What do I do to build a portfolio?

What advice would you give to someone who wants a portfolio of rental properties that they will build themselves?

• In other words, if somebody wants to buy land/lots, and build 4 plexes, or SFR, as an owner builder,  with the intent to keep them  for their long term rental income. 1. Where should one buy the lots, in order to have the highest cap rate? Aiming for ~10%-13%. In other words.... Should one build in a low cost area where the median rent is $0.65/sq ft (cheap lot prices) 2. Build in an area where the median rent is $1.50/sq ft? 3. Build in an area where the median rent is $3, $4/sq ft? (i.e. high cost area like San Francisco area)  Do you build in an area with the lowest rental prices, where the lot prices will be the cheapest? Or in a more expensive rental market? Which of these would produce the highest cap rate? 3. What is the maximum price per sq ft that should be paid for land/lots?

• Answer:

  The best advice I could give you is to be wary of becoming emotionally attached to the properties. When developers and builders operate property they have designed and built from scratch, their decisions and judgments are often colored by having developed an emotional attachment to the properties they created. This can be dangerous, especially when the owner's percieved value exceeds the actual market value of the rental units, which is often the case when builders operate their own properties. The location(s) of the properties in high-rent/low-rent, high cost/low cost markets is not an important consideration. Profit can be high (or low) in any of these markets. The only consideration should be the cost of the land and total cost of construction, including financing costs, versus the expected net operating income of the property, allowing for contingencies, vacancy rates, etc.