Building a 4-plex instead of buying one...
Rental Property Investor · Portland, OR · Member since 2015 · 85 posts · 49 votes
Building a 4-plex instead of buying one...
Most Popular Reply
Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
10y@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.
77 Replies
- Real Estate Broker · Windsor, CT · Member since 2015 · 1k+ posts · 268 votes10y
I would suggest crunching the numbers to make sure this makes sense financially. Building typically more expensive then purchasing an existing property. I would also suggest networking with local construction companies and other real estate investors @Chad Duncan
- Member since 2017 · 14 posts · 1 vote7y
Any tips on how to best estimate the cost per square foot of construction in an area? Is the best way to call construction companies or is there a good online source I can use to estimate before making those calls?
- Real Estate Broker · Seattle, WA · Member since 2014 · 1k+ posts · 427 votes7y
You have to figure out: first, is it cheaper to build than to buy? In many cases, you can find existing property below replacement cost.
Next, you have to factor in holding costs. Time to get permits and time to build. Permit time can be mitigated with an extended close, but you generally can't and shouldn't build until you close on the property! Financing a build is much harder - you would have to use a construction loan, which is generally a higher adjustable rate, short term loan.
For house hacking a 4plex, you have many options including the FHA loan which allows you to get in with 3.5% down. That is THE BEST leverage opportunity if you intend to house hack a 4plex.
- Real Estate Broker · Seattle, WA · Member since 2014 · 1k+ posts · 427 votes7y
Originally posted by @Stephen Rooker:
Any tips on how to best estimate the cost per square foot of construction in an area? Is the best way to call construction companies or is there a good online source I can use to estimate before making those calls?
Network, network, network. Call construction companies, talk to builders, talk to people who have been there, done that. Best of luck.
- Real Estate Broker · Seattle, WA · Member since 2014 · 1k+ posts · 427 votes7y
Originally posted by @Mike Wood:
@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.
Thanks for sharing. How long does it take to get permits where you are at? In Seattle, it is easily 9-12 months. So those holding costs add up quickly.
- Real Estate Broker · Seattle, WA · Member since 2014 · 1k+ posts · 427 votes7y
Originally posted by @Jay Hinrichs:
@Account Closed Totally agree with you... this is why new construction in the mid west is pretty much relegated to higher end SFR's and or urban renewal etc.
Most of the rental properties in the mid west coast far less to buy than they would cost to rebuild... ergo land in those areas is worthless...
PDX is very unique in its land use laws etc.. thereby allowing for a very vigorous building industry.. we normally built 12k new housing units a year.. in o9 we built 700 there is a huge pent up demand for new construction in all asset class's..
Orygun even though its a funky place is the NUMBER one in migration state in the entire US.. seems pretty weird but it is... combination of CA folks fleeing... white collar brain drain. and many who just want to live in an area with year round outdoor activies I guess.
when I think of a bunch of the new houses I built in the last few years.. many were sold to out of state... folks from Texas ( wanted to get out of the heat) Austrialia ,, Seattle ,
Califonria of course.. many from the rust belt etc... because here you can actually buy a nice home for 250 to 400k... I am building great homes that are selling for 350k a pop..
in SF or LA they would be 3 to 4 X that amount and I build for about 80 a foot FYI not including permits. and these are not stripped down TExas starters or GA starter these are nice homes.
What are construction costs in PDX like nowadays for a mid-grade spec home?
- Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes7y
@Adrian Chu In my city, its pretty quick. This assumes that you dont have to get any zoning variances. Without zoning variances, I can get a permit in 2-3 weeks after submitted the plans and application. If I need a zoning variance (over half of mine projects needed zoning variances), it adds about 6 weeks to the process. This extra time is due to the timing of the public zoning meetings that meet only once a month.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Adrian Chu:
Originally posted by @Jay Hinrichs:
@Account Closed Totally agree with you... this is why new construction in the mid west is pretty much relegated to higher end SFR's and or urban renewal etc.
Most of the rental properties in the mid west coast far less to buy than they would cost to rebuild... ergo land in those areas is worthless...
PDX is very unique in its land use laws etc.. thereby allowing for a very vigorous building industry.. we normally built 12k new housing units a year.. in o9 we built 700 there is a huge pent up demand for new construction in all asset class's..
