No one builds small multi family anymore, 6,8 & 12 units etc...

24 Replies

I am sure there is a something I am missing but it seems to me that no builders are constructing small multi family anymore! Here in Houston there are HUGE apartments going up everywhere but they are all Class A and overpriced while the entry level, bread & butter renter has only outdated 2-4 plexes built from the 50-70's...

What are your thoughts...

It sounds like a great opportunity to do some market research, find a piece of land, and tie it up subject to a deal w an investor to build a small multi. Get some investors together and spearhead the project. 

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In 2008 the lumber companies put a cash only on the building materials around June or July. There  were unfinished houses all around Houston that they could not get the money to finish. During that summer they merged several lumber yards together to increase their percentage on sales. Then we had...The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector that was signed into law by U.S. President George W. Bush on October 3, 2008. It was a component of the government's measures in 2008 to address the subprime mortgage crisis.

In 2009 the banks raised the credit rating and reduced credit lines on cards and made it difficult to borrow money for a mortgage. Most home sales in 2009 and 2010 were paid in cash. 

Some investors where buying apartment complexes of $15,000 a door in 2011 and 2012. Hedge funds and investors have driven the real estate market up three times the price since 2008.

If and when we have another hiccup in the job market we could face the same situation, however wages have decreased and debts have increased. So cash will be king again along with the Title III of the JOBS Act will make it possible for nonaccredited investors to invest and participate online in startup businesses and private firms. This will allow for larger groups of people to invest smaller amounts of money. As one of the most awaited components of the JOBS Act, Title III is opening a road of endless possibilities for nonaccredited individuals to participate in crowdfunding. The exact date for this law to go in place is not finalized and SEC Chair Mary Jo White has delayed issuance until October 2015 which will result in not being able to invest until 2016 according to Fortune, Entrepreneur, and Crowdfundinsider.

It will be hard for old properties to compete with corporate rentals when you compare taxes, insurance, utilities and condition of the properties.  Just my opinion, however I watch real estate everyday to find a deal, I'm still looking for something that will make me money.

Originally posted by @Rob Beland :

It sounds like a great opportunity to do some market research, find a piece of land, and tie it up subject to a deal w an investor to build a small multi. Get some investors together and spearhead the project. 

 That pretty much sums up what I have been considering although I will most likely have my own GC oversee it for me! Thx

@Tyron McDaniel , depending on the location, the cost of construction can be very prohibitive to what makes sense to build.  Ground up construction for a B class asset vs. A does not have that much of a gap in cost.  For it to make economic sense (in most cases) if you are building new it really needs to be Class A.  

@Tyron McDaniel There are people out there looking for ways to build small multifamily again. I've been doing research too. Check out this lecture from John Anderson:

"The Dark Art of Developing Small Projects"
https://vimeo.com/31441603

I have some of John's pro formas I could send your way if you message me.

Originally posted by @Josh E. :

@Tyron McDaniel, depending on the location, the cost of construction can be very prohibitive to what makes sense to build.  Ground up construction for a B class asset vs. A does not have that much of a gap in cost.  For it to make economic sense (in most cases) if you are building new it really needs to be Class A.  

 I have considered that Josh... but what I have found here in Houston is that rental rates and values have shot through the roof! We have vacant apartment units that need total full-on rehabs for $30k per door and these are Class C properties... So my thought is we can build apartment grade for no more than $55-60 per sq. ft. which at those numbers leaves a TON of profit on the table...

Originally posted by @Stephen Lassiter :

@Tyron McDaniel There are people out there looking for ways to build small multifamily again. I've been doing research too. Check out this lecture from John Anderson:

"The Dark Art of Developing Small Projects"
https://vimeo.com/31441603

I have some of John's pro formas I could send your way if you message me.

Thanks for posting this Stephen! I am finding that to be REALLY true... My good friend is a Commercial Apartment broker and the amount of interest he is getting in small multi families from investors all over the world looking to invest in them is BANANAS! In fact, it was after talking to him about this that really caused this idea to go to the forefront of my mind! I will keep you posted.

