New construction apartments

19 Replies

Anyone out there ever built an apartment building from the ground up? Can you shed some light on price/sq foot it cost you to build (not including the cost of the land). What type of cash on cash return can I expect from new construction? A few years ago, the small multis I have in my portfolio cash flow around 20-25% cash on cash return. I understand cash flow on new construction probably won’t be anywhere near as high, but it’s something I’m trying to learn more about as all the deals in my area have been non-existent and I have not purchased anything for the past year. How does the loan from the bank work, approval process from the town ect? I’m completely new to new construction, the only expierance I have with the town are simply pulling permits on a few rehabs I have done. What is the best number of units to build per building to be profitable? 12? 16? 20? I only have about $250k in cash available right now.

@Frank Maratta The answer to your questions greatly depend on the size shape and topography of the lot and how many units you’re going to build overall. It all starts with the land and you work backwards into it.

The more units you have under one roof the more cost effective it is to build. The number of units per building generally comes down to the site layout parking zone and code requirements etc.

Construction costs are going to start at a minimum of $100 a square foot in most areas for the sticks and bricks that’s for vinyl siding vinyl windows builder grade construction the average right now is about $150 square ft for mid grade product.

Generally cash on cash returns are going to be in the 8 to 10% range and the internal rate of return expectations are 18-30% depending on hold time and exit strategy. 

Again a lot of this depends on the size of the project number of units type of construction etc.

here is a high level overview of the process. 

First you want to interview several commercial general contractors that build the type of building you want to develop so you can get an idea of costs, time frame and requirements.

Next you want to check with the city or county to determine what is required for all approvals including site plan and building permits, proffers, water/sewer tap fees, bonding requirements, inspections and CO process and time frame for all approvals.

You also need to check with the utility companies and get an idea of availability and cost estimates from them for water, sewer, power, gas, cable, installation and connection requirements, tap fees, hookup charges, transformer location and relocation, power line and power pole relocation issues

Check to see if you have to install any manholes, fire hydrants, curb, gutter, sidewalks, street signs, street lighting any specific street design or access requirements,.

Check DOT requirements for access, stop lights and permits, traffic studies

DWQ requirements for permits, permit fees, time frames

This is a broad overview of the process and your civil engineer can handle all of this but it's good for you to know exactly what's required.

@Frank Maratta I am 99.9% ground up investor, I am my own GC. 

$250 cash? you need to build on land that is already developed ready to go. Unfortunately for me, I can never find that. However, in older cites, you can find where you tear down something where the rent market is hot. 

I dont know about New Britain Ct.  but here in Texas, I would expect to pay a GC about $120- to $130 a foot for really nice construction and about 75-80 for lower end affordable type of construction 

To get in to the next tier where I m using more commercial type of sub-contractors? I usually need to be building about 40,000 sf so per-foot the price difference for 4 and 20 units is not all that much for construction but it may be quite different with the financing. 

What banks? stay away from big national brands, the smaller the better for the construction. Try to find a one time close and get your rate fixed for at least 5 years. Once you get a loan amount over 1.5 mill, you can find a Fanniemae lender to refi with to fix your rate for 30 years.  

Smaller complexes mean less rent loss on the front end. That's one of the best parts.

Cash on cash? if I am only counting the mortgage, taxes and insurance plus water trash etc.. (basically the known expenses) I would expect about 30% or I won't do the deal. 

@Greg Dickerson

Lots of good info in there. Thanks for taking the time, Greg.

And yes I was looking at vinyl siding, vinyl windows, pretty basic housing with 1-2 bedrooms each unit. Just to make sure I understood your paragraph correctly, for something like this, you think $100/ sq foot is a good estimate to build? Does this include the engineering/architectural, utility hook up fees ect? Basically all costs other than the land itself.

How would you suggest is the best way to start my search for a contractor? All of my rehabs I have done in the past I have been the GC. But these are just two and three family rehabs. I could not handle GCing a 12-24 unit building while keeping my full time corporate job.

@Charley C.

Charley, just to clarify, you are obtain a 30% cash on cash return from building from the ground up? I did not expect that number to be that high, that’s amazing. Are you counting principal payment towards it?

In regards to your comment of tearing down a building and rebuilding: its funny you say that, i just got offered a burned up 7 unit downtown for about $100k. What is the benefit of rebuilding on already developed land? Is it just the fact that the zoning approval is already there? What if I wanted to rebuild the 7 unit bigger: into a 16 unit?

What is your opinion on the lowest amount of units to build, generally speaking, to make it profitable for new construction? I know grant cArdone had mentioned nothing less than a 32 unit building, not sure if there is any reasoning behind that.

That’s a bummer to hear you don’t think $250k will get me far. I still don’t know much about the financing and how it works, but I figured $250k would equal about 25% down of an 8 to 12 unit building.

