Building a 4-plex instead of buying one...

55 Replies

I am wondering if building would be better than buying. I live in Portland Oregon and the cap rates for multifamily are around 5-6% max.

My idea is to buy some land, and build a 4-plex on it. House hacking on one of them. Anyone have advice, ideas, or subject matter experience on this?

Thanks.

Originally posted by @Chad Duncan :

I am wondering if building would be better than buying. I live in Portland Oregon and the cap rates for multifamily are around 5-6% max.

My idea is to buy some land, and build a 4-plex on it. House hacking on one of them. Anyone have advice, ideas, or subject matter experience on this?

Thanks.

I'd talk to people in your local market - maybe at your local real estate clubs.  The above posts that state that you can't possibly build for anything close to existing stock may not be true at all in a market like Portland.  The Midwest is a different animal with very low population growth and housing costs.  You may be able to find a run down house in an area zoned for 4 plexes and make yourself a nice return by building a small apartment building in a strong market like Portland.  I think it is going to cost you a lot of money up front however.

@Chad Duncan I build my duplexes, as it makes more sense to me than buying turnkeys. But there is some very different issues when building than buying.  Financing can be a really big difference, as you would be looking at a construction loan and for me, that means coughing up 20% of the total costs (land, construction, permit, etc).  Another issue is zoning, and you might find it difficult to find land with the proper zoning for 2-4 unit buildings.  Things like design the building and getting plans might be an issue.  There are alot of choices to be made when building also, something that you must be comfortable with.

In my area, I can buy a turn key duplex for about the same as I can build it, but the house is older and comes with those Capex risks. I can build some equity into the project if I build from vacant land, plus I build exactly what I think renters want nowadays. I stay with duplexes (2 unit houses) due to building regulations and limited land zoning for 3+ unit building in my area.

With all of the above being said, you should be able to do a quick check in your area to see if building makes sense.  First is land cost, second is building cost and last is what existing 2-4 unit buildings are selling for.  Land costs is likely the biggest decider if things make sense.  Below is a quick example that works in my area (I am looking at this project right now).

2 unit duplex, 2bed -1bath, 1800ft2 total (900ft per unit)

Construction Costs = $90/ft2 = $162,000

Comps sales prices = $140/ft2 = $252,000

If I pay $52,000 for the land, the cost of the land is $28.89/ft2, making my total costs $118.89/ft2 (equity of $38k), this is a good deal.

If I pay $100,000 for the land, the cost of the land is $55.55/ft2, making my total costs $145.55/f2 (equity of -$10k), this is a bad deal.

Your construction costs per sq ft will vary with region, for me $90/ft2 is right for the size of duplex that I build.  

Once you determine this, you can drill down into the income to determine if it makes sense from an investment standpoint.

@Darlena Jones That really depends on your area.  I definitely don't experience the same as you, as I'm on my third duplex new construction project with built in equity.  

I do agree there a lots of areas where you can not build for anywhere near what you can buy for, especially in areas where existing homes are selling for way under $100/ft2.

@Chad Duncan You might want to give vanessa rez with Umpqua a call.  She's a mortgage agent who deals extensively with construction & renos and knows a lot of contacts in the Portland area who can steer you in the right direction.  

I live in Portland,  and have designed, built, converted, and still own several plex's.   I would disagree with the more expensive to build theory.   The building can be done for less than new  IMO.    Your problem is the land.   Anything zoned for 4 units in a decent rental  area, (even a mediocre rental area)  is likely already gone or way too expensive.   

Start by looking at building permits in your area. Compare it to 2004/05. In my area, SoCal builders have not been participating due to the fact that replacement costs are higher than existing in most areas. I would not be surprised if it was the same case in OR

Just my $.02 but I personally live in the Oregon (Bend) area and have grown up here and all my rental investments, etc. are out of state. I find that i'm getting much better cap rates elsewhere. Oregon has a low pop. density and I find that in the market conditions (currently as of 1/12/16) , that good rental areas or higher density areas with good renter pools are overpriced and offer low cap rates. The areas that have attractive pricing end up being places like Pendleton, Hermiston or Madras, etc. and have IMO a poor renter pool / pop. base. 

