Multi-family build to rent advice

27 Replies

Looking to build a tri or fourplex as an investment property. I'm a general contractor myself so I will be building it. I've been trying to find all the literature and bigger pockets articles to help me with this new ventures. Any go to literature or anything of the sort or advice for me! Thanks in advance everyone.

@Jeff Efird Jr There is literature all over the site. What kind of help are you looking for specifically? You might want to start under the education tab above

@Ned Carey Main thing I'm looking for is amount of money to put into them for a certain return. I've read a bunch of literature but they go back and forth on the subject. This will be my first multi-family and I know they are a totally different beast compared to SFH.

Figure out your landcost + cost to build, probably going to be high. Then figure out what's average rents for the area. I'd be conservative and give yourself a range...

Ideally you'd hit 2% of your cost in rents, realistically that probably won't happen for new build maybe you'll hit 1%.

So it cost say 400k for land and build you're looking at wanting 4-8k per month in rent.

In all honesty you're probably better off doing a rehab vs new ...

As I'm sure you know construction is booming wait till it slows down....

Plus is there even a demand for this in your area? Not all places support tried/quads and sometimes city won't give you the zoning. 

@Matt K. I'm located 15 min outside of charlotte. Tri and fourplexs are doing really well. Especially the mid range ones. Really everything is doing great. That will slow down soon though in the home building and buying department but it's looking like renting will stay hot. Theres not enough homes being built fast enough for the influx of people coming in so rent is their only option.
Originally posted by @Jeff Efird Jr :
Looking to build a tri or fourplex as an investment property. I'm a general contractor myself so I will be building it. I've been trying to find all the literature and bigger pockets articles to help me with this new ventures. Any go to literature or anything of the sort or advice for me! Thanks in advance everyone.

This is great. Please keep me updated. Being your own builder is awesome--- maybe you can work the numbers to build 8-10 of them and get a couple on the tail end free and clear? Scale, Scale, Scale. 

@Jeff Efird Jr You need to be careful.. Some areas the rental market doesn't support commercial build if using income approach as value.. For example an 8 Plex.. 1000 sqft per 2bed unit that rents for $1000 each.. your annual gross will be $96,000.. using conservative 40% on expenses your NOI is $57600 you 8 cap and it's worth $720,000. You divide $720,000/8000sqft and now you got $90 a sqft.. and this doesn't even include the land.. Even if you jack up the rent to $1500 a month it will be $135 sqft without land.. Would it be feasible to build? This doesn't even include holding costs. I understand you are putting sweat equity but those numbers are tight.. If you build you need to automatically profit on equity or else it's pointless.. usually 20% to make it worthwhile Good luck
Originally posted by @Hai Loc :
@Jeff Efird Jr

You need to be careful.. Some areas the rental market doesn't support commercial build if using income approach as value..

For example an 8 Plex.. 1000 sqft per 2bed unit that rents for $1000 each.. your annual gross will be $96,000.. using conservative 40% on expenses your NOI is $57600 you 8 cap and it's worth $720,000. You divide $720,000/8000sqft and now you got $90 a sqft.. and this doesn't even include the land.. Even if you jack up the rent to $1500 a month it will be $135 sqft without land..

Would it be feasible to build? This doesn't even include holding costs. I understand you are putting sweat equity but those numbers are tight..

If you build you need to automatically profit on equity or else it's pointless.. usually 20% to make it worthwhile

Good luck

If he is building his own units---- those number will be greatly reduced. Im rooting for the guy. 

@Jeff Efird Jr Why would you build a 4 plex when you can buy them much faster and cheaper? The only way that I would do it is if I were planning to build a series of 4 plexes on a large plot of land resulting in 32 units or more in the future. This will require an approved plan by your zoning board. Otherwise, I don't see an upside to building unless there is nothing to buy in your market.

Originally posted by @Jeff Efird Jr :
Main thing I'm looking for is amount of money to put into them for a certain return.    .   .   .

