New construction multifamily deal

24 Replies

Hi BP,

Just wanted to share a deal I’m doing in regards to new construction multifamily in South Phoenix

20 units, 2 bed 2 bath 800 sq ft

Stainless steel appliances

Stackable front loader washer/dryer

Bottom stories get backyards

Covered parking

$95,000 per unit to build ($1,900,000 total, includes all soft/hard costs except land and closing costs)

Land: $225,000

Rent: $1,250/month per unit ($300,000 annually)

Sale price $200,000 per door ($4,000,000 total)

Total profit after commissions: $1,820,000

Cap rate for buyer: 5.7%

Lined up for almost 80 units next year, just wanted to share one of the deals I put together, develop, and build. I’d love to hear the communities thoughts on a deal like this and if others are doing similar



Originally posted by @Cody Barna :

@Rylan Lacey sounds like a great project, if you don't mind me asking how are you funding the deal?

I'm paying for the land cash and using that as collateral for the construction loan through a HML at 11%

Originally posted by @Roger Lindell :

Goggled it didn’t look to hard but what is hml? 11% just during construction?

Hard money lender. Traditional/local banks in Arizona aren’t the friendliest in terms of their construction loans and the hoops to jump through just aren’t worth a lower rate. All construction loans for ground up are reimbursement loans meaning I have to front the materials and labor with my own capital and then get reimbursed from the lender. This is extremely difficult to do when traditional financing only allows 4 draws (or reimbursements) for the whole construction project, or take 15-30 days to reimburse you it becomes a serious headache and burden on the project. Hard money lenders can close in less than a week, allow as many draws as you want, and can fund the draws in less than 5 days, allowing for cash to always be flowing on the project. The higher interest rate justifies the ease and speed of the construction loan

This sounds very great. I'm trying to do something similar but at a FAR lower scale....build a 4 unit multifamily with 3 bedroom/2 bath in each. Trying to learn the process with this and hopefully can scale up. Looking in Ohio. Found a designer/architect for the building, have a builder....now I'm trying to understand the land buying process. Any tips would be great. 

Originally posted by @Jerrod Hill :

This sounds very great. I'm trying to do something similar but at a FAR lower scale....build a 4 unit multifamily with 3 bedroom/2 bath in each. Trying to learn the process with this and hopefully can scale up. Looking in Ohio. Found a designer/architect for the building, have a builder....now I'm trying to understand the land buying process. Any tips would be great. 

 Hi Jerrod,

Is there anything in particular you’d like to understand about the land buying process?

Originally posted by @Rylan Lacey :
Originally posted by @Jerrod Hill:

This sounds very great. I'm trying to do something similar but at a FAR lower scale....build a 4 unit multifamily with 3 bedroom/2 bath in each. Trying to learn the process with this and hopefully can scale up. Looking in Ohio. Found a designer/architect for the building, have a builder....now I'm trying to understand the land buying process. Any tips would be great. 

 Hi Jerrod,

Is there anything in particular you’d like to understand about the land buying process?

I have been doing a ton of research. I'm looking for land in Cincinnati, OH. I'm trying to understand a few things: 

1. How do I find land (realtor, auditor site, sheriff)

2. Who do I contact to evaluate land (surveyor, engineer, etc)

3. how do I finance the land. Do I include this in my mortgage for the entire project

4. how do I develop the land if it has trees or other things

5. does it make sense to demolish a old house. If yes, what should I keep in mind

These are some of the things I'm thinking about. 

 

@Rylan Lacey   Rylan, how are you getting to numbers- on a pro forma no vacancy reduction and where are expenses?

I am seeing a number closer to $3,600,000 at a 5.7%  assuming .05 vacancy and a 28% expense ration.   Not here to nit pick and I like your numbers (Salem Oregon)   We are seeing a top line of about $185,000 per door for your standard 2 bedroom new build.   I think those numbers are coming but we look to be a bit behind.

Originally posted by @Jerrod Hill :
Originally posted by @Rylan Lacey:
Originally posted by @Jerrod Hill:

This sounds very great. I'm trying to do something similar but at a FAR lower scale....build a 4 unit multifamily with 3 bedroom/2 bath in each. Trying to learn the process with this and hopefully can scale up. Looking in Ohio. Found a designer/architect for the building, have a builder....now I'm trying to understand the land buying process. Any tips would be great. 

 Hi Jerrod,

Is there anything in particular you’d like to understand about the land buying process?

I have been doing a ton of research. I'm looking for land in Cincinnati, OH. I'm trying to understand a few things: 

1. How do I find land (realtor, auditor site, sheriff)

2. Who do I contact to evaluate land (surveyor, engineer, etc)

3. how do I finance the land. Do I include this in my mortgage for the entire project

4. how do I develop the land if it has trees or other things

5. does it make sense to demolish a old house. If yes, what should I keep in mind

These are some of the things I'm thinking about. 

