Should I build 17-unit multi-family project?

9 Replies

Hello! I've got a piece of vacant land under contract in Redding, CA which had approval to build 17 townhouse-style units, all 3/2.5 bath with attached garages, about 1350 SF each. The owner of the land recently passed away and I'm buying this 3 acre piece from the heirs for $150k. (Former owner had over $500k into the land and permits /engineeering/ architectural fees etc.)  This is an above-average class A location surrounded by newer developments (a fire station and a retirement home) as well as nice single family neighborhoods. It is very close proximity to several popular schools and colleges and there is huge rental demand and a scarcity of units available in this immediate area. There is also huge demand for furnished rentals for international students where I could further increase the rents, and from this unique location they could literally walk or ride bikes to the school campuses within the one-mile radius from here.

It looks like my all-in price to build including the land would be about $1.8 million ($105,000 per unit). The units should rent for $1200 each, bringing the annual gross rents to about $244,800. In our area there are literally no apartments like this available for sale. Neither have there been any sales of complexes this new and in this good of a location within the last 10 years. Researching back as far as the mid 1990's on my MLS I know that most units that sell are B and C locations that trade for around 8-12x the gross rents. The nicer buildings in nicer locations are definitely in the 11-13x gross rents-range. I recently represented a local doctor who purchased an 11-unit off-market apartment complex for $1.1 million. His was a similar type of location and building with all townhouse style units with garages built in the late 1980's. It was very clean and a good rental area, B+/A- area. It sold for 11.2 gross rents with a CAP rate of about 4.4%. He is ecstatic and would buy another building just like it if there were one available. Mine that I am considering building would be a better location and nicer units than that or anything I can find in the MLS that has sold. So even though there doesn't appear to be a ton of upside, with the worst-case scenario feeling like there must be worth at least 10% more than what the build-out costs would be it feels at least like it could be a project to consider.

My risk tolerance in pretty high and I've done quite a few rehab projects around here and have been actively involved in my market for over 10 years. I feel that the product I could deliver would be in high demand and there would be virtually no vacancies once this is completed. Worst-case scenario feels pretty palatable to me if it's worth at least what I have invested into it and the maintenance and management would be very minimal. I have other investors that have expressed interest in pooling money to do a project like this if I could find one worth pursuing in our area, so I also believe I could bring together the money to develop it and gain experience in developing properties, which is a primary goal of mine for the coming 5-10 years. So aside from just this project's fundamentals, my secondary goal is to gain experience with syndication, fundraising, and learning firsthand about the development process.

I am interested to hear from developers who have any insights into this and especially developers in markets similar to mine that don't have great cash flows but have high demand and potential for good appreciation. Is anyone building out projects like this currently or am I crazy to even consider this right now? 


@Aaron Nelson  since it looks like you have some initial rough #s, the next thing I'd do is speak to the planning board for the county and/or town to hear what they think about having a new development. And, get info on how long the process takes and what approvals you'll need to get and from whom. 

At 244,880 gross expected rents you would factor 40% costs ( vacancy, eviction, repairs, property management).

Now I know we use 50% on here and 60% if landlord paid utility but on a brand new complex in California I think buyers might go for it. The first about 5 years will not be much issues at all if built properly. I would keep a journal and pictures of the whole process to show a potential buyer the quality that was put in and no shortcuts were taken etc. It's one thing to tell them but " a picture is worth a thousand words " rings true.

So 244,880 X .60 = 146,928 NOI

146,928 NOI / 3,000,000 = 5 CAP resale

So all in 1,800,000 there appears to be a healthy spread on your project.

On all the plans and approvals you need to check if still valid and for how long as I have heard some areas it can take up to a year to get approval again if they have expired in CA.

You need to know soil samples and what construction method would be used for foundations etc. If soil requires extra reinforcing and it's harder to dig up expenses start climbing higher than anticipated. If it takes you longer to build market forces and exits might have changed since then. You need to look at permits applied for in your area to construct any multifamily units. If there are not any check occupancy at other places. If full with waiting lists and rents are growing above the 3% national average that bodes well. If there are a ton of permits already applied for then it's who gets to market first with a finished product and capitalizes. The last finisher gets to fall on their butt in a game of musical chairs.

