1st Time RE Development in Texas (RGV)

9 Replies

First off, I would like to state that I welcome any comments and advice. This is my first go at investing in real estate, let alone development, and it seems to be everything from exciting to nerve wrecking.

I recently purchased a small lot in texas and would like to develop a small 4 unit apartment building. (2488 SF)

Cost of lot: 9K, of which I put down 3K, seller carried the rest with 2yrs no interest.

Currently the lot is zoned residential, so I am at the moment trying to get it rezoned. The lot is in a small town, but is part of a small metro area. The rents here go for about .65 per SF on average, for an avg. unit.

There is a 1 yr old 4 (1 bed rm.) unit bldg. one block away from the lot I purchased, each of the units rent for 600 (each unit = 618 SF) which is HIGH imo

Each unit in my proposed plan would be 1 bed rm. w/ about 622 SF where I would like to start rents at 450.

The est. cost of constructing is around 85K, bringing the total cost to 94k.

I have contacted a few banks and the best deal I could find was:

10% down, 20 yrs (My quesiton here is...will banks negotiate? Can I find a better deal?)

if the neighbor building is leased at $600 per unit, undercutting them by $150 is leaving money on the table and gives the impression that you have an inferior building to prospective tenants. Why did you purchase the land outright before securing the entitlements/ zoning? I realize you only have 3000 in it but depending on the jurisdiction, a rezone could take a considerable amount of time.

I agree with David about securing the land before you know the cost or possibility for rezoning the property. My second concern is your build cost estimate of 85k. I am not sure what building cost are there because I know they vary throughout the country, 2488/85,000 = $34.16 per square foot. I don't know of anywhere you can build that cheap? I also think leaving $150 per unit on the table for rent will cut 7% off your gross cap rate.

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@davidjacques @ KennethBell I didn't rezone the property earlier, partly because of ignorance. I didn't know that I could rezone it before I was the owner. I also know members on the board, and many of them are pro development, so I never really anticipated entitlement being an issue. (I know this could come back to haunt me if it goes the other way.)

The area where I am building is a little below avg. on the socioeconomic ladder, and I thought that If rents were that high it would put an undue burden on the tenants. I know that the fundamentals may allow for a higher rent, but I thought it would be too much for the typical tenant. I'm prob. Wrong.

As for the build cost estimate, I just may be located in the cheapest place to build. My father and I will be doing most of the contracting. For ex. The guy who does the framing will put up all the walls for around $500. Tile install is at about .80 per sf.

Thanks for the feedback I greatly appreciate it.

@Pete Torres

If you live anywhere that you can get a 2400 square foot building framed for $500, I need to move there. As far as zoning is concerned the time and the cost is the major concern. Unless you are able to get a variance, changes in zoning take time and most likely a few thousand dollars. Most places require a zoning fee with no guarantee your petition will pass. A few angry neighbors can quickly destroy a zoning request!

@Kenneth Bell

Thanks for the advice. The rezoning issue is a concern for me, and if it doesnt fall through, I'll just have to modify my plan. The lot has one neighbor, everyone else within 200 ft should be ok with it.

In your opinion what is the time frame for a zoning change? When I spoke with the town administrator, he seemed pretty confident that it could be done in a couple of months. The town is small (2500 pop) so maybe smaller towns differ in the way that they handle zoning issues.

Sorry for the late reply. I havn't had a chance to really sit down and write.

First of all....boy do I feel ignorant. Lots of learning trying to rezone this lot. I had to submit an application but the city administrator kept asking for different details about that project. I think I submitted it about four times. When I finally got approved to appear before the planning and zoning committee, they went on vacation. As of right now, I have a meeting to appear before them on July 28th.

Ill update this thread when I get final word.

Since then I have also purchased another vacant lot near this property in question, and the same process will have to be undertaken.

@Pete Torres  I am not following your reasoning. In the first posts you admit that it probably wasn't very smart to purchase a property before finding out if you can rezone it. Then you go on to say that it is much more complex than you originally thought. Then next you say you've purchased another lot that will need to be rezoned. 

Questions, In a town of 2500 people, what makes you think there is a demand for the properties? Have you figured out all the costs to develop the project, from putting in infrastructure (utilities, water, sewer) along with having a design drawn, plus all of the costs to build? Is the person that is holding the current note on the property, willing to subordinate to a new construction loan, and if not, where will you get the money to finance? Have you considered the cost of financing in with your cost breakdown, and projections? 

What does the general plan show for the zoning in the future for the lot? That's usually what determines whether or not a parcel will be allowed to be rezoned. 

@Karen Margrave  I am sorry but I am leaving out a few details. I purchased the first lot which is on a corner for 7k, two lots over there is a seller asking for 18k for his, the lots aren't identical in size. I strongly believe I can quickly sell it for 10k, min. 9k, so I felt that it was a great deal. The second lot i purchased at 3k, the assessed value with the county is 12k. The owners just wanted to get rid of it, and I honestly wasn't looking nor did I see that purchase coming, it just seemed like a great opportunity.

The town is small, but its part of a much larger area. The city that neighbors is around 75k in population, and the larger metro as a whole is 1.5 million plus in population. The town also has no zoning plan, it hears requests on a case by case basis. The only problem with that is that the board convenes irregularly. At some meetings there was no quota, so no vote.

The financing of the project seems to me to be the most striaghtforward, I have spoken with several lenders in the area, and many are starting to finance investment projects with 15% down. The infrastructure costs have all been factored into the construction costs.