Multi family market study

[Andrew Caldieraro]

Hello, I’m looking to possibly build a cookie-cutter/basic, small apartment complex (10-20 units, one level, no basements, etc.) in a local town. The cost of living and the population is fairly low (5000 people in the town), so I’d like to have a basic market study done to help verify that there is a need for this. Any suggestions on who I should be looking at for a market study? Can I do this basic research myself (there are only 8 units of apartments in the whole town, all of which are full)? Is a market study needed for this? I appreciate your help!

[Sean Morrisey]

I think it may be best to contact local builders and obtain a variety of bids on what it's going to cost to construct this complex on a "price per square foot" basis. I fear you will find it's cheaper to buy on the resale market and obtain better cash flow than building new...

[Sam Grooms]

First, even if there is demand, does the project make sense? If cost of living is low, how are you getting a good return on investment, with construction costs so high right now? Are you getting a deal on construction? Are you getting affordable housing grants from the city/state? Usually, new construction is going after the higher class rental market, for the project to be feasible. 

If there are only 8 apartments, you can likely do the study yourself. I would contact the property managers and ask for occupancy history and rent history. If they're smaller operations and don't have this readily available, maybe you can get copies of their historical rent rolls and create it yourself. 

Usually you'll want information on new construction permits, completions, absorptions, etc as part of your market study, but it doesn't sound like you'll have any of that in this town. I'm not sure how helpful a traditional market study will be. Look for multiamily advisors in your nearest big city. You can engage them to perform the study, but find out exactly what they'd be able to do for you, first. 

[Andrew Caldieraro]

@Sean Morrisey Do you know what the average cost to build/sqft is in your area? I live in Southern IL, which is why I ask.

[Sean Morrisey]

I live in the Chicagoland area and use $100 per square foot as an initial very rough ballpark figure. 

[Andrew Caldieraro]

@Sam Grooms Great points, and that’s exactly what I’m trying to figure out - Does this project make sense... I have not looked into grants yet. I doubt I’ll get a deal on construction, aside from the cost of living being low). This town has a population of 5000 people. Median household income of $43k. I do not know what the other 8-units in the town rent out for, but they are run down. With the little research I’ve done, I’m betting I can get $500/month in rent for a simple unit, like I’m considering. I’m ok with the complex(s) being one level, which can make construction costs lower. I’m also ok with making them wheel-chair accessible so the units would be a good option for seniors.

[Hai Loc]

@Sean Morrisey $100 is just building? What about development and servicing to utilities ?

[Andrew Caldieraro]

@Hai Loc The area I’m considering is zoned for commercial and the price is $295,000 for 11 acres, which is much more land than I need.

[Sean Morrisey]

$100/sqft for just the building.

[Donna Thurman]

Here's a possible addition, after purchasing the property, you can subdivide the 11 acres and sell the other parts of the property to a developer, for additional income. Just a thought

[Jon Lund]

You haven't stated whether you own the property you are interested in building on...but you may consider going to the owners of the existing "run down" buildings and offer to purchase one and rehab. instead on starting from scratch. Just a thought.

[Hai Loc]

@Andrew Caldieraro I don't think you mentioned anything about zoning except for commerical zoning.. there are dozens of different zonings.. you need to make sure it's approved for density multi family.

[Andrew Caldieraro]

I have thought about buying the land and selling what I don’t need of it. And I do not know the exact type of zoning as of yet. How does one determine if the idea makes sense? I assume I would first make sure the town approves a multifamily complex in this area. After that, get bids from contractors? I want to do the needed research, but I don’t want to squander money when I’m just trying to make sure this project makes financial sense.

[Hai Loc]

@Andrew Caldieraro How competitive is the local market? If it's competitive and you think someone else will snatch it I would lock it up with an offer and refundable deposit with a 60 day due diligence clause. And be very straight with the seller that you won't go ahead with the deal if it's not approved for what you want to do with it.. meet with the township or county or whoever is in charge of planning and development. You won't get exact approvals on the spot but if you have something to work with like you can build on your lot " x amount of sqft, x set backs from road, x height clearance, x parking spots per unit etc" On an email or even a letter signed then that is something you can use to move forward with the deal.. Also if you don't think it's competitive you don't have to submit an offer and just meet with committee.. This doesn't cost you anything.. Where I am from you can't do it this way. You need to spend $10s of thousands if not $100s on drawings elevations civil engineers planners before you pay the plan submission fees to get in the door and they can say no or you need to make amendments that cost more $$$

[Account Closed]

Hey Andrew, 

Lots of good answers here. In such a small sub-market I would first try to address concerns involving demographics, employment, and supply. This seems like an after-thought, but it will be important to you if you hold the property and it will be important to a buyer if you decide to sell the property. Is there limited supply of units? Expected population growth? Do the existing apartments remain filled? Is there one main employer in the region? If so, what happens if the company goes out of business or downsizes on a project? In general you will have a higher allocation of risk in a smaller sub-market like this "micro"-market. 

Next, look at what rents are being charged for newer vintage apartments in your local area. Get a conservative $/psf in which you can use to estimate your rents. Keep in mind that if this area is a low cost of living it will likely put downward pressure on rents. 

Finally, come up with a feasibility estimate on your costs. Get a rough idea of the land value and the cost per square foot of the land. Brokers and development companies can help you out with this... Also look into any associated permitting, financing, construction management, and land closing fees you will have to pay. Put your cash outlay on a construction timeline. Add a reasonably large contingency at this stage for your construction costs. 

Develop your cash flow statement using all the information you put together above. Calculate the IRR on the project. If it is sufficiently high, it is time to start doing the real work for the project (actual quotes, pull permits, legal, drafting etc.).

Sorry for the length. New development is one of the riskier ventures in real estate. It can certainly be rewarding, but you must due solid due diligence to control risk. 

Good luck! Let us know how it goes. 

- JA

[Michele B.]

You need to contact a business consultant that will look into the feasibility of the project, unless you want to do all the leg work yourself.  A consultant is usually an hourly amount  and they usually will even go to meetings for the township. 

[Percy N.]

When we buy apartment complexes, we look for population of at least 75k - 100k and strong job growth.

What happens if you cannot find the right buyer in the timeframe you want? What are your holding costs?

Rural land is cheap - for a reason.