 

I always find land off of Zillow or I have MlS access thanks to my awesome realtor. Make sure you understand zoning and unit densities for multifamily in your area, realtors may be able to help with that. Look for some realtors that are trying to sell shovel ready land in your area, sometimes they have some knowledge about land and can point you in the right direction. Always good to use a realtor to help you

For me personally I don’t have anyone check on the land for me. It’s hard for me to rely on someone else to tell me and trust their word on it all being correct. The 3 big things I look for is 1. How close is a sewer tap? 2. How close is the water tap? 3. Is it in a flood zone/plain? That will usually take care of most of your due diligence on the build ability of the land. Usually an experienced architect can help you with things like that but you always want to see for yourself. You can learn all this by making an appointment down at the city for a proper appointment and and they’ll answer all questions you’ll have

Lenders hate lending on land. Unless you have great collateral to put up or have experience in this you usually have to pay cash for the land. Lenders will let you finance 50% but with no experience it’s tough, but it’s doable. I always use hard money for a quick close and leniency, just make sure to use a large one.

G and D/landscape architect can help you along with those things. If the tree is large odds are you gotta pay to relocate otherwise when you grade it you just remove it and haul it off.


You can demolish an old house. Nothing really to look out for on these other than some may have old septic systems that can get in your way, may have to pay extra to remove it because multifamily cannot use septic systems, at least here in Arizona

Hope this helps!
 

Originally posted by @Chris Blackburn :

@Rylan Lacey   Rylan, how are you getting to numbers- on a pro forma no vacancy reduction and where are expenses?

I am seeing a number closer to $3,600,000 at a 5.7%  assuming .05 vacancy and a 28% expense ration.   Not here to nit pick and I like your numbers (Salem Oregon)   We are seeing a top line of about $185,000 per door for your standard 2 bedroom new build.   I think those numbers are coming but we look to be a bit behind.

I’m getting the numbers based on a 20% expense ratio and a 5% vacancy. I know these numbers because I already personally own units of this plan that I have built. It’s actually a 17.5% expense ratio but I round it up. No maintenance hardly at all, no grass, modern irrigation systems, minimal required landscaping. Very simple plan. I think we’re getting more money per unit just based on pure influx of people moving here and new builds being so rare here in Phoenix on a small-medium scale. Plenty of new construction for 250+ units but hardly anything under 100 units. Plus multifamily is so hot here everything is under contract the week you put it up if it’s well maintained and a 5.5-6% cap. I’m not too familiar with the Salem Oregon market but I assume multifamily is hot there too, and If so you’re eventually you’re going to crack $200k+ per door

 

Originally posted by @Steve Morris :

Is this your first M/F construction project?

Any lessons learned you'd care to share?

 Next year will mark over 200 ground up units for me

Mistakes that I see developers doing is they want to make a super cool, modern, fancy, high tech project. They want to be the best/coolest in the neighborhood but 9/10 times what they build is totally impractical. Stick to lower end, no need to be the coolest product on the block. Also they hire top contractors in the state and pay top dollar for them when a much smaller licensed sub can get the job done for a fraction of the price. Know what generates more rent/value, don’t put extra cash into things that don’t give you a return out of it

I've got a bunch of guys in Portland that were building and I thought going the bare bones route was the way to go also.  However, it's getting to be a dogfight for good tenants so amenities may work out.  A lot of builders are really pulling back (like a lot of other places I'm sure).

Main thing is getting past the soft costs (like $22k to CoP for each unit) and just getting contractors to show and finish on schedule.  Then you have to operate in a very tenant-friendly environment.

You have much trouble filling these, am getting more people asking about PHX (an NOT a licensed AZ agent).

Originally posted by @Steve Morris :

I've got a bunch of guys in Portland that were building and I thought going the bare bones route was the way to go also.  However, it's getting to be a dogfight for good tenants so amenities may work out.  A lot of builders are really pulling back (like a lot of other places I'm sure).

Main thing is getting past the soft costs (like $22k to CoP for each unit) and just getting contractors to show and finish on schedule.  Then you have to operate in a very tenant-friendly environment.

You have much trouble filling these, am getting more people asking about PHX (an NOT a licensed AZ agent).

 That’s interesting, over here getting good quality tenants isn’t an issue because of how in demand rentals are right now. Lots of tenants to chose from, I’ve seen more than 50 applications in a day, and during covid. It’s easier to get better tenants when you’re building ground up because you can add amenities that older places don’t have such as washer/dryer, extras like that can really set you apart and create demand. 

That’s a lot for soft costs, in Phoenix I average about $3,750 per unit. What’s great about the lender I work with, they reimburse for soft costs, so all that soft cost money I put in I get right out of the first draw of the construction loan so I’m not out that money for long. 

Contractors can be very tricky and hard to nail down a time/schedule. It’s important to try to set a schedule with them but when you look at the big picture, it’s important to measure progress in months rather than days or even weeks. It’s a bad rabbit hole to go down if you start measuring progress by the day or the week, because some weeks you’ll have tons of guys working on your project and you’ll go a week or two at times with no one on your job as coordinating all the subs and doing so correctly is a fine balancing act. However the more volume you have the more of an emphasis your job will have on a contractors schedule.


