Help getting the ball rolling for apartment deal

7 Replies

Hey BP, I need some guidance on first steps for the following scenario:

There are several small, old single-family homes located in a great location for a moderate-size apartment complex. I want to buy half of a block (5 houses) with a good street front, demo all the SFHs, re-zone the land, then build my 75-150 apartments.

I feel strongly about the rent potential here, and with some preliminary analysis, I could get cash out of the deal if I buy at market rates for these old houses, use a construction loan to build, then re-fi into a 30-year. And it has strong cash flow potential.

I’m also confident in coming up with the cash requirements for 20% on my project through a good network of friends and family.

I assume my starting point is to get a letter of intent (LOI) from a bank, recruit my investors, then recruit my sellers. Is this correct?

What do you think I'll need for my LOI? Preliminary architectural drawings and an few estimates from builders to include in my business plan? A thumbs-up from the city?

Executing this deal seems more straightforward than launching it.

Thanks for your thoughts!

@Morgan Wallace   Good to hear about your plans!  I few comments from someone who renovated and added units in the past:

- The down will probably be closer to 30-35%, unless you have experience doing this in the past.

- Term will be 20 years tops, since it will be a commercial loan.

- You'll definitely need to have some sort of approval from the town, probably before you'll be approved for the loan.  So you'll have to put money into that first.  My experience was adding units creates more use on the town's water / sewer system.  So I had to pay thousands to draw plans, get approvals etc before a bank would even touch it.

Good luck and hope it goes well!

- Tom

Depending on the local city and their overall thoughts on mf, zoning is going to be the biggest hurdle.  It almost always takes 9-12 months to get something rezoned for what you want. That’s the absolute first thing I would look at.  Also look at building requirements, set backs, density per acre that the zoning would require.  You may think you have enough land to build something but setbacks, greenspace, etc....can potentially chop your land down to nothing.

@Morgan Wallace this sounds like a great plan and you obviously have vision and passion. 

There is a whole lot that goes in to a project like this. You need significant experience and a lot of capital to bring a project like this to the finish line. 

You really need to start with either hiring a consultant or bringing on a sophisticated and experienced partner. 

First steps would be to put together a financial model to make sure the numbers will work. If the project looks feasible you would then proceed to getting an option to purchase all the properties contingent on getting all of the approvals and density your looking for. Once you get all the properties under option you are ready to start working on site plan, building plans and cost estimates. Main thing is you do not want to close on any property until you get all of the entitlements. 

Once you have the entitlements you can start the final bidding process, fund raising and financing stage. Once the funding is in place you can then proceed to closing and break ground. This is likely a 3 year cycle to get the zoning, permits, financing, complete construction and lease up.

This is just a brief summary to give you an idea of the process and as I opened with there is a whole lot more to the process.

Thanks for your insights @Tom S. I'll update my analysis with that info.

You definitely hit the core of my question: How much will I have to spend to find out how much financing I can get. I'm prepared to do the work and pay the right people to get this thing together because I really believe in the project, but I want to make sure my resources are all pointed in the right directions. 

The good news is the area is under a fair amount of redevelopment. Our city has a Downtown Development Authority in place to encourage these types of projects, and the university near my desired location recently added new and bigger dormotories and added a new student center, so I'm sure they've upgraded surrounding utilities for those projects. 

I've factored in about $100k for demo, dirt work and utility upgrades. Do you think that's enough?

@Greg Dickerson , thanks so much for your insights. 

Is an option binding on the seller's part? And are you using "option" and "entitlement" interchangeably, or are they different things?

I have a few locations scouted out that have similar features in case I cannot get all property owners on one block to agree, though I thought a few discussions around each block would let me get the temperature quickly. Since most of the properties in my desired area are rental properties, I figured an offer of an equity position would be enticing if required to convince sellers.

With regards to the timeline, I know that this is a long play. I am assuming once demo commences I'm looking at a year for construction. Do you think that's accurate? And I know construction prices can be regional, but is $75k/unit a good estimate for my model?

Thanks again for your comments. Any good recommendations on a consultant? ;)

Originally posted by @Brent Shryock :

Depending on the local city and their overall thoughts on mf, zoning is going to be the biggest hurdle.  It almost always takes 9-12 months to get something rezoned for what you want. That’s the absolute first thing I would look at.  Also look at building requirements, set backs, density per acre that the zoning would require.  You may think you have enough land to build something but setbacks, greenspace, etc....can potentially chop your land down to nothing.

 Great point on the zoning. Part of the impetus for this idea was something I heard on our local NPR station about the city incentivizing development because our population growth is far outpacing our supply. As I mentioned in another reply too, our Downtown Development Authority (DDA) is in place to help our city facilitate development in my desired area, and the Downtown is very near the University, both positives for rent potential. Hopefully all these things will help keep my timelines pushing forward. Luckily I serve on a board with the E.D. of the DDA, so maybe she can help me too!

Originally posted by @Morgan Wallace :

@Greg Dickerson, thanks so much for your insights. 

Is an option binding on the seller's part? And are you using "option" and "entitlement" interchangeably, or are they different things?

I have a few locations scouted out that have similar features in case I cannot get all property owners on one block to agree, though I thought a few discussions around each block would let me get the temperature quickly. Since most of the properties in my desired area are rental properties, I figured an offer of an equity position would be enticing if required to convince sellers.

With regards to the timeline, I know that this is a long play. I am assuming once demo commences I'm looking at a year for construction. Do you think that's accurate? And I know construction prices can be regional, but is $75k/unit a good estimate for my model?

Thanks again for your comments. Any good recommendations on a consultant? ;)

An option to purchase is a contract whereby you are exchanging consideration for the option to buy the property at some point. Yes it is binding on the seller as long as you are performing as required in the agreement and or it expires.

Entitlements are all of your approvals and permits. Meaning you are now fully entitled to develop the property.