Investor · Houston, TX · Member since 2013 · 27 posts · 1 vote
Hi all,
I am interested in constructing a 6 plex, class C apartment in Houston in place of the house that currently stands on the lot. The contractor has given a bid for 630 K for a turn key (including the development of a retention pond). Each unit will likely fetch 1200 in monthly rent. I figure the payback is a 10 year period. Is that the right way to determine the feasibility of the project? Please advise
@Mohammed S. i would pay very close attention to you learning curve and price associated with it.
Typical new build will have primarily 3 segments for value creation
1. Land Development - If you buy from retail market (i.e. MLS) then probably no value can be added
2. Construction process- If this is your first time then chances of value creation for small project is highly unlikely
3. Once its fully rented - once you go through #1 and #2 and then wait till you rent out everything and then sell
What i have seen is that contractor cannot provide you a +/- 10% estimate unless you have construction drawings on hand. You cant have construction drawings unless you have a civil engineering company with you and you cant have a engineering company with you unless you have a property under contract ..
So, i would put that property under contract and then start engaging an architect to get a layout/construction drawings and once that is completed .. close on the land ..
Not trying to negate your project but just saying that you need check your assumptions and their stress test those in your forecast before you get started.
Hi @Mohammed S., I can understand why you would want to develop a new small multi-family. There just aren't that many in Houston to begin with, and very few new ones being built. That might lead one to ask themselves why. Do developers know something you and I don't? Probably, a lot.
A few things to point out. By any definition I've seen, new construction would be classified as Class A, rather than Class C. Age, construction type, and general conditions are just a few things that characterize multifamily classes.
Just out of curiosity, why is there a need for a retention pond?
Do you have a $/sq. ft. quote from the General Contractor? This would give you a more standard metric to compare apples to apples.
When analyzing new projects, the Internal Rate of Return (IRR) is a metric that most people use to compare different deals. For example, weighing the option to keep your single family, or tear it down and build a 6 unit. There are lots of calculators out there that will calculate the IRR for you.
No one builds Class C assets, they just wait 30 years until it becomes one. Question yourself why would anyone pay rent of $1200 for a Class C product when they can get into a B class product.
@Michael Dang@Jacob Ayers : Thank you for the feedback. My comment about building Class C may have thrown us off-topic. My reference to Class C implied a construction that provided affordable yet comfortable housing - so devoid of any high-end amenities. I realize from your posts that the use of Class C was misplaced.
As per the recommendation, I will run the IRR on the investment but wanted to know if there was a back of the envelope/rule-based approach to evaluating the feasibility of the construction.
Thank you again for the education and your feedback,
@Michael Dang@Jacob Ayers : Thank you for the feedback. My comment about building Class C may have thrown us off-topic. My reference to Class C implied a construction that provided affordable yet comfortable housing - so devoid of any high-end amenities. I realize from your posts that the use of Class C was misplaced.
As per the recommendation, I will run the IRR on the investment but wanted to know if there was a back of the envelope/rule-based approach to evaluating the feasibility of the construction.
Thank you again for the education and your feedback,
Using an IRR calculation is the right approach, but keep in mind that new development projects are more risky and should therefore demand a higher IRR.
Technically the payback period is an actual mathematical calculation that is used to help validate a project's feasibility. When you say a 10 year period, I am assuming you mean a 10 year period for your IRR calculation. This doesn't seem to be too unreasonable, especially if you secure debt with a 10 year balloon payment. One suggestion is to run your calculations with several different holding periods to help get a better idea of how the investment could perform.
In your IRR calcs make sure you are using reasonable assumptions. It is probably unwise to assume the value of your property will skyrocket in todays market for a commercial property.
One other note is to check into permitting. You mention a house currently stands on this lot. A 6-plex is a commercial asset and you may need to evaluate zoning requirements.
Good luck! Let us know what happens. Sounds like a cool project.
@Mohammed S. i would pay very close attention to you learning curve and price associated with it.
Typical new build will have primarily 3 segments for value creation
1. Land Development - If you buy from retail market (i.e. MLS) then probably no value can be added
2. Construction process- If this is your first time then chances of value creation for small project is highly unlikely
3. Once its fully rented - once you go through #1 and #2 and then wait till you rent out everything and then sell
What i have seen is that contractor cannot provide you a +/- 10% estimate unless you have construction drawings on hand. You cant have construction drawings unless you have a civil engineering company with you and you cant have a engineering company with you unless you have a property under contract ..
So, i would put that property under contract and then start engaging an architect to get a layout/construction drawings and once that is completed .. close on the land ..
Not trying to negate your project but just saying that you need check your assumptions and their stress test those in your forecast before you get started.
New construction costs can vary on several factors - land development, total sqft built area, on-site/off-site utilities, retention/detention area, covered/open parking, type of foundation and the list goes on.
Do u have all permits from your City/County? Review civil & Archtect plans to see if u can save development costs