@Frank Maratta reason I say find developed land? Civil engineering (easily hit $50,000(20,000 just for the plans)) can eat you alive. Now days we have to put in retention ponds, divert drainage and stuff like that. Its a royal pain. Its a lot time and uncertainty in what its going to all cost.  If I can avoid that, I will absolutely avoid it.

cash on cash? I got 2 mill in to a job that generates 25,000 a month but a lot of that 2 mill is land development for more a lot more apartments to be built. Even still, take 20% of 2 mill makes $400,000, work your numbers from there. New construction has very little to fix so expenses are mostly mortgage, taxes, insurance, mowing the grass, some common lighting, watering the grass etc.. I am my own manager but do have a some employees for various interest to help me out. Some months its reflecting 20% others its reflecting over 30%

Paragraph 2, thats the ticket, good play, look at the area rents and what is right next to you. Avoid things like RR tracks, noise and smells. Good going!

Paragraph 3 is hard to answer but perhaps the 32 units is starting to attract a more commercial type of contractors (not so hand to mouth like  what custom home builders have to use) its least important thing to consider with an urban play like yours

$250k will get you one mill total (25% down)  15 units may be .. And I will say this again, go to a very small small bank. Teaming up with the right GC will mean a lot to who ever is financing it. A good GC could advise you on where to apply. 

I cant think of a better way to invest that $250,000

Spend a lot of time doing your rent study and find your niche. Small complexes seem to do really well in high density nicer types of closer in urban types of locations.

Good luck

Originally posted by @Frank Maratta :

@Greg Dickerson

Lots of good info in there. Thanks for taking the time, Greg.

And yes I was looking at vinyl siding, vinyl windows, pretty basic housing with 1-2 bedrooms each unit. Just to make sure I understood your paragraph correctly, for something like this, you think $100/ sq foot is a good estimate to build? Does this include the engineering/architectural, utility hook up fees ect? Basically all costs other than the land itself.

How would you suggest is the best way to start my search for a contractor? All of my rehabs I have done in the past I have been the GC. But these are just two and three family rehabs. I could not handle GCing a 12-24 unit building while keeping my full time corporate job.

Those estimates are just ranges of what I am seeing all across the country. It would be sticks and bricks only not including any soft cost permits impact fees etc. the best thing to do is to talk to some local contractors in your area and ask them what their costs are running for what it is you’re looking to build. You should be able to find them with a quick Google search. 

Bank financing is a construction loan with a conversion on the backend. Best thing to do depending on the size of the project is talk to several local and regional banks as they all have different appetites rates and terms. You can also get agency construction loans as well you can look that up on Freddie Mac Fannie Mae and HUD.

Originally posted by @Barry Ruby :

@Greg Dickerson

Greg, does “bricks and sticks” include horizontal costs for on and off site improvements?


no that does not include site work as that number can vary greatly depending on a lot of factors. My area is a minimum of $300k per acre for most sites with surface parking and mild stormwater requirements. That Can escalate very fast. 

 

@Charley C.

Charley, those are amazing returns. I’m in shock as to how much you are making off new construction. Incredibly impressive.

It seems like the advice you are steering me to is to take the 7 unit burnt up building downtown. I would have to knock it down and build ground up again. Is this what you are suggesting when you say you “can’t think of a better way to spend the $250k” ?

I could acquire the building for $100k and then I would have to incur the costs to knock it down and build ground up. I personally didn’t think this would even be worth it to do for something as small as a 7 unit, but I am new to this game and don’t know any better.

How would you work this type of deal in terms of closing and financing? Would I have to pay $100k cash to tie up the deal and then go for financing and approval from the town to rebuild? Or will the banks construction loan include the costs of demolition as well?

@Greg Dickerson

Thanks Greg, I didn't see mention of these costs in your prior post and wanted to confirm the composition of the "sticks and bricks" cost range cited in it. The $300k per acre for site work matches the ~$30,000 per unit I use in running early pro forma analysis as confirmed by competent GCs. 

Another formidable cost that is in play in the "wild west" of Colorado is for raw water, which is now running as high as $47,000 per single family lot and a bit lower for MF. This figure is on TOP OF hook up fees and associated impact costs...try building something affordable with them apples.

@Frank Maratta lot of that shocking return is from me building a multimillion $ project for free. Construction management is a lot time and work. If I offered my serivces as an employee, that value is worth anywhere from $100,000 to 250,000 a year so dont loose site of that. That does give me an edge but more important than that, I pick deals carefully and look for over looked nitches (like your small tear down) deals too small for the big nut to crack on a big private equity corporations 

Do want to mention that Greg and Barry are giving you some solid advice too.. start talking to a good local GC now early on. Pick his/her brain. There can be some land mines like what Barry mentioned lurking deep in your deal you don't know about yet. You don't know for sure what you will be allowed to build there.

What is the size configuration of your lot you are looking at? and what is the street frontage? 

