"Build-to-Rent" 101 and Why Building Makes You MORE Than Buying

welcome to the Bigger Pockets podcast I'm your host Dave Meyer joined today by my friend Henry Washington Henry thanks so much for joining me today hey thank you for having me man I I I I always say it but I love doing these shows with you and this is a pretty fun one that we get to do today I'm very excited to have this conversation but I need to ask you how is your French accent well um terrible to be honest with you terrible every time I hear a French accent I just think about the video where the guy got his croissant knocked out of his hand and all he could say was you made me drop my croissant okay well I'm going to still make you do it anyway because our guest today is a French Canadian investor which is super cool there's a lot to learn and there are so many overlaps and interesting things uh going on in the Canadian market and I'm going to have you pronounce Natalie's last name because I want to hear your French accent yes today today we're going to be talking with Natalie Clutier about new construction and how she is using new construction to create profitable deals in today's market we're going to learn about how she is finding land and developing that land into a robust rental property portfolio by doing her super secret method that you know a little bit about what she will share with you at the opening of the show well first of all Henry I took French for six years and you have a better French accent than I do so excellent job with that but as Henry said Natalie is a seasoned investor and she's going to teach us about budget friendly construction that honestly is not as inaccessible or difficult as you might assume so let's bring on Natalie and learn about her really interesting and unique approach to real estate investing Natalie welcome to the Bigger Pockets podcast thanks for being here thank you for having me man what an honor I am stoked I am nervous I'm all the feels let's do this I like it I'm I'm feeling the energy this is going to be a fun show to kick off this conversation can you tell us a little bit about your real estate strategy I understand you have an interesting name or terminology for the strategy you use can you tell us about it I have a couple names for it but I guess the one that kind of bounces off more it's the bur 2.0 that I like to call it so it's kind of like the traditional Burr of you know buy renovate rent refinance and repeat but in in dead it's build rent refinance and repeat so we build from the ground up and we hold the properties long term so you can also call it the build to rent or build and hold um but yeah basically you buy land you hire a designer you set your budget get all your estimates get your appraisal build the thing rent out the thing and then uh you know refinance and repeat again very cool so I looking forward to digging into that but before we talk about specifics about this really cool sounding strategy you are a Canadian investor so can you just tell us and give us a little bit of background about the Canadian housing market and what's happening there so things have been crazy probably uh about the same as you guys but um obviously interest rates skyrocketed they doubled um or if not more and uh so like I'm a realtor but I I'm not a very active realtor so I don't check the database you know all the time the daily activity but I do know like on the buy and sell side of things there's definitely been um a little bit more of an increase in inventory in the market but not that much because I think there's still a lot of people that are waiting on the sidelines for interest rates to drop you know houses that are priced above 650k I think 650 is pretty much the like average uh home price so anything above that takes a little bit more time to sell yet it still does sell and it might even sell with a competing offer but it's usually uh it usually sells like under asking so you have to be well priced I also think that in the next couple of months the projected fiveyear fixed will be um a little bit lower and things might start picking up again uh during the springtime but that's that's my opinion anyways for the local Ottawa market for a point of clarification right so right now here in the US we're at 68 on a 30-year fix where where are you at uh in Canada in terms of interest rate first of all 30-year fixes don't exist in Canada that blows my mind that you guys can get you lock in a rate for 30 years like I'm so jealous of that I know right uh God Bless America in Canada you have to renew your rate no more than 5 years so 5ye max you got to renew your rate I believe we're at 5% so we're a little lower than you but our house values are a lot higher than your typical uh in the US right so I do just want to uh clarify for people as we have this conversation with Natalie I know everyone feels the United States housing market is very expensive and that is true but by most estimates the Canadian housing market is 50 to 70% more expensive than the American Market um as just judged by income versus the expense to buy a home so if you're thinking oh things are different in Canada it must be easier to buy it's actually harder for people to buy in Canada than it is in the United States absolutely it's a pain in the butt more expensive and you can't get a 30-year fixed got it yeah exactly the other thing I wanted to talk about was you know in in the United States kind of what's playing into our prices not really taking a huge dip across the country is we've a as a nation have uh more demand than there is Supply I would say especially in the single family space space we've got we don't have enough homes for people who want to rent or buy which keeps the pricing up you talked a little bit about inventory but can you give us some some like paint a picture in terms of like what's inventory like in Canada well you know what I think our problem in terms of housing