Building Small Multi-Family? Is it worth it?

Question

We are considering building small multifamily units? Thinking 4 to 8 units in B class neighborhoods.

Is anyone currently doing this?

What are the risks?

The hypothesis we are trying to poke holes in:

Jeremy Kleier · Answer

@Bjorn Ahlblad That's an interesting idea. Are you thinking you would build on the second lot and sell the lot with the house?

@Gino Barbaro I totally see your point, I guess part of my hypothesis is if i can find more heavily discounted land right now than multifamilies that don't need a ton of rehab. I am figuring it might be worth spending a little more time on the front end and not as much on the capital improvements long term.

Bjorn Ahlblad · Answer

I have been seriously considering this option. Currently looking at buying a SFR with two severed 1 acre lots. Need to get a zoning variance to build one or two fourplexes. Talking to the town right now. Cost to build is not an advantage but there is nothing good to buy, and it would be new. There is always risk; other than the zoning, risk in this case is pretty much nil as there is a shortage of quality rentals in the area.

Jim Hiler · Answer

@Jeremy Kleier Due to the difficulty in finding multifamily property in my area I'm considering the same thing. I'm trying put a plan together to locate lots that are zoned for multifamily and then figure out how many units can be built on the lots.

I'm figuring that the cost to build plus the cost of the land is about same as things are selling for now. $150 / SF +/-.

Let me know if you decide to go ahead with it.

Grant Rothenburger · Answer

@Jeremy Kleier I think like @Gino Barbaro said, that would be a little harder to scale. But if that is not your goal and you can build for same price as buying current properties, go for it.

The other advantage (which goes along with the scaling) to purchasing an existing property is the ability to add value and cash out refi and do it again. Can't do that with a new building.

Salvatore Lentini · Answer

@Jeremy Kleier maybe this isn’t the case as much by you but when real estate prices are going up so do land prices.  Also, building new comes with it a lot of variables.  You’ll likely go over budget (especially if you’ve never built MF before) and it is not a guarantee that new MF will be problem free.  Ask the owners of Millenium Tower in San Fran (Google it).

Aaron Hunt · Answer

Okay, that makes much more sense. I honestly don't know the costs associated with splitting utilities and getting meters on there - or who to even contact for that matter.

Rick M. · Answer

I don't like it when the utilities are "included" in the rent, wait until you get a tenant that leaves the windows open in the winter on 80 or a tenant gets a "clogged" sink all the while leaving the sink running then decides to go away for the weekend. "Baking" them into the rent is leaving you open to liability something I will never do, I'd rather pay $10K plus (which is extremely high for splitting utilities) then wait for a tenant to make 10K worth of damage and then pay the initial 10K to get the utilities split. Do it once, do it right. Pass them on to the tenant or bust!

Aaron Hunt · Answer

Agreed. I was evaluating a multi-family deal recently and the utilities weren't split.

Worse yet, they didn't seem to be baked into the rents either to pass on the burden to the tenants.

Bjorn Ahlblad · Answer

@Jeremy Kleier thanks for asking. The main lot is 1.5 acres and has two nice houses which we would rent out, build the MF on one of the severed lots, and keep the other lot vacant for now. I really need to continue working with the planning folks to see how this might play out. The location is to die for.

Building Small Multi-Family? Is it worth it?

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