@Tyron McDaniel I am very interested in this myself.  I would love to meet with you sometime to discuss it. I know the demand is out there if you can find cheap enough unrestricted land to build on.  If you can build something decent for $55 - $60 a foot then I would be interested in either partnering with you or hiring you on a contract basis.

Originally posted by @Waylon Themer :

@Tyron McDanielI am very interested in this myself.  I would love to meet with you sometime to discuss it. I know the demand is out there if you can find cheap enough unrestricted land to build on.  If you can build something decent for $55 - $60 a foot then I would be interested in either partnering with you or hiring you on a contract basis.

 That's good to know Waylon, I will reach out and connect with you as I am getting more excited as I do more research. This is quickly taking precedence over some other new construction projects I had planned. 

Land cost and construction costs make small developments very difficult to build profitably.

All what you may be true, but here LA, there is an 8 unit apartment building going up as I speak.  I will say because of the anticipated appreciation for later years and also because of future anticipated rental increase that this complex is being built.  Appreciation carries much more weight for this situation.

The 8/12/20 units type properties are in demand because as the SFR yield dries up what these investors know is rentals. So now you just have a bunch of tenants under one roof pay rent instead of a house.

The entry level to that is these small unit type properties.

When you build it's not only the potential profit but the TIMING of the project. What happens if plans were to be finished by summer and now it is winter?? What if there was demand but 5 other builders finished their project before you and now the market has an oversupply?? What if rents softened in the market??

All kinds of things can go haywire with a development deal. This is why you want to build fast and get stabilized so you can exit at full market value. You work your exit cap backwards down to land acquisition costs and see if the project makes sense on conservative numbers.

55 to 65 a sq ft sounds low. I would want to be conservative with my numbers and not optimistic. Construction materials and labor costs could rise increasing total project costs and reducing anticipated returns. 

There are a few 6-8 units being built as infill projects around here ... mostly row, or stacked townhouses.

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Originally posted by Account Closed:

Land cost and construction costs make small developments very difficult to build profitably.

 Luckily living in Houston there are still many nice sized lots throughout inner city Houston that are relatively in-expensive and highly suitable for the small multi family market! But in other markets where construction is more regulated and land costs are higher, the numbers don't work!

Originally posted by @Joel Owens :

The 8/12/20 units type properties are in demand because as the SFR yield dries up what these investors know is rentals. So now you just have a bunch of tenants under one roof pay rent instead of a house.

The entry level to that is these small unit type properties.

When you build it's not only the potential profit but the TIMING of the project. What happens if plans were to be finished by summer and now it is winter?? What if there was demand but 5 other builders finished their project before you and now the market has an oversupply?? What if rents softened in the market??

All kinds of things can go haywire with a development deal. This is why you want to build fast and get stabilized so you can exit at full market value. You work your exit cap backwards down to land acquisition costs and see if the project makes sense on conservative numbers.

55 to 65 a sq ft sounds low. I would want to be conservative with my numbers and not optimistic. Construction materials and labor costs could rise increasing total project costs and reducing anticipated returns. 

 Joel you bring up several valid points that are definitely things to resolve early in the due diligence phase... just thinking through them out loud...

TIMING - right now in Houston, we have nearly ZERO available rental stock and a very robust number of people moving into the area weekly which bodes well for the immediate future. Even with oil prices and the market ultimately cooling down at some point, the rental market in areas with close proximity to downtown will still be robust. 

Currently I know of one new construction duplex in the proposed area(s) and even this developer is selling them as single family units versus renting them out. In the inner city literally every residential developer is building in the gentrifying areas the townhomes and small single family properties. The commercial developers are all building Class A rental properties which that market is close to being overbuilt I believe and has the potential for saturation.

As for my exit strategy, with these I am really building these for my own portfolio and as a template to do this in a few other areas of Houston I have identified where this should work.

My construction costs are based on current market & trade prices for rental grade but as you said, these are all subject to market conditions and these numbers do not reflect a 10-12% contingency I add to the budget when doing new construction but I try and identify as best as I can a true to dollar, cost per sq. foot minus all fluff. (Call me OCD)

Ultimately, I'm believing I may have identified a small niche market here locally for smaller players like myself... we will see!

Thanks for the feedback guys!

