Build to Sell Breakdown: The Real Estate Investor’s Guide to Profitable New Construction - Part 1

 

Add a Lucrative New Income Stream to Your Real Estate Strategy with Duplex, Triplex, Quad, Townhome, Cottage Cluster, or Boutique Apartment Construction in Prime Small to Midsize Markets 

 

In the ever-evolving landscape of real estate, one niche gaining attention is small-scale urban housing development. 

 

If you’re an investor with experience buying, renting, and renovating single family homes or a similar asset class, the world of new construction can feel intimidating! 

 

But while strategies like BRRRR take a back seat as high interest rates eat into profits, it’s time to explore a new strategy.

 

As a developer in downtown Bryan, TX, building housing from the ground up to sell remains a profitable strategy, and I want as many investors as possible to realize the potential of build-to-sell in their markets! 

 

This comprehensive guide hands you a roadmap for your first ground up construction, specifically of a small-scale build-to-sell development in a revitalizing, small to midsize market. 

 

Step-by-Step Guide for Build to Sell

 

1. Market Selection
2. Acquisition & Due Diligence
3. Design & Predevelopment
4. Construction Phase
5. Sales & Marketing
6. Closing out the Project 

 

This first post - Part 1 of 3 - defines the build to sell model and breaks down how to perform in-depth market research to identify whether your market is developer-friendly. 

 

First, let’s define the build to sell model I use and examine the macro trends making it a lucrative strategy for investor-builders. 

 

Why Build to Sell?

 

Population Trends in Smaller U.S. Markets

 

Increasingly, Americans  are opting for smaller, more affordable, homes in lively, walkable communities vs. extravagant houses in prestigious and meticulously planned cul-de-sac neighborhoods.

 

As demographics in the smaller American downtowns shift, they include more single professionals, young families, and empty-nesters. 

 

This demographic prefers more sustainable, eco-friendly housing options in walkable communities that provide a sense of belonging. They allocate less of their budget to housing, and more towards experiential activities and quality of life. 

 

A primary beneficiary of this trend are smaller markets across the U.S that provide a higher quality of life, lower cost of living, vibrant diversity, a pedestrian friendly district, and cultural/ recreational amenities.

 

The Problem Build to Sell Solves

 

Many of the towns experiencing this growth are simply not equipped for it. 

 

After decades of optimizing streets for cars instead of pedestrians, many towns and cities are hindered by outdated zoning laws that prohibit development of the communities people now desire. 

 

Some towns are recognizing the opportunity to lead this trend.

 

They welcome and work with small, local developers to create appealing environments. 

 

This shift reflects a return to the past, when downtown and Main Street USA was the epicenter for entertainment, commerce, leisure and living.  

 

Think of your favorite town to visit...

 

Do you envision yourself in a lively town exploring charming streets, soaking in the aroma of local bakeries and cafes, bustling energy, and friendly faces passing by? 

 

 

 

Or do you imagine walking down a deserted suburban neighborhood on a culdesac street, admiring one identical garage door after the next? 

 

 

Sorry, but I’ve never seen anybody strolling down the sidewalk of their favorite local subdivision because they love “the vibe….”

 

As small to midsize urban markets across the US become more densely populated, there's an increasing demand for housing solutions that cater to this demographic shift.

 

The Solution: Missing Middle Housing

 

In downtown Bryan, TX, we develop projects referred to as missing middle housing.

 

This asset class includes townhomes, duplexes, triplexes, quads, cottage clusters, boutique apartments, as well as mixed-use construction.. 

 

Missing middle housing serves as a natural transition that fills the gap between single family neighborhoods and massive apartment complexes, high rises, and large-scale commercial buildings in a downtown area.

 

Building a boutique townhome community or cottage cottage cluster downtown offers:

 

1. A greater sense of community with more intimate and smaller-scale construction
2. Cost efficiencies (for the builder AND the buyer) with smaller footprint homes
3. The charm and aesthetic appeal a typical downtown demographic values. 
4. Increased walkability and accessibility, reducing the need for cars and promoting a healthier lifestyle. 