shortage from what I've read and from what i' I understand I think it's worse in Canada because there's yes there's less people per capita but um there's just not enough housing there's just so much territory to cover um and so we are facing a serious housing shortages in different markets like you look at Vancouver uh Toronto Montreal all that you know the bigger uh urban areas there's definitely a a big problem and so a lot of municipalities a lot of areas are like trying to get more inventory created like in Ontario they created the bill 23 so for me this is this was like a Golden Ticket they created this in 2023 that basically it allows to add more uh secondary secondary dwelling units onto existing properties that already have secondary dwelling units so it's basically a way to uh stop the municipalities from putting the brakes on development projects and stuff like that so that we can create more affordable housing so yeah no it's I I think we might be a little bit worse but I'm not too sure don't quote me on that but it's definitely a big problem of housing shortage here well it seems like we've talked about a lot of challenges and difficulties that one would see as a problem to be an invest in the Canadian market so how is your method of the bird 2.0 uh allowing you to succeed cuz it sounds like you have all these challenges but you're still you still have a successful real estate portfolio in business so what's what's driving that our strategy I mean we've been doing this for 10 years now so we have seen a couple Market Cycles um we always fa challenges during covid it was the high prices of construction finding labor um yet there's still a lot of reasons why I just love this strategy and um so first of all like I have like five reasons to why I love the strategy but first of all the the the number one is new construction like the value is always higher than older buildings right so if you look at our portfolio to say that we have $9 million or or count we're closing in on $9 million worth of real estate but that's only spread out across like eight already built properties like yes we have three vket lots but they're worth a lot less than the actual built property so that's 26 units for almost 9 million of real estate but I know someone who has a portfolio of $15 million but it's 90 doors so like for $6 million more they have to manage like 70 doors more than I do right so I just love new construction for that because you can basically like you you can you have more control over like the design and the budget and what you want to build on the land you can almost create the value that you need for the property um so I love that I also love the fact that you can create your own deals with it so finding properties on the market that have enough equity built in with so that you can force uh appreciation with Renovations can be really challenging and especially here in Ontario the rentals the rental laws make it very very difficult to vacate tenants in order to uh renovate the properties for us new doing new construction is kind of like creating a loophole right for creating our own deals so Natalie it's interesting because you're saying that you find all this flexibility and uh creativity in new building which is really cool when I look at new building I see risk it worries me just to be perfectly honest I see a lot of complicated things going on and so am I wrong like do you see risk or like are you just comfortable with risk or how do you get over some of the challenges that are associated with new building so I mean there's definitely more risk especially in terms of financing it is way easier to get financing on an existing property because there's a tangible asset for the lender to consider right when you're doing a new construction you've got a vacant land it can be harder to get traditional financing because there's nothing tangible for them to consider and so they don't want to repossess a half-built property uh it'll be very hard for them to resell so traditional financing can be harder however it is done we have done it we started through house hacking so just saying like that could be a good way to get in but there is risk um so you just have to hire the right people right you have to hire the right designer the right civil engineers and have the pre-c consultations with the municipality that's like my number one rule if you go under contract on a property make sure that your condition uh in your offer includes um a a pre-consultation with the municipality and bring a list of questions of what you want to address don't hide what you plan to build be straight up with them tell them I want to do this I want to do a Triplex I want to do a fourplex what do I need to get this approved do I need to do minor variances do you think this lot will cause any problems um so you just have to be really straight up do all your due diligence and then in the end to me it's like doing any other kind of deal it's all about your due diligence and hiring the right team hiring the right team is drastically important and I think you said something here that that is important for people to realize you said uh you go and you talk to the cities and municipalities and you're upfront with them about your plans um uh in in the United States uh we also have to deal with obviously the cities and the municipalities and get their approval and what I found is super helpful is not just going to them and saying what you want to do but going to the city and asking for their opinion on what they think should go or what should be done in this area now whether you're going to do that or not is kind of irrelevant but I found when I go and I ask hey I've got this lot I'm considering doing this what do you think or what would you do with this lot knowing cuz they have obviously information about what's coming that maybe you don't have and um you I just found that if I if I rephrase the question and