 A good book in Dave lyndahl's Multi-Family Millions. But you won't find a lot on the numbers. It will cost real money but I recommend Ray Alcorn's Deal Makers Guide to Commercial Real Estate. Another very good book on terminology and numbers is Frank 

Gallinelli's book What Every Real Estate Investor Needs to Know About Cash Flow. Frank was on one of the early Podcasts #4

Jeff good post. I'll do my best to share with you as a fellow GC/Developer. Huge fan of building new - renters love the shiny pennies and as your aware you build instant equity. We have a totalof 65 rentals about 50% mix of SFR and attached housing .At one time in 2013 we had over 100 and ended up selling 39 units to 1 investor . SFR B/C props and attached A. The attached we built 10-12 years ago and they are solid EZ to rent and sell / still very new in comparison. Our vacancy rate overall is under 1% YTD for all 65 props. Now to some of your ?'s

1.) 1% rule very realistic in new builds 2% I can't imagine how thats even a mention with new construction to be honest very very unrealistic.

2.) The $95 / SF I assume is your cost which IMHO is very realistic we are paying $75 for our current project - which is a duplex project and will be paying $95 on one we will be starting within 45-60 days.

3.)  Based upon the fact they are new - maintenance is a non issue for the first several years which is very very attractive to my objectives. The other bonus here is by the time you are required to do maintenance rents have increased enf so cash flow stays current. 

4.) Cash flow - lot of numbers - formulas opinions on here regarding ROI/IRR/ My favorite Cap rates. Heres mine : On a unit that rents for $1395 I will being home $300-350 depending on if I go with a 20-25 year ( 2 families ) amortized loan. On a unit that rents for an average of $1600 ( 4 families ) I will bring in on average $500 /month cash flow. This will be based upon a 20 year amortized loan.

5.) Equity - As I'm sure your aware based upon the fact you are a GC you will have instant equity and in fact both deals above I will be putting no additional money into the deals because I purchased the land from a bank for the duplex's and the 4 families another builder is purchasing all the SFR lots allowing me to pay down my debt.

Summary - as a fellow homebuilder a huge fan of building new . Interesting story that just happened  / a "friend" today in another State asked me if I would "share " my 4 family prints with him . I'm like Share no it took me 18 years to figure out a successful formula - I can finance and you can build if you want and we split it 50/50. Crickets. Point is this -it works and it can be very very profitable.

Best wishes Jeff 

@Benjamin Maciel So am I.. Didn't want to be offensive in anyway and do not want to be discouraging. I am facing the same dilemma with land that I have in Ohio.. I have guys who can finish the building after its framed but the cost of foundation, framing, paving, water and sewer lines cost a fortune.. To me it doesn't make sense if it's not high-end A class.. After this experience I find that value add is much more stress free than building.. Good luck After
Originally posted by @Hai Loc :
@Jeff Efird Jr

You need to be careful.. Some areas the rental market doesn't support commercial build if using income approach as value..

For example an 8 Plex.. 1000 sqft per 2bed unit that rents for $1000 each.. your annual gross will be $96,000.. using conservative 40% on expenses your NOI is $57600 you 8 cap and it's worth $720,000. You divide $720,000/8000sqft and now you got $90 a sqft.. and this doesn't even include the land.. Even if you jack up the rent to $1500 a month it will be $135 sqft without land..

Would it be feasible to build? This doesn't even include holding costs. I understand you are putting sweat equity but those numbers are tight..

If you build you need to automatically profit on equity or else it's pointless.. usually 20% to make it worthwhile

Good luck

Building brand new product, the goal should not be for it to trade at an 8 cap.  The challenge is that even if the product is new, at a 4 family it trades on comps, which will be difficult.  The other thing on the income approach you will need to be in an area where new product trades at a better cap.  This is fairly rare on small apartment deals.  So you might actually have better success developing out all 5 acres at once with some partners.     

In that example a 6 cap would be worth 960,000.  

Originally posted by @Jeff Efird Jr :
@Anthony Dooley

We have 5 acres were looking to build multiple units. Plus I'll be my own builder being I own a construction company. I've been looking for a while but not a lot of multi-family around me

 How many units could you build on that 5 acres? 

@Adam M. Still working with zoning on that. Realisticly I'd like 10 to 12 fourplexs in all, but I have been thinking about building 6 to 7 then on the rest of the land build some 1200 to 1400 sqft sfh and selling them to cover a good bit of my cost.

@Jeff Efird Jr That is very impressive! What a great idea.

I love the multi family advice of Michael Blank and the Multi Family Academy on Facebook and LinkedIn. Read lots of great stuff from many sources there often. Maybe some of the info you seek could be there?

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