 

Building middle housing drives demand AND improves the long-term forecast for an area’s growth and economic success. 

 

More buildings with true character and charm = a greater chance residents and entrepreneurs will continue investing, working, and spending time there. 

 

Build to Sell in Bryan, TX: A Case Study

 

 Here’s a breakdown of how and why building to sell is a lucrative strategy in our market:

 

 

1. Bryan, TX is a hybrid market, so it’s a reliably strong buyer’s AND renter’s market (more on this later). 
2. Alongside the national housing shortage, our market is a revitalized downtown where most housing options were gutted or eliminated over the last 50 years in favor of commercial/retail storefronts, adding to residential demand.
3. We build relatively high density with a small footprint (like 6 townhomes or cottages on a “typical” sized single family lot). Each “unit” in the projects we develop can be deeded as a single family home, which addresses the growing barrier for residents to affordably become homeowners.
4. A lower total price point ($225,000 to $250,000) makes it more affordable for the buyer and one of the best priced products in the market, even when compared to resale houses. While the price per square foot is not low, the overall price point is due to the small footprint.
5. Build to sell provides us with pops of income we can funnel into long-term hold investments when the market becomes favorable for build to rent again. 
6. There is ALWAYS a plan B if we cannot sell the houses due to market shifts. It must at least break if we have to rent it (fortunately, our hybrid market means this should be relatively easy)

Now let’s dive into the factors and trends you should see in a strong build to sell market.

 

Market Selection and Research

 

Just because you build it does not mean they will come!

 

Before you build, it's essential to grasp the underlying economic drivers of the market. 

 

A healthy market for real estate investing does not change regardless of the type of project you are looking at. 

 

Good economics are good economics. 

 

So your market’s basics should be solid - growing population, strong job market, desirable amenities within walking distance of buildable sites, etc.

 

A couple of great resources for market research are the Texas Real Estate Research Center (has data on more than just Texas) and the St Louis Fed Economic Data.

 

Build to Sell Market Factor #1: Population Growth and Urbanization Trends 

 

You want to invest in markets where people want to live!

 

As the American workplace shifts to favor remote work, people are flocking to smaller American cities. Perhaps there’s less “in person” economic opportunity, but they’re drawn to a higher overall quality of life and sense of community these more quaint areas provide. 

 

As mentioned before, this creates a problem in smaller American cities that no longer have the infrastructure and zoning to absorb that growing population. 

 

Constructing missing middle housing can be a highly lucrative solution that meets this demand!

 

 

Build to Sell Market Factor #2: Employment Health Trends

 

Employment health can give insight into why there is population growth and if it is sustainable. 

 

You want to invest in a market with a large, diverse, and stable employment base. 

 

Ideally, you want diversity in the number of employers/companies, types of industries,  and a mixture of both government and private ownership. 

 

A key indicator of strong employment health is a market’s unemployment rate compared to the national average. 

 

You want a low unemployment rate, but not so low that employers can’t find the workforce they need to conduct and grow their business. 

 

A strong job market helps ensure a steady pool of buyers and reduces absorption rate risk (the amount of time it takes to sell new inventory). 

 

Build to Sell Market Factor #3: Housing Affordability 

 

Understanding affordability helps mitigate risks associated with market downturns, as more affordable cities tend to be more resilient over time.

 

To calculate affordability, look at the median home price of a market compared to its median income. 

 

Ideally, the median home price will be 3 to 4 times that of the average income. 

 

Expensive markets such as New York and San Francisco can be as high as 10 times!

 

Build to Sell Market Factor #4: Landlord Friendliness

 

Even in build to sell, choosing a landlord friendly state is critical because it helps diversify your buyer pool to include real estate investors looking for rental properties (roughly half of our build to sell homes are sold to investors!). 