ask for their opinion whether I do it or not I get their Buy in on whatever I'm going to do because they feel valued and they feel like um this is somebody who wants to work with us and not somebody who's trying to work against us is that I would assume that the permitting process or that the approval process is very similar you've really got to get these people on your teams so how do you go about that you nailed it cuz that we have to have really good relation with the city right like you have to make sure that you have an open honest communication with them and that uh you can have a like precedence you know and make sure that you build a solid relationship or or solid um um I have the word in French reputation what is it in French what is it in French just wasn't coming to me that sounded way cooler let's just stick with that my bad no that's perfect I was going to take on a new construction project this year and then I decided not to do it because there were just a lot of challenges and Hoops to jump through and it became very overwhelming for me and not because I think new construction is super overwhelming but I think because it's not my bread and butter the time and effort it was taking me to to have to jump through all these hoops and and and kind of plan this thing out was taking away from me doing deals that were within my bread and but but one of the things that were a concern for me was the and I think it's a concern for a lot of investors is the initial upfront costs to to build a new construction project before you even break ground right cuz permitting costs money and surveys cost money and and utilities cost money and and there's all there could be excavation work and and and so I guess it's a two-part question like how do you pay for those things on the on the front side or how do you bud to pay for those things and then uh how do you know what you're going to have to pay for when you're out here making these offers yeah so when you've got all your plans done by the designer you have to have them appraised right you have to have your budget you have to get your estimates in before you even submit for your appraisal and then once you get your appraisal report that's where it paints a really solid picture of they're going to give you your cost approach which is basically what it costs to build your uh income approach so that's usually the highest one and then your market value so by seeing that report it can give give you a good idea of what you're going to have to work with in the budget because typically a traditional lender will finance 80% of the cost approach which is the lowest of the three approaches in your appraisal um so if you think that you're able to do it for that 80% then yeah you're probably good to jump in but if you think that your costs and your estimates are way over that then maybe it's not the right project or maybe you have to redesign maybe you have to reassess um so we usually because the way they do the traditional financing is that you have to put up like you said you have to put up a lot of upfront money you have to basically cover the down payment the 20% yourself before they even give you that first draw so it can be very tricky we have line of credits lined up we've have been working with the same Credit Union for ever since we started but you can also get a private lender right we've done that before too we were about to build a fourplex once and uh at the ninth hour they the the the financing fell through they thought they made a mistake and so they revoked it and we were just about to pick up our $40,000 permit so we kind of panicked and we got you know you do what you do when you don't have a choice when you've got a gun to your head and we found a private lender um it was a really great deal end being ended up being a really good contact of ours now um but yeah and we did the entire construction with a private lender that he still did it in a traditional uh draw you know he would send in the draw so you're only paying um interest on the amount that's being used you're not paying on the full amount and uh we did it that way so that's a really good way to do it when traditional financing is taking too long or if there's just too many bureaucracy you know loopholes to jump through okay great that makes sense it's actually pretty similar to what we would do on a more traditional renovation project so what you're saying is you understand that there may be expenses on the front side before I break ground and so you go out to your network of private lenders and your network of institutional lenders and you get lines of credit or access to money so that if those things come up you've got them on lines of credit you can then fund these things not directly out of your pocket take care of the expenses and then when you go and you get your loan you can either pay yourself back for those things or when you refinance out you can pay yourself back for those things is that what I'm hearing it's exactly it yeah Natalie you very clearly know what you're talking about new construction and I just curious is this how you started in real estate did you just start building stuff right off the bat not really no we started we were like we were just fresh out of college uh in 2013 we had graduated from college uh young and in love wanted to move in together and uh it's funny because my husband was actually renting from like student housing rental back in the day and they had a bunch of uh roommates and they were the definition of the Worst Tenants like I'm talking bed bugs parties never paying on time the whole shebang so it's ironic that now he's a landlord but anyways uh he wanted to get out get out of that and move in with me I was still living at my parents and so we ended up buying a basement unit condo because it's all we could afford we thought we'd be renting an old apartment but we bought a basement unit condo we moved in there uh and