Another specific reason you see less small multi development are excessive city and county charges which are a fixed cost and thus deluded over more units compared to few unit developments. Utility connect fees and building permits have skyrocketed compared the their inflation adjusted prices 30 years ago. They are really no longer permitting and connection fees but an additional source of serious revenue in many citys that boost their municipal budget. As an example Portland charged me 28k on a sewer connect fee on a SFR I bought last year. That was a free service 30 years ago.

Building costs have also disproportionately skyrocked for these same reasons and others which is counter-intuitive as usually increased productivity and advancing technology lowers cost over time-  apparently not in construction.  Obviously economies of scale lower the variable cost per unit but with fixed costs so much higher, smaller buildings become much less sensical to build except in the most expensive city's where land value is at a premium.

Originally posted by @Tyron McDaniel :
Originally posted by @Joel Owens:

The 8/12/20 units type properties are in demand because as the SFR yield dries up what these investors know is rentals. So now you just have a bunch of tenants under one roof pay rent instead of a house.

The entry level to that is these small unit type properties.

When you build it's not only the potential profit but the TIMING of the project. What happens if plans were to be finished by summer and now it is winter?? What if there was demand but 5 other builders finished their project before you and now the market has an oversupply?? What if rents softened in the market??

All kinds of things can go haywire with a development deal. This is why you want to build fast and get stabilized so you can exit at full market value. You work your exit cap backwards down to land acquisition costs and see if the project makes sense on conservative numbers.

55 to 65 a sq ft sounds low. I would want to be conservative with my numbers and not optimistic. Construction materials and labor costs could rise increasing total project costs and reducing anticipated returns. 

 Joel you bring up several valid points that are definitely things to resolve early in the due diligence phase... just thinking through them out loud...

TIMING - right now in Houston, we have nearly ZERO available rental stock and a very robust number of people moving into the area weekly which bodes well for the immediate future. Even with oil prices and the market ultimately cooling down at some point, the rental market in areas with close proximity to downtown will still be robust. 

Currently I know of one new construction duplex in the proposed area(s) and even this developer is selling them as single family units versus renting them out. In the inner city literally every residential developer is building in the gentrifying areas the townhomes and small single family properties. The commercial developers are all building Class A rental properties which that market is close to being overbuilt I believe and has the potential for saturation.

As for my exit strategy, with these I am really building these for my own portfolio and as a template to do this in a few other areas of Houston I have identified where this should work.

My construction costs are based on current market & trade prices for rental grade but as you said, these are all subject to market conditions and these numbers do not reflect a 10-12% contingency I add to the budget when doing new construction but I try and identify as best as I can a true to dollar, cost per sq. foot minus all fluff. (Call me OCD)

Ultimately, I'm believing I may have identified a small niche market here locally for smaller players like myself... we will see!

Thanks for the feedback guys!

This is something that I'll definitely be looking into myself now that you have brought it to my attention. If your correct about identifying this small niche market it sounds like you'll be on the cutting edge. Great stuff!

I've been looking into this as well. I'm in Florida where the construction costs are lower than the national average.  First off, there is a lot of land out there but not much that is zoned for the density needed for apartments. Most small multi family units I see that were built decades ago have much higher density than is currently allowed by today's zoning code. 

There is also no economy of scale on these 6/8/12 unit projects. I just built a house last year, acted as my own GC and there is no way you can build for 60$ a sq foot anywhere in this state on a small project unless you physically do a lot of the work yourself. Whether or not you're using builder grade materials or high end, the bones of the house cost the same. Maybe in the mega subdivisions can you get those prices, but not on a small project like that. Like you, most of what I see is mega big, mega expensive Class A projects with lots of amenities. 

@Tyron McDaniel ...interesting you should bring this up.  I work with a builder here in Utah that has completed 10 brand new 4plex developments over the last few years.  We expanded into TX and just sold out of our first project in NW Houston...right off of Mills Rd.  That's comprised of 10 new construction 4plexes that we manage.  We're in the process of locking up land for a larger development of new 4plexes in Katy.  Message me if you'd like details.  We just finished all the prelim info on tax, rental, vacancy and have a pretty solid proforma put together.  

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