Phoenix is definitely a landlord friendly state, both on a lawful level and a supply/demand level. Great market for landlords, loads of applications, huge renters pool to choose from. Great place to get some rentals going here forsure, even with the rising prices

@Rylan Lacey - This is a great thread with lots of useful information.  Do you feel you can get a buyer to pay based on a 20% expense ratio?  I'm seeing new construction multifamily with expense ratios closer to 30%-33%.  A larger expense ratio will dramatically affect value at a 5.7 cap.  

Second question - on a larger project, say 80-200 units, how do you decide a budget for amenities?  It seems like most renters these days want a pool, small clubhouse with kitchen, etc.  It's very easy to get carried away on the amenities and drive up the total cost of the project very quickly.

I really appreciate your sharing, and I'm jealous the returns you are projecting.  1.82m on 4m of revenue is crazy good margin.

@Rylan Lacey I assume you are going to be selling this project- So a bridge to HUD loan does not make much sense. (We currently have a Bridge to HUD in progress) With the changes in HUD- we get to a 35 year perm loan and (Hoping) sub 3%. (Keeping the asset) I would love to see your actual numbers for your build. We have a 17 unit build cost (plus small onsite storage), currently finishing up a 18 unit complex. Starting a 42 unit in Jan. We are excited about a number of new innovations that may remove the cost of lumber out of our equation, and speed up the build process by 30%. My goal is eventually have a 6 month build schedule. I will be documenting the process with some larger project we have on the board. I would love to connect and compare real costs. I have some real live examples broken down into percentage specifics.

@Rylan Lacey

Great deal! I’m working on something similar, my first ground up. Looking to build 5 townhomes that will be rentals. 3/2 roughly 1100sqft. The plat should be done this week. I’m buying the land cash and look to use that as collateral for the construction loan.

I have a unique opportunity to partner with the owner of the vacant lot behind mine to assemble and develop their land as well. This will increase the unit size to roughly 15.

With this being my first development- what pitfalls do you see novice developers making that can be avoided? Tips on project management?

I look forward to hearing about the progress of your project.

Happy Investing!

Best,

Canesha

Originally posted by @Mike Smith :

@Rylan Lacey - This is a great thread with lots of useful information.  Do you feel you can get a buyer to pay based on a 20% expense ratio?  I'm seeing new construction multifamily with expense ratios closer to 30%-33%.  A larger expense ratio will dramatically affect value at a 5.7 cap.  

Second question - on a larger project, say 80-200 units, how do you decide a budget for amenities?  It seems like most renters these days want a pool, small clubhouse with kitchen, etc.  It's very easy to get carried away on the amenities and drive up the total cost of the project very quickly.

I really appreciate your sharing, and I'm jealous the returns you are projecting.  1.82m on 4m of revenue is crazy good margin.

 Yes so the expense ratio certainly seems on the low side for buyers. If I kept it for myself long term I know I can be at 20% expense + 5% occupancy but the area I’m building in (south Phoenix) is growing so rapidly, I know I can still put my 2 bed 2 bath rents at $1,350 and still be very competitive in the area. I also implemented some 3 bedroom 2 bath on this lot that will rent for $1,650. I began consulting with ABI multifamily which is a huge multifamily broker here in Arizona and they said that a 25% expense ratio and 5% vacancy is right on point with what they recommend. The city wouldn’t allow us to squeeze 20 units on there so now we’re at 19 units. Gross rental income is $318,600 and then with 25% expense ratio and 5% vacancy puts you at a 5.7% cap. Just submitted the engineering and site plan to the city today so hoping to start construction by mid January.



Well often times when you get to that size the city will dictate what amenities they want and then you can put more on from there. I usually do the bare minimum as I’m not interested in real luxury multifamily builds. I’d do just a swimming pool and dog park and get bids for it from the proper contractors. Or just look around town and see what the newer construction projects are doing and make sure you’re not doing more than what’s required or competitive.

@Rylan Lacey currently under contract in Phoenix area for some land with plans to develop additional multifamily. Would like to connect further with others that are active in the space. Thanks for sharing your thoughts and insights.

@Rylan Lacey I love this thread and solution to building more rentals! We build duplexes in our area, and it's easy to get financing since most banks just regard it as two houses, and easy to build since it's just two houses. I'd love to build more units in our area and do what you and @Chris Blackburn are doing. We have building experience and have a GC and subs, just need to find land and scale up my knowledge of what some of these bigger projects require (ie fire sprinklers, riser rooms, upsizing water meters, larger funding, etc.). Thanks for sharing what you are doing, I'd love to hear how it's going and connect more.

About $118/sf construction. Nice work. If I ask a builder if they can do that for me, they'll say its impossible. I know it's possible (depending on the state), and you are confirming it- just isn't going to happen unless you know how to do it for yourself. 

Originally posted by @David A. :

About $118/sf construction. Nice work. If I ask a builder if they can do that for me, they'll say its impossible. I know it's possible (depending on the state), and you are confirming it- just isn't going to happen unless you know how to do it for yourself. 

Well how I’m able to get it that low is since I’m also the GC and developer I can do the whole thing for cost with super small and cheap subs. If I take out all soft costs, loan interest, and supervision the build cost is under $100 per sq ft. If I hired a GC company, I’d anticipate about $135-150 per sq ft to build, without soft costs or interest.