 

Key indicators of investor friendly states are:

• strong property rights laws
• balance between tenant and landlord laws
• efficient eviction procedures
• strong lease enforcement
• no rent controls

 

The Build to Sell Gold Standard: Hybrid Markets

 

An ideal type of market for development generally is what’s known as a hybrid market, a market with both above average appreciation AND strong cash flow over time. 

 

My market -  Bryan College Station MSA (metropolitan Statistical Area - is a great example of a hybrid market.  

 

Key traits of a hybrid market are steady population growth driven by strong and diverse employment, reasonable cost of living, and a favorable tax and business political environment. 

 

Because of Texas A&M University, the rental and buyer’s market for the Bryan College Station MSA remains strong. 

 

 

For the same reason, the town grows incrementally year over year, driving consistent appreciation without the hockey stick growth trendier cities see. 

 

This can be frustrating during high growth market cycles when you hear peer investors talking about their property values going up in unsustainable percentages.

 

But in the long run, it provides downside protection during economic instability (like we’re seeing now).

 

Remember, the tortoise ultimately won the race ;-)

 

When you combine a hybrid market with the downtown renaissance many cities are experiencing across the country (like we see in Bryan), there is a prime opportunity for new construction of unique, dense housing with little competition. 

 

These are just the basics! Once you determine the market is economically sound for real estate investing in general, there’s still more work to be done for developers.

 

Identify Real Estate Developer Friendly Markets

 

Because many cities have outlawed the ability to build dense urban housing or missing middle housing through their zoning laws, it is critical to determine how willing the government is to work with you in developing such projects. 

 

Read the Comprehensive Plan 

 

First, get your hands on the city’s comprehensive plan. 

 

This is a document every city produces outlining their vision for development over the next 20 years or so. 

 

It shows you their anticipated growth patterns and the areas of development they intend to focus on. 

 

Is the City Actively Investing in Improvements?

 

Actions speak louder than words, though. Look around at what is actually taking place onthe ground.

 

Has the city visibly invested money to improve public infrastructure? 

 

Have they put in medians, trees, and public spaces? 

 

 

 

Have they upgraded the water and sewer line capacity to make it developer friendly?

 

Do they offer grants or incentives to revitalize old buildings? 

 

Are there some first movers who have already renovated an old building here and there? 

 

Set up an In-Person Meeting with Your Local City Government 

 

Once you’ve read the report and done your own investigation, call the local city government and identify the primary point of contact for the planning and development department.  

 

Set up an in-person meeting to:

 

1. Gauge their willingness to support developers and any regulatory exceptions it may require 
2. Identify whether their active growth plans actually align with the comprehensive plan you read
3. share your VISION as a developer and highlight how it aligns with their vision for the city. 

Build to Sell Market Research and Selection: Recap

 

As tempting as it might be to plow ahead and get that lot on Main Street under contract, this fundamental market research will help mitigate much of the risk in your first build to sell project!

 

To recap, a strong build to sell market includes:

 

1. Growing populations and diverse, dynamic employment data (basic market research all investors should do for any type of investment)
2. A developer friendly local government actively investing to improve the downtown and open to working with developers.
3. Evidence of first movers/developers already improving the downtown area (to mitigate risk, you don’t want to be the first)
4. Need for affordable and diverse housing options that missing middle housing can address. 

 

Want a guide to take with you that walks through these steps and gives you even more action items to determine whether your market is Redevelopment Ready? 

 

Click Here for your Redev Ready Market Ready Checklist.

 

 

It’s a fillable PDF that organizes the market research and selection process from beginning to end, so you don’t miss something crucial!

 

Stay tuned for the next installment in the Build to Sell Breakdown, which hands you a playbook for successfully getting a development deal under contract. Plus, learn how acquisition and due diligence for build-to-sell are different than what most investors are accustomed to with single-family rentals. 

 

Questions about research in your market? Let me know where you’re looking to invest in the comments below!