then 3 months of living there we realized we are not condo people there's just too many neighbors living above us the uh condo fees were already rising and so we were talking to my parents about that and how we were a little disappointed and uh I had this like aha moment because my parents was like okay my mom said this is time you knew uh the truth and so it kind of felt like um I don't know if this ever happened to you guys when I was a kid I had like this fantasy that my parents were secretly rich but they just wouldn't tell you cuz they want you to be humble right and then they all of a sudden they reveal that secret to you so kind of felt like that moment it's not what happened but and so they told us you know there's this loan you can get it's called an autoc construction loan and you can replace your down payment with Sweat Equity so I I remember feeling super stressed because I thought I'd be renting an old apartment to now all of a sudden I'm building a new house um so and you know they said and then to help pay for expenses because we were new graduates they said you can just get uh a basement apartment to help pay for expenses so you know already it's it was house hacking I didn't know it was a thing back then but that's what we did so we built our own home home we added the basement apartment uh and then a year later we uh realized that we had kind of forced appreciation with that basement rental and so we had we added a $440,000 HELOC and then from there we realized you know we could use our design skills because we studied architectural technology so we're like we could use our design skills and kind of make this into a business and then we only learned a couple years later that this is actually real estate investing that we were doing we were young so we really didn't know what we were doing Natalie when you moved into together did your husband become a better tenant than he was with his friends well I mean he was owning so at that point yes but he's still messy I mean hey it's a guy but he didn't bring the bed bugs with him hopefully that wasn't him that was his roommates was like guys living in that apartment all right well thank you for for for telling us a little bit of your backstory Natalie I'd love to sort of pivot the conversation a little bit to some tips that you might have for our audience about build buing sounds like Henry has been considering it I actually closed on a property today that I'm thinking about redeveloping so I would love your help on how to make new builds cost effective you know it seems like the the fear I have personally is that we'll we might have you know something just gets super expensive and there's just all these overruns so how do you keep things under control so the first thing I would say is you have to meet with with your designer architect whatever you want to call them and you have to sit down and tell them that your intention is to build a rental property I'm assuming I don't know if you're building to sell but in this case if we stick to building to rent uh you say you know yeah so you want to have a budget friendly construction it doesn't mean cutting corners and being a cheap contractor it just means you don't want any fancy roof schemes or or fancy Footprints you want to keep the box and the footprint relatively simple so that the structure Al the structure aligns you know your mechanical align your electrical panel is placed in a convenient location that it's not too far away from the kitchens where you have the most wiring your duck systems are essential you know you have to just make it U efficient in terms of budget and in terms of like everything else in terms of functioning too um and then another thing too that if you want to save a lot of money is build it yourself you know be the project manager on that build because you're going to save 15% on top of your cost if you hire a PM on it it's going to they're going to charge you 10 to to 15 15% right well that one's out for me yeah so it is for a lot of people and I mean that's fine um but yeah it's it's going to cost you a little bit more we save like $75,000 every construction by doing it ourselves right so it's it's a good chunk that you can put towards your um your refinancing your you know your your your bur but uh yeah so and then obviously just get as much um estimates as you can but definitely it's all about the design and the structure uh you know you don't have to put in fancy bathrooms like we try to keep we used to put like a a standalone tub and a standalone shower but then the shower would always leak we'd always have problems so we just do shower tub combos we do maybe a single vanity you keep it simple uh but you keep it nice you keep it um it still has to test the the time there the the test of time but um yeah I mean it's all about the kiss roll keep it simple stupid so does that mean that you're your buildings are ugly just out of curiosity I don't want to to make any accusations but are you still able to make into a nice place absolutely it's all about textures right so you can have a boring box but if you make the front work with different textures and stuff it can still look really nice um and anything that's new is not ugly I mean come on it's new it looks good yeah we play with a lot of the textures and we can make it look usually really nice we'll play with stone and sighing typically that's the that's the the exterior finishes that we look for uh here in our area but um we have one building that we're doing right right now with the budget was a little tighter so that one's like a full sighting a little bit more boring but it's still new so it still looks good no I think that that's a fair question Dave because that's what people think right when we when we say I want to build a rental people automatically think exactly what you said Natalie oh you're going to oh you're going to cut corners and you're going to build something ugly