How to: develop 22 unit apartment buildings

Question

Hello all,

Pardon the trivial inquiry but I feel myself now moving into a different area in investing.

I've mostly dealt with single family dwellings. Recently I was introduced with an opportunity to purchase 1.4 acres of land from a friend of mine. It's approved for 22 units., curb and gutter already there, in prime location on a main street, easy to connect with city water and other utilities. The price (I believe)  is very reasonable considering the overall scope; 180K for multiunit land property with approved plans.

For the land itself, I may secure an owner carry back, lease option or buy cash with institutional financing.  So my question...how can I secure financing for the project itself?

Richard Copeland · Answer

Per your friend, the site is approved for 22 units.  I would confirm with the City.  I would get with an experienced architect and get their opinion on how many units can be built on the site and ask them how long to begin construction.  Also, reach out to a MF contractor and ask what the cost would be for the number of units your are building.  This will give you a ballpark of cost.  Keep in mind there are a lot more cost involved in the process.  With the ball park, you can check out comps in the area and see what they are renting for and estimate your rent.  With your rent, you can estimate your operating income and expenses to determine the properties value.  Contact an area broker or look at Loopnet to see what cap rates are to assist in your valuation.  If your value is the same or close to the same as cost to build, it's not worth pursing unless you want the experience and have cash for unexpected expense.  However, if there is enough equity between cost to build and valuation, then go for it.  Have your architect create a financing package with drawings and everything to present to a builder for a quote.  Once you have the financing package, you can approach lenders for financing of the transaction.  Typically, lenders will probably as for you to have 35% in the game, but not always.

Arcinio Arauz · Answer

Brian,

Thanks for the easy to understand explanation. As stated, risk to build is a major factor of pulling the trigger. Selling after the project is completed may also be a consideration.

Also... I see I was the first discussion you responded to and you just joined BP today? Welcome! What position in REI do you play? Your information was helpful.

Arcinio Arauz · Answer

Thank you kindly for the response! I really appreciate it. Even though I'm still in the negotiation stages of the acquisition, I am certainly open to ideas. Can you (or someone else) give a basic example of the "cost to build and cap rate" variation? Say I have plans drawn up after verifying zoning and permits ect; a builder quotes me at say...$1.2 mil. and rents average $800 per unit.

A scenario of good investment to cover building cost?