Over the past few years, Nashville has been teeming with new construction. Jokes have abounded about how the crane is the city’s official bird, and how new cranes are nesting outside of loft windows. Indeed, Nashville has experienced new developments at a previously unprecedented rate. The Metro fiscal year that ended on June 30, 2016 had approved a record of over $3.6 billion in building permits. This was a 50% increase over the previous year, which had set a record of $2.4 billion. The past three fiscal years have all set new records for the amount of development dollars pouring into the county. In other words, this city is on fire.
After watching others make good money in the new construction business, I had been watching and waiting for the right opportunity to get into the game myself. In May of 2016, that moment presented itself.
I came across a property in emerging Buena Vista, a neighborhood in North Nashville that has experienced new revitalization, largely due to its close proximity to downtown. The property I looked at included an old house in terrible condition. It had been vacant for years and the yard was overgrown. As much as I like to see the restoration of historic homes, this particular house had virtually no vintage charm remaining and was in too poor of condition for a renovation to make sense financially. The intelligent decision was to tear it down.
What drew me to the property in the first place was the favorable zoning of R6. This means that one or two homes could be built on the property with no variances or zoning changes required. Investors are attracted to the areas of Nashville with this zoning, and that is reflected by hundreds of new construction homes rising in those neighborhoods. As with many investment decisions, it comes down to the numbers. If one can buy a piece of land and develop two houses instead of one, quite a bit of efficiency is gained throughout the process, meaning the total amount of expenses including land acquisition, is usually much less than buying two separate parcels that are each zoned only for one home.
By regularly studying the market and knowing what was being built and what was selling, I knew what I wanted the final sales price of my houses to be. Since the neighborhood was still beginning the early stages of revitalization, I wanted to the retail price to be a little lower than the competition. This seemed less risky than some of the other bigger homes rising in the not yet entirely proven neighborhood. I had spoken with a couple of other investors about what cost per square foot of new construction I could expect. Smaller houses tend to be more expensive per square foot, because they still have the costs of a kitchen and bathrooms, which are the more expensive spaces to build. Larger homes with a fourth bedroom and bonus room tend to just have more foundation, drywall, flooring, and roof, which end up being cheaper spaces to construct. I wanted to optimize this balance and concluded that a three bedroom, two bathroom house with nice finishes would offer the best return on investment, present the least risk, and be the most marketable product.
After viewing dozens of house plans, I selected one that captured the space and style of what I wanted to build. It ended up being a 1527 square foot two-story house with nine foot ceilings on both levels. It had front and back porches, open living spaces in the downstairs, along with a half bath and laundry. The upstairs had a master suite and two other bedrooms with a bathroom in between. We opted to put oak hardwood floors throughout the whole house except tile in the bathrooms. Rather than complicating the project with two completely different house plans, we chose to build the same plan twice, but paint the exteriors different colors. Additionally, the positioning of the homes on the lot was such that one would face the street in the front, and the other would be behind it, facing the street in the rear.
The next step was interviewing several builders and finding the right match. Many of them that I talked to tended to fall into two different categories. There were the higher-end builders that were too expensive for my project, or the cheaper guys that have a builder’s license and a pickup truck, but may not have a proven track record and the systems in place to economically build two houses quickly. I was searching for someone in between those extremes, a builder with solid references and the management processes to do work well and in a reasonable time frame. But that is the ideal type of builder that many investors want to use, and in Nashville they are ridiculously busy right now. At one point I began to doubt that I could find the right guy to build at the price point I had projected. Fortunately I had purchased the lot cheap enough that I could still make a decent profit if I had to abandon the project altogether. So I weighed the option of just selling it as-is and not dealing with the hassle of construction.
Eventually, after enough networking and asking around, I interviewed two builders on the same day that I would have felt comfortable moving forward with. One seemed to have too many developments happening, including doing several of his own investment projects. The other was busy, but had an additional project manager, and had a handful of other construction projects just blocks away from my own, which seemed beneficial to both of us. We soon met again and settled on a fair contract. Breaking ground was just days away.
The timeline from breaking ground until completion in the contract was about five months. Throughout the process there have been several delays including waiting for city inspections, sub-contractor stalls, and weather. But we are nearing the finish line, with only landscaping and a final cleaning remaining. Hopefully these two houses will be on the market for sale in the coming days.
So far I have thoroughly enjoyed my first entrance into new construction in Nashville. It reinforces my continual shift into more passive investing. I wanted to maintain creative control for this project, selecting the paint colors, tile, fixtures, appliances, etc. especially since it was my first time working with this builder. But overall, my time involvement has been very low in comparison with the potential profits. And I could easily lessen my involvement in future projects, as the builder I am working with has a similar taste in style as my own. Since the midway point of this project, I’ve been looking for other lots to develop. Prices for land and tear-downs in Nashville continue to rise, making the next purchase more difficult to find without what I consider to be overpaying. Nevertheless, I have tasted and seen that new construction is good. And I want to dive in deeper.