and that's not at all what's happening like affordable housing doesn't need to be ugly affordable housing doesn't need to be cheap it can be done uh in intelligently and still look beautiful I think your point about um being smart about the types of finishes that you put in is huge because when I was develop when I was in talks with the designers like everything they wanted to do you're right it was these pitched roofs and and um what are they called where you let the light in that I'm drawing a blank on right now the skylights yeah pitch roofs and skylights and it was I remember she was like for the driveway we can have it where you do you know the slabs of of concrete and then the grass in between and I'm like I just I just need a place for them to park like I like when you think of from a rental perspective and so like are you finding designers that typically do this for rental property so that you're not having to deal with all of those headaches of trying to explain to people every single time why that doesn't make sense for your build well luckily my superpower as an investor is that I can do the plans myself cuz we studied architectural technology right so we do all of our drawings inhouse what cheat code yeah so that's our our superpower our cheat code exactly um but there is a way like I have friends who do it with designers you just have to really communicate there's just so many uh different construction systems out there you just want to do a plain and simple you know 2x6 construction with your standard uh standard package as long as everything is up to code which is already the code the building code these days is already way better than whatever it was 10 15 years ago um so you just want to follow code pass all your inspections be legit um but yeah no it definitely it is way way fun uh to be able to do our own designs and our own our own plans like the other day we're working on a on a new Triplex design right now and it's like a a different grade level and it's a little bit complicated and we were sitting watching TV was like 8:00 pm and Rob just like lighted up all of a sudden he's like oh I just have an idea and we went to the computer sat down redesigned what we were trying to do that's that is absolutely a cheat Cod that's cool uh during our during our pre-interview chat I did I asked you about like how you're finding the land and you said you get a lot of the land that you're purchasing I think you said about half the land you're purchasing is on the MLS can you talk about that for a second yeah so most of our deals I'd say 50% was through MLS and the other 50% was like through our Network so people just calling us you know I've been posting on Instagram what we're doing and it started with just posting it to friends and family and the word spreads and people call you they have land that they want to sell um and then um and then yeah a lot of it has been through MLS because um well this was before Co but uh you know during Co everybody was being a developer all of a sudden everybody was buying land but before that bacon land was usually the type of property that would take a little bit more time to sell on MLS so we had time to do our due diligence negotiate and then you know make sure that this was a solid deal and it's starting to come back too there are still uh developers there's still like more developers than there were before Co um but we just we just uh bought a bank repo off of MLS so I mean it's coming back um yeah one of the things that I do when I'm buying land is I need to get it uh at a price point where if at some point I decide that I don't want to do a new construction project I can sell the land and at least recoup my money break even maybe make a little bit of money and so how are you mitigating risk on your land purchases like if you can you pivot or do you have to build once you buy land in order for you not to lose money usually when we buy land is because we've done our due diligence we know exactly what we're going to build on it and it's just like a done deal but yeah I mean you you can pivot but if you're if you did your due diligence correctly you should know what you're about to build or you should have at least an exit strategy right what like if this doesn't work what could we do with it instead maybe you can change the zoning on it and do something completely different maybe you can uh resell it at a higher value if you've done a lot of the steps of like the permitting steps maybe you can resell it and include that as a package to another investor um so I'm not sure if that answers your question no no you nailed it you did good Natalie as we we head into another sort of Uncertain year for interest rates construction the broader economy what are some of the challenges you're anticipating over the next year and how are you managing them interest rates have definitely put a crimp in our uh approval rating right so it's a little harder to get approval it's harder we used to be able to pull out money at the end of every construction and pay ourselves a salary with that like a typical bur but in this case like the triflex we're doing right now um we're actually having to leave money in for the first time which pisses me off but I mean it's part of the new world we are in right now with these rates um so the the way that we're going to try to kind of you know pivot around this in the next couple of years while interest rates are are high is that we just have to make sure that the rents that we can get so basically this Triplex the reason why we have to leave money in is because for one we bought the land towards the end of like the co High time so it was still a little bit high and it was a very tight lot where you can only fit two bedroom units and like I said initially there was an influx in two-bedroom units so they are harder to rent and like I can only get so much for the rents um so but the next triflex we're doing with