So no permits ongoing and strong rents bodes well for you. You might want to build in a 100 basis points premium to sell at a 6 cap by the time you exit for worst case if markets change. Rents could also be stronger than 1,200 by the time you have completed lease up and build out. Time the project to finish not during the holidays where it's tough to land renters. During that time you have to give lower deposits and rent specials sometimes to get people in.

No legal advice  

I don't know the process in California, but would it be possible to go with a condo conversion as an alternative strategy? 17 units might bring in a hefty sum.  You could also sell a few to pay some expenses and rent out the remainder, keeping control of the condo board. Just brainstorming.

Can you build the project in sections? For example, build the first four units, then after they are built and occupied, build the next four, and so on until the project is complete?

@Joe Fairless  thanks for the insights, Joe

@Joel Owens  really appreciate the tips and analysis you provided- extremely helpful and I'm going to re-read that several times and go to city today to see about how many multi-family permits are approved at the moment

@Ben Julius  thanks Ben for the tip- I had thought about a condo project here as well. I feel if I could keep expenses about the same that I could do pretty well with that. I believe each of the units could sell for around $159k-169k once completed. But I have never had experience with that and am not sure which way would be better. I'll be weighing it out so thanks

@Anthony Gayden  I had someone else mention this might be a good, lower risk way to go. I appreciate you bringing that up- I'm going to see about that possibility

@Aaron Nelson  This sounds like it could be a viable property. I would agree and think the area you are talking about (near the colleges?) has no multiunit rentals for miles that I can think of. That could bode well in your favor. I do like @Anthony Gayden  suggestion about hedging against some risk buy building in sections. You don't want to get stuck with 17 incomplete units if something were to happen. 

I hope this project happens man. Fun stuff!

Awesome project!! I would love to do that type of project in the future. So definitely keep us updated.

@Aaron Nelson  I think your a very savvy guy, so I think you'll have success if you decide to do this, because like you said, worst case scenario seems pretty palatable. At least thats how I like to look at this type of project is to simply say whats my exit strategy if it gets ugly, and what recourse could come back on me (aside from losing that particular property and invested monies).

Anyways, one thing that comes to mind for me is the Redding demographics and wondering how that would play into my renters pool. I have a 4-plex on churn creek (further south by Enterprise area, which is a less desirable location than what you've got and attracts the corresponding folks), but i've noticed that it really takes a lot of time and a lot of screening to find tenants that aren't a bit sketchy. I've not been in redding as long as you (i've been here 4 years) but my impression is that the vast majority of the people I get applying are smokers, exhibit possible signs of being a junkie, are unemployed, have pre-scribed pets, etc. My fear is that if Bethel school runs into a problem or goes away for some reason I would feel as though I would be really digging hard for people to rent to, especially if I had a large number of very nice new units to keep full and keep nice. I'm probably being a little pessimistic, but I know that it's a thought running through my mind right now with my own investment strategy.

However, I am getting some good business from Bethel students and recently just got our first AirBnB renter from out of town, and are starting to get backed up on furnished rental demand.

Also, i'm sure you could likely attract retired types to live in your units which wouldn't want my 2/1 apartments. Or even traveling professionals. Also, like you said, you could sell off chunks of the property and keep whatever porting of the units you want.

I guess i'm rambling a bit, but like you said, you've got an A location and and where there's a will theres a way. P.S. ... just curious but do you currently hold rental properties in the Redding area?

@Rodney Smith   thanks for the post here... you've got some good insights and comments. Yes, I would be a bit nervous if Bethel collapsed and that renter pool dried up, as they seem to comprise some of the best potential tenants out there. I know the new townhouse style homes that Palomar is building (around same location as mine off Churn Creek) that front the freeway have been getting strong tenant demand and they rent quickly. I've heard they go for around $1500 although I'm pretty sure they are bigger and nicer than mine plus they are detached. I would hope to attract same tenants as those ones attract.

Anyway, thanks again for your thoughts. My model in Redding has mainly been to flip the residential properties. I've got a multi-tenant commercial building on Cypress I own, and I'm in process of buying a large commercial building on Lake right now that I'm trying to get a government lease with for a tenant. I'll have to keep you updated on that later. Otherwise, no, I just have my primary residence here but no long term residential at the moment, although I am interested now in possibly keeping some multi family if I can find the right deals here. thanks

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