Build multifamily? Or buy?

Question

I'm in a position where I have my rent paid until March in the San Jose area. I managed to save $120,000 for a down payment to get into a house hack multifamily property. I want to get at least 4 units, but I can maybe afford more.

I have some experience in real estate. I purchased a house in 2014 in Austin with my sister, and sold it in 2018 so I have home ownership experience.

In early 2019, I was moonlighting 2 full time jobs, when I was able to negotiate remote work for both jobs, and I sold everything I had except two backpacks of clothes. I started looking at my options and I ended up traveling and working from January to September. It was an amazing experience and I can't wait to do it again. Maybe after I build and have tenants (hopefully)?

Now I'm in paid temporary housing until March and I want to get into a multifamily property in the Las Vegas area. I'm debt free, 818 credit score. I'm single with no kids so I have flexibility on the location, but I like Las Vegas, and ideally I'd want to buy in an opportunity zone.

I think the better option is going to be to build a new multifamily property. This is a general outline of my plan, let me know if it's crazy

• 1. Get down payment for land + construction to perm loan, I've seen construction loans LTV around 15%. Right now I can afford $800,000, but I don't necessarily want to spend all of of, unless it's to get more units. This is on top of a $10,000 emergency fund.
• 2. Find a R3 (multifamily) zoned land in the city with utilities at the curb, or at least very close and purchase it after verifying that it's buildable and purchase it. Ideally an opportunity zone.
• 3. Take design rough draft of building plans to drafting engineer to make blueprints and lot placement.
• 4. Find builder to build property
• 5. Move in and rent all the other units. Maybe keep one unit for airbnb/guests?
• 6. After a year or two & saving up another down payment, use the existing blue prints to find another plot and reuse the plans to make another building

I've obviously over-simplified some of the steps, and it's a work in progress, but that's kind of why I'm here. I'd like to know what holes my idea has. The biggest issue I'm coming across so far is that finding multifamily zoned land is difficult. I haven't prequalified at a lender yet, because I don't want to take the inquiry hit until I have the land figured out. In March/April I wanted to wait a little bit to see if housing prices would be depressed from COVID, but prices have continued to go up.

One of the reasons I'm leaning towards building is that most of the multifamily properties out there are 30+ years old and will cost about the same to build. I have the time to wait for construction and would prefer to have a newer building where I can charge higher rents.

Oscar Cardenas · Answer

One of your main issues is as you have mentioned. Finding good build-able lots in the right zones is tough work. I would suggest reading up local zoning law exceptions. Like in my county in Oregon, any residential corner lot can have multifamily.

Second thing is that loan programs differ between 1 unit and 2-4 unit and 5+ unit. Be sure to get that cleared up since at 5 units and up its considered commercial property and has vastly different loans. at 2-4 unit you can still get residential loans but down payment might increase.

Third thing is that clear up how much a new build would cost. Different contractors have vastly different estimates.

Other than that the plan sounds reasonable. New multifamily builds do seem to be a good option considering how much small multifamily properties cost.

Travis Turner · Answer

As an Electrical Contractor the first thing I would recommend you do is go to the city or county jurisdiction and find out how much the permits would cost.

Developing land can be crazy expensive.

Here in Oregon when building a single family home its typically around $4k just for a set of plans to be drawn by an architect.

Up to $10k for building permits

In my small town its $11k just for the water meter and sewer connection. (On a SFR)

Excavation and site work is also not cheap. Underground utilities, grading, gravel etc. Digout for footings, foundations and drains.

Each property is > $50k before walls start being built on a 1500 sq ft home.

People here are literally buying properties with tear down houses where they can literally tear it all down EXCEPT one wall and call it a "remodel" to save all that development cost. (including myself)

I'm new to investing but well versed in construction.

In my opinion if you could find a foreclosure or off market deal to purchase that needs lots of work, you would almost definately always be $ ahead vs building new.

Vegas is obviously a different market but definately research the total cost before beginning.

Good luck in your venture!!!

Steve Morris · Answer

"I think the better option is going to be to build a new multifamily property."

Great, so I'm assuming you understand:

1) Local zoning code and what is allowed or not. Then get ready to deal with permits and inspectors and all the fees.

2) How to find the right piece of land in the right place

3) How to get a team of sub-contractors and making sure that everyone is following OSHA/BOLI and they are all licensed and bonded. They get hurt without that then you're responsible.

You can build, but hire a builder and pay attention on your first project

Scott Schultz · Answer

I have been contemplating building multis as well, i figure self GC'ing i should be able to build for around $75K/unit without a basement, and Me being the HVAC, finish, cabinet, flooring ect guy.

Ramon Melero · Answer

Thanks, I've done alot of saving these past few years so I'm definitely looking forward to having somewhere stable that's mine and generating cash flow.

I'm definitely not planning on doing the building myself, I'd hire that out. I'm providing the initial design then hiring an engineer/architect, down payment, and property management. Of course I'm going to be wasting space in one of the units :)

I agree that having rent checks coming in sooner is better. I'm still open to buying an ok multi-family and rehab, but I'm not finding any I'm interested in and I've been looking for months.

Calvin Ozanick · Answer

Good afternoon, I would highly suggest you look into a potential Out of State investment. Here in Wisconsin, 120k is the sale price of a duplex that rents for in the 1400-1600 range. You could dump that 120k into 2-3 duplexes and see 3-4.5k in rent income. The market is strong and very beneficial to landlords at this time here. I would love to talk more about the potentials of your cash in this market. I would love to give you some insight to what I am seeing in my market. Best of luck!

Ryan Landis · Answer

@Ramon Melero you are in an awesome position! Just my 2 cents, and take it with a grain of salt, but managing contractors is hard enough. Building (if you don't have the right people doing it) can really go over budget and become a bit of a nightmare. If you can pull it off, power to you. But there is something that needs to be said for just having rent checks come in from day 1.

Dan Chomycia · Answer

I don't know much about Multifamily properties. My take is that for your experience level I would try to make simple choices with fewer variables. I'm not here to limit you but there is a reason why the Sharks (Shark Tank) do want someone going too far and too fast with their money.

Congrats on getting yourself in a great position!

Ryan Landis · Answer

@Ramon Melero totally understand! Sometimes the professionals though can mess things up/delays/etc. so just plan for contingencies when you Budget. You may also be able to just take something that is average in a good location and do better end finishes and make it a place you are okay living in. Again, new construction is pretty great when it is done. The big things are "when" and "done" lol

Scott Schultz · Answer

if you do not have experience in construction, or managing construction I would agree, I am currently building a spec house and Licenced GC and HVAC, so I feel I am there.

Build multifamily? Or buy?

Build multifamily? Or buy?

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