the one with the great problems this one uh we should be able to fit three bedrooms two baths and so that should be way better rents therefore the income approach will be higher which will also increase the cost approach and you know basically your value is higher so you should be able we should be able to at least break even with that one and not have to leave any money in so we're actually I just sent it in for appraisal this week so I mean I can let you know in a week if that if that works and if it's if the plan uh pans out but yeah I think that's how you just have to make sure that you can really um maximize your Roi on the bill that you can get as much of like the maximum rates that you can for rent so that it improves your value got it all right well thank you and what about for people who want to get started in the beginning in new construction because it does feel daunting as someone who's just starting to consider it how do you recommend people just get on the path towards being able to pull off these kinds of projects 100% house hack now I know a lot of people don't want to do house hack because maybe they're already in their you know living situation they don't want to change but the reality is um if you get get to design and build your dream home why not right I think it's great that's how we started uh it's always a lot easier to get financing to when it's a house hack and you don't have to rent rooms in the property it can be a basement unit like we did it could be a unit above a garage or even a Coach House in the backyard you can get creative with the ways that you house hack but as soon as you do that first of all it's like I said easier to get financing so once you have your foot in the door and you complete your first build um it creates a precedent and it creates a history with your lender so then they now see that you're able to like complete a construction that you're able to do that uh process so it should be easier on the next one especially if you can force appreciation with an ex a secondary unit that adds U income to the property and you can get a helck and you do the way we did it you know you buy a piece of land you keep going from there uh I think that's definitely the best uh way to get started in new construction as it is in most strategies house hacking just rules well that's awesome congratulations I just want everyone to think about what Natalie is saying here house hacking we all talk about it so much as it's such a good way to get started because it's really just training wheels it teaches you so much about investing and honestly I had never really thought about house hacking with new construction before but it's just another example of how depending on what strategies you're interested in and what markets you operate in you can use house hacking in a variety of different ways to teach your yourself the skills in a relatively low risk or at least a lower risk way than you know just doing this on a traditional rental property that is not owner occupied so I I kudos to you Natalie that's a super cool story and thank you so much for sharing it with us today and all of your knowledge about construction and the Canadian Market we we really appreciate you having you on today yeah no problem big thanks again to Natalie learned a lot in that episode and it's something that's pretty relevant to me Henry how how deep into your investing career did you start new construction six years five years maybe like five and a half years so just recently and what gave you the confidence after five and a half or six years to start going after it well I'm I'm pretty strategic about how I do it and so I'm I don't go out and look for property to buy so that I can build new construction on what I do is I find deals that work as they sit that have additional Lots with them so I'm only building on land that I got for free or super cheap so that way if I want to Pivot and not build because it gets too tedious or too expensive I can just sell the land as it sits because I basically got it for free you clever clever man that's a very good strategy well thank you so much for joining us here today I would love to hear from everyone listening if this type of information about new construction is relevant to you I don't personally do it but I'm super interested in it and more and more people I talk to this idea of build for rent whether you're doinking a burr or you're building them and selling them off seems to be a really profitable successful strategy here in 2024 and if you want to hear more about it please let us know if you're on YouTube in the comments let us know in your comments we'd love to hear if this uh strategy here this type of conversation is relevant for you and if you want to learn more about Natalie make sure to check out our show notes Henry thank you for joining us I hope you and your wife have a lovely Valentine's day and I'll see you very soon yeah unfortunately I'll be with you on Valentine's Day and not my wife but I will make sure she's taken care of excuse you you are lucky to be with me on Valentine's Day I know that's what both you and your wife want is to be talking about podcasts with this guy Al jide thank you all so much for listening we appreciate you and we'll see you very soon for the next episode of the Bigger Pockets podcast [Music] w

Channel: BiggerPockets

Views: 160,568

Keywords: build to rent, real estate portfolio, build-to-rent, new construction, new build, built to rent, real estate development, real estate, rental property, income property, new development, buying new construction home process, new home, brrrr method, brrr method, brrrr, buy rehab rent refinance repeat, building a home, building a house, costs to build a home, cost to build a home, real estate investing, invest in real estate, biggerpockets, biggerpockets podcast, podcast

Id: qCGypZ167Vs

Length: 33min 17sec (1997 seconds)

Published: Wed Feb 14 2024