I personally house hacked a 4-plex myself when starting out, but I bought for $192k in 2012 ... theres no way I could do it right now. Having said that, i'm sure there are many who are craftier than I at acquiring good deals.

Although I will acknowledge that if your starting out it is much scarier (and impossible to 'house-hack') when working out of town. I would suggest that if you want to pick PDX to be your market that you operate in, then take a close look at what REI strategy lends itself to that market and pursue the path of least resistance, rather than trying to force your strategy on a given market (not saying thats what your doing). I spent a few months scouring the I-5 Corridor looking for buy-n-hold rental income props and couldn't find anything to get excited about, but now we are closing on 16 units out of state and will have a 14%-18% cash on cash return / cap rate given 75% or better occupancy. The numbers are there, but definitely require a little more initial startup efforts if going out of state.

Just food for thought. But I will say, if you can come up with something profitable in the valley area now, then it will likely pay big dividends later (or built in equity) that I wont get in my out of state portfolio.

Without getting into a long, drawn out post, it is definitely possible to pencil a new build 4-plex in Portland, especially if you can swing a deal on the land and get the right kind of financing. Infill is happening all over the city. 

@Account Closed   I can see how you would think that.. in the mid west and most of the rust belt and or deep south I agree with that statement.

but not in our area.. there is a ton of building going on in multi family.

I just had lunch with my banker today discussing a 4 plex ground up project.. now my lots are zoned such that its really a townhouse but its still a 4 plex.

It all depends on area and price of the dirt. but it can defiantly be done here.

What what are people paying for land these days in Portland that has good zoning and headroom to develop?  If I see anything on the East side for under $250k I'm shocked.  I don't know as much for the West side.  

@Isaac Frost You need to be specific, $250k for 100 acres is pretty cheap. 

@Chad Duncan First thing is first, are you building on a really big down payment? If you don't have any experience, can you find any lender who will lend to you? I'm a GC, I even have a hard time finding one.

@Account Closed I don't think a statement like that, when you do not know their market, is appropriate.

@Manolo D. Well since this thread is about small multi-family, let's say an appropriate lot to build a 2-4 plex? I personally would NOT build a 4 plex on 100 acres in Portland. I would build a neighborhood.  A big one : )

I am able to come up with a good down payment, not a large one, but enough to secure a loan. I was thinking of building a 4-plex, but having each be separate "condo" like units that i can sell individually later. Thanks for all the replies!

The bank is going to want to lend to someone with experience and they will require to be in first position on the land. Your job is to go out and either pay cash for the land which will contribute towards your qualifying construction loan, or to negotiate an off market deal where you can either substitute the collateral of a seller carried note with another property. This way your construction lender can still be in first position.

This is extremely broad, but these are generally where market is at in close in Portland for land you can build 4-plex. Land- $40-$65/per sq ft (more in higher density zones), $150/ sq ft of hard costs for construction, $20k per unit in SDC fees. Your soft cost ratio will probably be about 30-35% of your hard costs.

Here's a good starting place to build a pro forma. Good luck!

@Chad Duncan Regarding your comments on later condo conversion, you would need to verify that such a thing is even possible with local zoning. I dont know Portland zoning, but its typically not an easy process of taking a multifamily building and turning it into condos.  Plus, I am not sure you would be building for the same type of people and as such it might not make much sense.   Building for a renter is definitely different than building for an owner. 

As I indicated, construction financing is likely to require 20-25% of total costs for a downpayment. Also consider that on 2-4 unit buildings that are non-owner occupant loans, your permanent finance max loan to value (LTV) will be 75% of appraised value.

Jerry Rien Why would you give advice on a Nebraska market when you don't know anything about Oregon? And if someone is building 4 plexes there, then obviously there is something wrong with your system.

Jerry Rien I cant seem to find it in this post.

@Chad duncan i would take a real hard look at your numbers per sq. ft. building will be much more expensive than buying one will.

@Jerry Rien i kind of agree with manolo d, you appear to be giving advice to a poster from oregon.  calling someone an @ss on BP...never appropriate.  also, using all caps is the online equivalent of yelling...also never appropriate.