Orygun even though its a funky place is the NUMBER one in migration state in the entire US.. seems pretty weird but it is... combination of CA folks fleeing... white collar brain drain. and many who just want to live in an area with year round outdoor activies I guess.
when I think of a bunch of the new houses I built in the last few years.. many were sold to out of state... folks from Texas ( wanted to get out of the heat) Austrialia ,, Seattle ,
Califonria of course.. many from the rust belt etc... because here you can actually buy a nice home for 250 to 400k... I am building great homes that are selling for 350k a pop..
in SF or LA they would be 3 to 4 X that amount and I build for about 80 a foot FYI not including permits. and these are not stripped down TExas starters or GA starter these are nice homes.
What are construction costs in PDX like nowadays for a mid-grade spec home?
since permits are specific to a jurisdiction without permits 90 to 110 a foot add 10 to 20 a foot for permits.
- Real Estate Broker · Seattle, WA · Member since 2014 · 1k+ posts · 427 votes7y
Originally posted by @Jay Hinrichs:
Originally posted by @Adrian Chu:
Originally posted by @Jay Hinrichs:
@Account Closed Totally agree with you... this is why new construction in the mid west is pretty much relegated to higher end SFR's and or urban renewal etc.
Most of the rental properties in the mid west coast far less to buy than they would cost to rebuild... ergo land in those areas is worthless...
PDX is very unique in its land use laws etc.. thereby allowing for a very vigorous building industry.. we normally built 12k new housing units a year.. in o9 we built 700 there is a huge pent up demand for new construction in all asset class's..
Orygun even though its a funky place is the NUMBER one in migration state in the entire US.. seems pretty weird but it is... combination of CA folks fleeing... white collar brain drain. and many who just want to live in an area with year round outdoor activies I guess.
when I think of a bunch of the new houses I built in the last few years.. many were sold to out of state... folks from Texas ( wanted to get out of the heat) Austrialia ,, Seattle ,
Califonria of course.. many from the rust belt etc... because here you can actually buy a nice home for 250 to 400k... I am building great homes that are selling for 350k a pop..
in SF or LA they would be 3 to 4 X that amount and I build for about 80 a foot FYI not including permits. and these are not stripped down TExas starters or GA starter these are nice homes.
What are construction costs in PDX like nowadays for a mid-grade spec home?
since permits are specific to a jurisdiction without permits 90 to 110 a foot add 10 to 20 a foot for permits.
Seattle's way too expensive. :(
- Rental Property Investor · Los Angeles · Member since 2019 · 284 posts · 184 votes6y
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.
Exactly what Im planning to do in Los Angeles... except Im buying distressed teardown houses on lots zoned for MFs. With prices so high... And Rent Control, its better to have vacant units so I don't have to inherit tenants that I can't evict with out "just cause". Bonus for me in Los Angeles, is that "new construction" is exempt from rent control for the next 15yrs. Im in "progress" on building a ground-up duplex now as a practice run.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes6y
Originally posted by @Alvin Uy:
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.
Exactly what Im planning to do in Los Angeles... except Im buying distressed teardown houses on lots zoned for MFs. With prices so high... And Rent Control, its better to have vacant units so I don't have to inherit tenants that I can't evict with out "just cause". Bonus for me in Los Angeles, is that "new construction" is exempt from rent control for the next 15yrs. Im in "progress" on building a ground-up duplex now as a practice run.
Except for the house hack part, I am all for this too Alvin, been looking and looking. Deals are not easy to come by but love your strategy my friend!
- Real Estate Agent · San Diego, CA · Member since 2020 · 41 posts · 30 votes5y
I actually get this question a lot here in CA since the cost of real estate is so high. The basic logic being that construction costs per sq ft is much less than the cost per sq ft for purchasing existing properties in desirable areas.
I think an important consideration first is the financing for land acquisition and construction financing vs. buying an existing 4plex. Generally speaking, there are many more avenues to finance a strong 4plex deal and more leveraged options than a new construction/land acquisition deal. Sometimes your financing options may not be attractive enough to even pursue the new construction route.
Another consideration is the opportunity cost and risks of a new construction opportunity vs buying an existing 4plex. When purchasing an existing 4plex, you essentially know what you're getting with exception of unforeseen property condition items or existing tenant issues. Once escrow closes, you're generating cash flow right away. With new construction, it's a far lengthier process where cash can be tied up and there is a while host of risks you may incur such as permitting issues, construction delays, exceeding construction budgets, etc. I'm not sure how streamlined the permitting process is in Portland, but here in Southern CA, it can be very lengthy and challenging at times.
