Buying versus building investment properties

5 Replies

I'm in an unusual situation, I recently sold a 4 unit commercial investment property. I attempted to do a 1031 exchange and the properties fell through. I am now looking to purchase 10 to 20 unit apartment building in the $2 million range and there's nothing in my area. I own a totally renovated eight unit building and I'm considering building a 20 unit in a vacant lot that I own right next-door. The problems are that while the neighborhood is rapidly up and coming with a brand-new courthouse, brand-new health center, brand-new art center, huge university presence there is still a level of transients in the area that make me Worried about a building there. But I figure I already own the property so I might as will capitalize on it and I can't find anything to purchase, so is it smart to build? My 8 unit loft building I've been at 100% occupancy since purchasing it only two years ago, I've increased rents from 7K a month to 12K per month.

My initial response is to say, be careful of building if you haven't done it before! You have to be sure that building costs don't exceed the market value of a completed block. Plus, there is the time factor, so make sure you hire a reputable contractor who won't string you along because he has other jobs on the go. Having said that, though, if others are investing in the area and your existing block is doing so well, the indications are that you can't go wrong. I would build something that matches your existing block in terms of unit size and design, because it obviously appeals. Accommodation close to university campuses always seems to be in demand and you can contribute towards the overall vibe of the neighbourhood by enlarging the residential zone.

If you have the lots it would be worth while to explore a feasibility study.
A feasibility study will answer these questions:

If you build it will "they" come?
Does the market need the product you are considering building?
Is there a higher an better use for the land than the one you had in mind?
Absorption rate: how long will it take to stabilize once it's built?
How much should it cost to build?
Market rents.
Rent rent trends (over last 10 years).
Cap rate trends.

A feasibility study will cost you a few thousand but could save you millions.

Even the best of us can get too emotionally involved (especially in a development project; building your vision) to heed all the pre construction red flags.

A favorable feasibility study will also be a great tool on that first visit to your bank.

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Great advise, I've had the feasibility study done by a civil engineer and he's saying 20+ units would work. The area has hundreds of new condos and lofts and they do not remain vacate for long. The vacancy rate for the city is @ 3%. I've budgeted for a building cost of $225 per squire foot.

Hi Robert,

My wife is from around close to Lowell.

The transients you would need to look at the crime map and see if population is increasing but frequency of violent crimes is decreasing. If that is occurring likely the transients are being pushed out as the area is changing positively.

I used to be in commercial development assembling parcels for developers on larger projects. The TIMING is the key to all of this. If you slate the building for 2 years completion and lease up and it takes 3 and the market shifts with oversupply you could be in for a bumpy road.

I like existing buildings where the cash is already coming in. I understand nothing is available there to buy.

Sorry your 1031 exchange fell through. There are other options out there but they may not be in your area.

It's hard to comment further without knowing your end goals. It's easy to pay someone for a report. I can tell you building from the ground up will be way more involved than you have probably envisioned. Expect delays, more expenses, and unforeseen problems than what people tell you.