@Charley C.

Street frontage is about 70 linear feet maybe more. It’s a 7 unit burned apartment building 6300 sq feet with parking for about 8 - 10 cars in the back. There is also a tiny barber shop on the streetfront that was not affected by the fire, but included in the deal and on the same parcel of land. Total of 0.21 acres

@Frank Maratta have you looked at the zoning code yet? Once you figure out how many apartments you need to make your numbers work you have to verify that you can build it.

Go to the zoning department and ask the following questions:

1. What are the setbacks (front, rear, side, height)?

2. What is the FAR (floor area ratio)?

3. What is the lot occupancy or lot coverage?

4. Are there any green area requirements?

5. How many parking spaces does each unit have?

6. May parking spaces be reduced if near public transportation?

7. Are any public space improvements required?

8. Is there a minimum size for a unit?

Once you go over 3 stories you will need an elevator and two sets of egress stairs. This takes up a lot of space. Also, this will be a new building so everything will have to be to code.

The costly items are installing a bigger water meter/service line, sewer, catching water runoff, and the building foundation.

Once you know what you need to build verify that it may be built.

@Frank Maratta  Ive worked on apartments that were costing for 130k/unit w/o land cost. that was in the midwest. I agree with @Eric Teran those are great questions. Id say start building relationships with a team of professionals, such as architects and contractors or even a DB firm in your area. is there a possibility to keep the same footprint, and salvage the foundation? 

I have a four unit building and I own the lot and the four unit building next-door I met with the city they told me if I join the two lots together they were allow me to build another 4 unit building on now 2 joined  lots  
  Does anybody have any idea of the possible negative affects of joining the two properties together with a property line adjustment  

@Eric Teran

Thanks for the response. I am planning on going to zoning, but as I’m totally new to this realm I didn’t want to walk in as a total newbie, which is why I posted here first to get some general info first and see if the deal even makes sense - could you explain what the terms you present in questions 1,2 and 3 mean? I want to understand the questions before I ask them.

The building is currently 3 stories, and here in CT we have to have two egresses for 3 stories, and even two families.

One thing I did find out today through a contact of mine was that in this particular town, if I go to 4 stories, the needs to be built with a steel skeleton. So in my opinion thus far it is looking like it would not be cost effective to add another story and build additional units.

@Frank Maratta

1. Setbacks - there are limits on how close you can build towards the property line. For example if you have a 20’ rear yard setback you can’t build there. You probably can put a parking lot but not a building. To verify the setbacks first determine the zone you are in. Then you will know the setbacks. You can probably find it online. I had one project killed because the setback was too much due to the adjacent property being a different zone with more restrictive setbacks. According to the city the adjacent properties setback governed because there had to be a transitional zone.

2. FAR - floor area ratio. If the property is 5,000 SF there will be an FAR number which means how much building you can build. If the FAR is 3 then on a 5,000 SF lot you could build 15,000 SF of gross floor area. However, sometimes you can’t build to the maximum FAR due to setbacks or height restrictions. Sometimes an FAR may be increased if you provide some affordable housing or improve public space.

3. Lot Occupancy - if you have 5,000 SF lot and the lot occupancy allowed is 50% that means you can only build on 2,500 SF of the lot above grade.

4. Green area space - similar to lot occupancy where it might be 20% of the lot. So you need to provide green space. It can be in the parking lot if you provide previous pavers or a green roof and may be within the setbacks. It is just another requirement.

With that said, all these restrictions will give you the allowed building envelope. For my clients I usually prepare a feasibility study on what may be built. I provide them all the restrictions, a few options on how to maximize the floor area and very rough design ideas. Then they determine if it works for them.

Also, you are correct that wood frame construction is only allowed up to 3 stories. Some places allow 4 but not more than that. Some mixed-use building have retail on the first floor made of concrete and then 3 floors of wood framing on top. Once you go over 3 floors you will have to do concrete, steel, or timber. Depending we’re you are will determine what is best for the lot.

@Eric Teran

That’s very informative, thanks for the explanation. So it seems lot occupancy and FAR are two ways of measuring the same thing - how much building can actually be built given a specific lot?

Generally speaking, for you personally - what is the minimum # of units you would need to build on a specific lot in order for you to do the deal? Obviously, the bigger we go the more the economies of scale will help us out, and I understand this is a very open ended question dependent on many factors. But speaking in absolute minimums, and as broadly as possible, I’m curious as to how small of a new construction apartment building is worth it to be profitable. For instance, this 7 unit building I am looking at seems like it wouldn’t make sense to incur the expense of the building and lot for $100k another $80k for demolition/debris removal and then the cost to build from the ground up. Have you ever built something as small as 6 units and still been profitable? If so, what kind of cash on cash returns did you see?

What type of cash on cash returns are you seeing with your portion of your portfolio that were new construction?

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