Multi Family Property

6 Replies

Hello,

So I was wondering, I noticed that there are a lot of mulit families built in the 1880s - 1920s and I have not seen any new constructions for a multi family property in Rhode Island. Is there a reason for this? My logic tells me that we continue to build single families because it is profitable (people will buy). I believe people would buy a new construction if it was a 3 or 4 unit property. Random thought maybe, but just wanted to see everyone's take on it.

Hi Raymond , my thoughts is a lot of the multi family built now are condos or apartment complexes usually not for sale , anything else I seen are renovations.

Hi- I’m originally from RI. I think what you are seeing is a product of the shift in demographics. You had a big influx of immigrants at about that time- Polish, Italian, Irish, etc. Many did mill and factory work- jewelry and textile so you see the multifamily in places like Central Falls, Pawtucket, parts of Providence, Cranston, West Warwick, etc. When the industry started shutting down in the 70s- 90s you see people moving out to Kent, South, and Washington Counties. All of those countries were more agrarian that turned suburban. There is definitely the need for affordable housing in those areas and I agree multi-family could be a good fit. The real issue I think is that many of the old factory jobs shifted to retail and people, while they need housing, could not pay a high enough rent to get new construction multi-family to cash flow.

The largest reason is because zoning ordinances and regulations have changed in a number of these cities and towns.  For example, I own a 5 unit property in northern RI.  Across the street, I purchased a vacant lot that I made into a parking lot for the 5 units.  In the 80's, a 6 unit property sat on that land and subsequently burned down.  I approached the city about what if anything I could build there.  I can't even put a garage on the land without having to get variances and jump through a bunch of hoops.  

Same city.  2 unit property that had potential for a 3rd unit.  I inquired about legally renovating everything to make it a legal 3.  I purchased the abutting vacant land also and merged the lots.  Even still, I was denied due to not meeting the square footage minimum with the lots.  

If you compare my two deals, the lot that the 5 unit currently sits on is only moderately larger than the two combined lots that I wanted to convert my 2 unit to a 3 unit.  If you have something existing and are grandfathered in, your in good shape.  If you are trying to expand the zoning scope, it is a process.  If you are building new, you will need to typically jump through a few hoops depending on the unit count.  However, I have seen with new construction, that side by side units require much less red tape to build new as opposed to a traditional "decker" style multi.   

@Raymond Hill my sense is that due to the various costs and regulations involved, as @Brandon Ingegneri mentioned in his examples, it just makes more economic sense for builders to focus on single families than multis.

I think it's related to the fact that most single family purchases don't make sense from an investment point of view because as an investor who's looking at income and expense #s to determine what you can offer, you're competing with owner-occupants who have very favorable financing and are buying because of the school district and because they like the kitchen and bathroom, not whether the rents vs. expenses & mortgage is profitable.

In other words, because of the favorable financing and "use benefit", the buyers of single families almost always pay more per unit than the buyers of multi families. So from a builder's point of view I think it's just more profit for less work.

The only time I've heard of new multis being built in the last 10 years were when someone either bought, inherited, or carved off a piece of land and wanted to build a new multi to hold onto themselves, rather than to put it on the market. I don't think the market compensates you enough for "newness" vs. the extra cost and complexity of building.

There was a good article on Bloomberg about this last year that's worth reading to get a sense of the bigger economic forces/trends involved in this, America Needs Small Apartment Buildings. Nobody Builds Them (Single-family homes and high-rises are all the rage. Meanwhile, the vanishing middle bodes ill for the future.)

@Amy DeCesare While the areas you mention could certainly benefit from more multi-family units, generally people in the more affluent parts of the state like Washington county oppose such new development, either indirectly through zoning ordinances like minimum lot size and parking requirements that make it almost impossible to build (as @Brandon Ingegneri mentioned), or directly at zoning hearings where neighbors show up and oppose it because that they don't want to change the "character" of their neighborhood.

It can be done, but it's far more the exception than the rule and requires big bucks, political savviness, and the ability to make a big bet and absorb the loss if you lose.

A few more seasoned investors have told me, perhaps controversially, that most cities place such onerous zoning restrictions and are completely inactive in aiding affordable house because lower income and lower-mid income residents are such a net loss to the cities, i.e. little tax revenue and big consumers of city services. If this is true, it's likely the supply of affordable housing in Providence, Warwick, Pawtucket, West Warwick, Central Falls, North Providence, South Providence, etc will remain extremely tight. A good thing for investors. 

Now this is a big macro assumption, but you'd have to believe the underlying growth factors of Boston to be pretty strong for the foreseeable future, and companies will continue to open campuses outside the city, e.g. Dell EMC in Franklin. It's not too much of a stretch to think this will increase the demand for housing just south of the border.

Would love any thoughts from armchair pundits!