is I’d like to pay, have the interest accrue submitting 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, it’d be hard on the math, 7% would be 7,000 a year, 14,000, 14,000 a year. So it might be like 7,000 over six months is the interest I would owe them. And 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.

Chad:
I want them to have a little bit of pain and like, all right, I still got this loan going on. 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 missed the payment because then I can go help them fix it. You 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 the interest rates a big term, the payment of whether you make payments or have it accrue is another big term. Another one that’s 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?

Chad:
Because in 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. Then if you pay 7% interest on the full 200, and 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. I got that money sitting in the bank. So you can try to 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 survive for 22 years as an investor is things might not go right. We might get a six months and I haven’t finished the project or I can’t get a loan yet. My burr refinance loan hasn’t worked out.

Chad:
Have a game plan for what will happen if you can’t pay them off. Can we extend it? Will I need to charge a fee for that? Just go ahead. 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 that 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.

Tony:
Up 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. Alright, Chad, so we’ve covered planning, we’ve covered making the most of the land, all of those different pieces, but 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 bill is successful?

Chad:
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, 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. And so if you want to find the good subcontractors, keep ’em 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.

Chad:
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 three projects lined up, you’re going to have to get on their schedule way ahead of time, plan this out. You might have to be a little more patient as the little one small investor who’s just doing one project at a time, but in the end it’s going to be faster. I’ve gone 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, they’re doing good work and get the referrals from those other builders. So I think if there is a trick that is that there’s no shortcut on those contractors, you just got to get the good ones.

Tony:
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 is tied up with other projects we had going on. I was like, I want to start these now. It’ll be closed 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. So 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. So I think we know what to look for. But I guess what is your recommendation to actually find those folks? If I’m a Ricky, 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 bill to rent strategy?

Chad:
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. They’re going to be a little bit guarded with their contractors. They’re trying to use ’em too. But if you can go to construction sites, talk to people, go to meetups, talk to people, but what you’re talking to ’em about is like, Hey, here’s my plans. I’m building a house. Do you have a good framing crew that you really like? I’m looking very good framing crew. Do you have a good roofing crew? Have some specific questions and show that you’re competent, show that you’re ready.

Chad:
I think if you show that competence to another investor, another builder, I think they’re willing to share at that point. But referrals, referrals, referrals, that’s the name of the game. The other thing I was going to add though too about our prior conversation about how do you be efficient with your construction calls, 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, let’s do a little wing on this property and let’s change the blueprint a little bit. What that means is you don’t know is clearly what your supplies are going to cost.

Chad:
My builder partner has a list right here of every down to the nails and the screws and the flooring, every single material they have, and that stuff just gets delivered to the property. 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. That’s what you have to do with the remodel projects. Every house is a little bit different, but the more you can not customize, the more you can make it consistent over and over and over again is just going to make the flow, the whole job easier. You’re going to make more money. And it might not be as, it’s not going to be on the front page of design magazines typically building an entry-level house, but it’s going to make it a better investment typically.

Tony:
Yeah. So I guess on that point, 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?

Chad:
Yeah, I think it was picking and choosing a couple features that are going to be really nice. So for example, in these properties that we built, the location was good. That’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.

Chad:
So you spend up a little bit on things that make a big impression. Kitchens of 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 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 the great location that’s going to be do a lot of the job. If you get them in the house and they’re wowed by at 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. Or maybe it’s nice LVP flooring, but it’s not the highest end. So you can go quality, but you don’t want to go to 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.

Tony:
Chad, I appreciate all the value that you’ve shared today, and I know you’ve peaked 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 bill to rent project off before the year’s over as well. But I guess last piece of advice for Ricky’s that are considering Bill to rent, what mindset expectations should they adopt for the long-term success with this strategy?

Chad:
I think you got to be patient. When you do anything new, there’s going to be a learning curve. So we’ve talked about land development, we’ve talked about building relationships with contractors, we’ve talked about land plans. There’s going to be a lot of new here. So 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. I’m a big believer in partners, so don’t be afraid. I have this philosophy that if I were going to a county fair and I wanted to eat a pie, I’m in the south, I like to eat pies, sweet potato pies, pecan pies. If this pie was on sale, but I didn’t have any money, I would be willing to, 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.

Chad:
And the point is, I could split the pie with you, Tony, and I find so many times where I want a hundred percent of this pie and I’m going to do either nothing or get a hundred percent. And 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 for the person who’s willing to 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. There’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 go hungry. And that attitude has served me super, super well,

Tony:
Chad, I can’t think of a better way to close out this episode 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?

Chad:
I hang out a lot on YouTube, so if you’re watching on YouTube or listening to podcasts, I have a Coach Carson podcast that is all about real estate investing and the nuts and bolts of the small and mighty style investing that I do of, you don’t need a thousand units. You might could do it with two units, five units, 10 units, and so 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.

Tony:
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 Robinson or follow the podcast at realestate 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’ll link to Coach Chat Carson’s YouTube channel and 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.