4-Unit Apartment Opportunity, Where do I Start?

Question

So I know a guy who is interested in working a deal out with me on this property, as long as we can both profit from it. Here are the details:

-He owns the lot free and clear (existing single-family house on it with renters)

-He hired me to design a 4-unit Apartment Building for him on this lot (new construction)

-We got 90% of the way through the Planning approval process, only a few hoops to jump through there to finalize the approval

-The Design and Concept for it is Approved and the owners wants to build it, but his financing feel though when his investment partner had to step away

-I have no money myself to invest in this, but I do have the skills/ability to finalize the plans needed to pull the building permit.

-Estimated cost of construction is $1.3M with rent estimate of roughly $2,200/unit per month based on comps in the area. (4 units)

He’s willing to hear what I could offer him on this project (either to partner up or strategize a way to finish it). I just have no idea where to even begin!

Is this an opportunity at all? Is there a creative way we could secure financing? What could be in it for him AND me? Thanks in advance for the thoughts and advice on this situation.

Chris Martin · Answer

Regarding "-The Design and Concept for it is Approved and the owners wants to build it, but his financing feel though when his investment partner had to step away" I think that tells you what you need to hear. If the financing partner realized that the numbers weren't working, why bother? If you want to salvage something, read on for my opinion.

If I were in your shoes, I'd talk to a local bank loan officer about a construction loan as the financing vehicle. You'd need to understand what the bank thinks is reasonable from a margin perspective to even start. In my area, if you are less than about 8% profit (they prefer more, obviously) then banks just aren't interested. In other words, your end valuation should be (example) 1.3M * 110% or $1,430,000. I assume you have an experienced builder lined up, have done market analysis with a broker, etc....

Geordy Rostad · Answer

Four units that bring in $8800/mo and it costs $1.3M to build and that doesn't even include the value of the land? I would think you could go find a better deal on the open market and not have all the blood, sweat, and time to build out the project.

Might make more money finishing and finalizing the design. Get the permits ready to pick up, and then put it on the market as a package. Sometimes it's best to just sell the dream...

Pavan Sandhu · Answer

Sell the thing since you're basically approved and sound "shovel ready"

Justin R. · Answer

This one all comes down to the value of the project once it's rented and stabilized, which is dominated by the location of the project.

What zip code or area are we talking, and what do you think the value would be after the build?

Scott Choppin · Answer

@Alec B Calzada

Get us some more data:

What’s in the 1.3m exactly?

Does it include city fees? Soft costs, like your architectural fee, civil etc.? Loan fees and loan interest, if he was proposing a loan

For this reply, I’ll assume this includes hard costs.

How big are the unit square footages? What the bedroom count? What’s the parking configuration, garage or surface, covered if surface?

How much does the guy value the land at? How much is the land really worth?

In his original deal, that the investor backed out of, did his capital stack include a construction loan? If so, what was the amount of the construction loan he was underwriting?

Where is this project, from your profile, should I assume it’s in Palmdale?

I do like the idea of selling it, with permits RTI, but that only works if there’s a market for sellers of fully entitled and permit ready projects in the location, ie others developers or builders.

Are you getting paid your fee timely? Or is he deferring payment to you?

Get these answers back, and we can provide some basic underwriting of the project.

~ Scott

Rob M · Answer

@Alec B Calzada FHA Construction loan for 4 unit... same limit as buying

If it’s a nice lot and plan... I may be interested for myself. Im looking for a new primary residence in California 🌞

Nick Earls · Answer

It doesn't sound like you should build to rent it out with those numbers.  Have you considered selling the units as condos?

Selling to another builder with permits in hand is also a good idea.  I know some attorneys and architects who specialize in getting zoning approvals and then selling to builders.

4-Unit Apartment Opportunity, Where do I Start?

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