Just some more things for consideration as you weigh out your options. Hope this helps
- Specialist · Portland, OR · Member since 2019 · 81 posts · 88 votes5y
@Chad Duncan We just had a similar debate/search in Portland... but with the following cost factors:
- cost of land (at least anywhere close-in, where I assume you'd want your plex)
- current rates/availability of most Portland builders we've worked with in the past
- the currently insane fluctuations (though June certainly looked good/better) in cost of lumber/building materials
- current mortgage rates
- dead time/holding period between land purchase and permitting/approval/building and eventual occupancy,
we decided it was still best to buy rather than build, and are in the process of closing on a 4plex close in.
We may be one of the few that still believe in the long term value of property/rentals in Portland and I do look forward to building in the future (hopefully), but at least with the current unknowns in building costs...
We decided we'd rather buy and cashflow a known entity than risk the unknown (and if you haven't built or dealt with building/development in Portland, before Id put a heavy emphasis on that point).
Honestly, it all comes down to the deal you can find... best of luck in your search! - Fort Worth, TX · Member since 2021 · 90 posts · 32 votes5y
@Matt Mason hi there I'm located in Fort Worth Texas and I'm trying to find out how a certain property is zoned. I looked at the tax records and it wasn't located there. Any idea where to start looking for that information. Or should I just call my city and ask? Also, have you ever had the zoning changed if so was it difficult? Thanks
- 5yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Nicki Shelton thanks for posting! Always great to hear from a fellow Texan. Bigger Pockets does have some good state specific forums and Texas is their most active forum. Feel free to post there if you ever need some more "local" advice about things.
And to find out how a property is zoned you'll need to call the city - https://www.fortworthtexas.gov...
They might need the legal description to really find the correct zoning but if you play a little dumb, like you are new and you don't really know how to do anything...they will usually take time to help you a little more.
And is it difficult to change? I mean, I guess it would depend on your definition of "difficult" but yes, it's really difficult...and in some neighborhoods it's impossible.
- Fort Worth, TX · Member since 2021 · 90 posts · 32 votes5y
@Andrew Postell thank you for letting me know about the Texan forum. I will start reading it.
- Rental Property Investor · San Antonio, TX · Member since 2019 · 30 posts · 22 votes5y
@Andrew Postell I agree with @Nicki Shelton. I did not know about the Texas forum either. Thanks!
- Investor · Monterey, CA · Member since 2014 · 174 posts · 55 votes5y
Beware of the fluctuating costs of supplies. I had a friend that tried that but was half way through her investment and lumber prices skyrocketed. Not only that, it was almost impossible to get so they had to put off a costly 6 months of building time plus they could not find other products as well.
- Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes5y
I am building in Jacksonville. it is not for the faint of heart. Just like the shows on the DIY networks that flip a house in 30 minutes and make a BA-ZILLION dollars on every transaction, never saw anyone lose a penny. Building new construction is getting the same reputation. Just pick some numbers and put them on a spread sheet and poof! The risk is grater than a flip, the money is more expensive and harder to find. The main reason is the municipalities. There are no "cosmetic" build projects, there is no such thing as a "grey" area for a permit. The municipalities have a lot more control over permitting and zoning in new construction. Add to the mix the utilities, architects and engineers and it is easy to get bogged down. Oh and if you are in area that has: earthquakes, hurricanes, wild fire, excessive snow, there will be some extra requirements on top.
With all that said, it still comes down to number for the specific location.
- United States · Member since 2021 · 125 posts · 49 votes5y
If you have experience building stuff then go for it, but if not then this could be more trouble than it appears, especially in a place like Portland where building is restrictive and expensive. But financially if these things are not a problem then building could allow for better cap rates.
- 5yWale LawalBusiness MemberReal Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
I am not familiar with the market, but I would interview a couple of contractors for an estimate on the 4-plex. Then, I would add the cost of the land to see if it is worth it. Good Luck!
NETWORTH BUILDERS5236 Reviews - Real Estate Broker · Chicago · Member since 2021 · 108 posts · 23 votes4y
Now that I've built my 4-plex project, I can't wait to get started on the next one. While building the 4-plex was a lot of work and took longer than expected, it has been worth every minute. The income from renting out these units covers all of my expenses in owning them plus gives me some extra cash for other things in life. The best part is that this will continue to grow as long as I keep adding more units when opportunities arise. Once you have reached financial freedom with rental properties, you'll wonder why you waited so long before getting started.
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