Building a Small Multifamily - Where to Start?

Question

All advice welcome!

My fiancé and I are looking to build a 3-4 unit townhome style multifamily in the Knoxville area. This would be our primary residence. We currently live in Maryland and have $135-140k in equity in our primary residence. We own a triplex in NY with $200-240k in equity. We will keep our home in MD as a rental, for which we will net $700-900 additional monthly income once rented. We are limited on cash.

I'm looking for advice on where to start. I want to speak with a lender to see if we could borrow against our existing properties to put less money down, but I have no idea what the cost would be of 1) the land, 2) improvements on the land, and 3) construction of the home. The goal is for the rental income from the units to cover all of or most of the mortgage, multifamily house hacking, if you will.

Do I find a builder to talk to first? If so, does anyone have recommendations on a builder? Will a builder even talk to me if I'm not approved for a loan yet?

Thank you in advance!

-LeeAnn

Greg Kasmer · Answer

@LeeAnn Owens - I think you're on the right track. I would first start with a few lenders to understand your options for taking out the equity in your existing properties - likely either a Home Equity Loan or Refinance. From there I would speak with a lender in/around Knoxville to see what lending options there may be for a new development. I'm not in new development but their down payments, interest rates, and terms are likely different than buying an existing property. That should give you an idea of how much money you can leverage in addition to your down payment. After than is know you'll have an idea of the total amount of capital you'll be able to deploy into a new project. With that total capital in mind you can then speak to an architect and/or construction company to see if that is enough capital to build what you want. I think you have a few steps to figure out, but seems like you can put it together to make a good decision. Good Luck!

Cory King · Answer

I'd echo what @Gino Barbaro mentioned above. If you can swing the dirt cash, it can be used as leverage towards your new build.

Do you care about any current cash flow from your triplex as it is or are you ok with say doing a refi on it to free up the cash but your cashflow drops because of it.

You should definitely talk with a commercial lender in the area, I'm in Knoxville and built new so I'm happy to connect directly to my bankers. We also host a meetup locally w/ a massive network to pool from. What @Robert Rixer said in terms of cost to build isn't un realistic for our area depending on level of finish and any improvements needed to the dirt. We have soil made up of mostly clay, rock, and some sand so digging footers or basement of any kind can dramatically drive up costs. Worth investing in the soil sample on the front end. I'm building a small multi next year on a lot I own next to another rental locally. Happy to connect

Gino Barbaro · Answer

@LeeAnn Owens

I think the first thing you need to do is to find land. If you can buy the land in cash, then you can go to a bank and fund the construction with a loan. But you need to start finding team members, such as your contractor, broker.

I can connect you with a community bank in Knoxville.

Gino

Robert Rixer · Answer

What is the reason behind wanting to build new versus purchase existing? Typically land costs will decide whether it's feasible to build new. Construction obviously varies but roughly you could use $150-250/SF, until you talk to a local contractor. Right now in most markets across the US, it's tough to make a new development like this pencil out. But in the long term you're almost guaranteed to come out ahead.

Robert Ellis · Answer

we are building 5 new builds at a time including several triplexes and the investors buy the dirt cash, refinance into a construction loan. single family approval is like 30 days multifamily is 4-5 months because of rezoning. Columbus ohio is our main market and Miami Florida let me know if either are of interest. I live in miami and lived in columbus for 12 years

Evan Polaski · Answer

@LeeAnn Owens, I am going to differ a little from Gino's suggestion.  I would talk to lenders about the HELOCs, refi's of you existing properties to free up cash.  You don't need to start this process in earnest yet.  But you need to know your current cash (including potential refi/HELOC proceeds) before you can even begin.

I would also make some calls to a few lenders about what their terms are on loans.  As Gino noted, if you buy a lot in cash, that can often be contributed as equity in the deal for the loan, but depending on the value and LTV ratios including your current mortgages on the existing properties, you may have very little equity available to tap into from a refi/HELOC.

It has been a while, but the construction loans I have been quoted have been 80% LTV of after construction value, capped at 80% of actual cost.  Meaning, even if the property will be worth $1.5mm when done (80% of that being $1.2mm), if the actual cost to build is $1mm, you will still need $200k equity to to put into the construction.

From there, Robert's construction quotes align with what I have seen, and this is heavily dependent on finishes. The lender will likely require you to have an experienced GC or homebuilder on the job.

I would say, if you are building 4 units, 1200 sq ft each, you will likely be in the construction with a GC/home builder about $1mm without any lots.  This would be modest build grade finishes, nothing luxurious, but not bargain basement, either.

Gino Barbaro · Answer

@LeeAnn Owens

DM me and send me your email address

Gino

LeeAnn Owens · Answer

Thank you both!

@Gino Barbaro if you have a banker in that area you can recommend, I’ll absolutely reach out!

LeeAnn Owens · Answer

Hi @Robert Rixer,

Good question, nothing existing on the market in the area that matches what we are interested in. Additionally, I think a new build would attract higher quality renters. We're young, so I wants something that we can hold in a rental portfolio for the long term. In 40 years I don't want 100 year old properties in my portfolio.

Building a Small Multifamily - Where to Start?

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