Does it ever make sense to build multifamily?

10 Replies

Hey everyone,

I was bored the other day and  ended up browsing some sites for modular homes.  I noticed that most of these sites has a multi-family offerings that were pretty attractive. Have any of you chosen to build a multi-family property as opposed to buy one? Do you regret that? I guess the answer to the question of my title is that if the numbers work then sure it makes sense to build, right? But, I'm assuming the numbers rarely if ever makes sense when it comes to building over buying.

Not something I was seriously considering, just curious if anybody else on here had any experience with this.

Thanks!

@Brian H. one of the things I love about purchasing B and C class apartments is that they don't make economic sense to build right now (at least in the Chicago market where I am). Since there is a limited supply of these assets, if you can purchase one in a solid location you are set up to see solid appreciation and high rental demand. For instance, the first apartment I tried to rent out in my Berwyn nine unit last year had 72 interested tenants in the first 24 hours! There are lots of renters and not enough rentals!

What I am seeing that is being built are A class apartments. In Oak Park, which is an A class suburb, there were multiple "A" class buildings constructed in 2017. The rent was running around $3 per square foot last time I checked, so the income makes sense versus the purchase price. The problem with the B and C class stuff is that they cost the same to build, but demand way less in rent. 

I've tried a few times got as far as plans and budgets. We even own the lots and I have a lot of good construction contacts and planned to do some work ourselves. Even then it was difficult to make the numbers work. I was trying to build 4 plexes. I backed out when I was able to buy a fully functional 20 unit for 35 dollars a ft.

I think you have to build a a massive amount of units (100 or more?) at once to get to the price per ft for the numbers to work.  

@John Warren @Peter B.

Thanks for the responses.  I guess it really wouldn't make sense unless you build a large complex.  Just was curious about other people's experiences and thoughts.  

Thanks!

@Brian H. Location can have a huge impact. Where I invest it’s different (read: restrictive) of you want to build inside city limits vs. just outside. So if I wanted to build there it would take me longer, great builders are always backed-up, there are holding costs for land, etc. So I’d be an amateur playing in a sport for professionals. Now outside of city limits I notice a lot of different builders but I still wouldn’t jump in that realm. To be very blunt, I’m not a developer. I’m sure I could be an amateur and fumble my way through it. Even if I did my cost structure wouldn’t be the same as someone who does it for a living. Taking longer holding costs out of it, I’d wager I’d still be paying a good chunk more for materials.

Would I build for a personal residence? Sure, I get exactly what I want built for all of my quirks. Would I build an 8-plex? No, you want the basic, universal, cookie cutter floor plans, so there’s no emotional benefit for it.

I’m not crying. But lots of emotions running of off this post. And still feel it’s going to get worse for the little guys to even try to build. 

Look not a Grant Cardone fan in terms of his technical advice but even he is saying it’s starting to make sense to build a class. As of a few years ago it was making sense for sophisticated investors to buy class b not class c mfh apartments because the price per Sf was not much different and you get a much better asset. Now that trend continues.

@Peter B. thanks for weighing in on this discussion. What would you expect build costs to be in your area per square foot? I just finished my first flip, and a local builder who is more experienced than me told me that $50 per square foot is what I should expect when doing a gut rehab job. My Berwyn flip ended up being eerily close to $50 per square foot, which was a real eye opener for me. 

@Brian H. I have realized that there is a big difference between investing in purpose built Class B or C apartments and trying to develop from the ground up. I personally prefer the lower risk of purchasing assets that are already performing, but which can be improved through better management or some remodeling. I also love purchasing these assets here in the Chicago suburbs where there is a stable tenant base and high rental demand. 

@John Warren

New construction. Gcing myself and taking no wage it was about 50 per ft all in on a 4400 sq ft 4 plex. We planned on doing some of the labor ourselves but taking a wage for that.

We have 6 lots zoned for mf in a rural setting. Sewer hookups are in for the first 2 buildings. We got this sub division from our bank that foreclosed on the developer.

I really want to build these but I can buy for less with the ability to force appreciation. If  I build these, I have 6 fours worth about 250 a piece..

It just don't make sense. 

I've actually dug pretty deep into some bigger developers projects. (I won't go into detail) but they were all in at about 70 a ft. On 1000 sq ft 2-3 bedrooms ,building about 100 at a time. When project dropped in size the cost went up proportionality.

Peter

@Peter B. that is fascinating to hear from my perspective!  So build costs would probably be quite a bit more than $50 per square foot for new build, especially if you were paying someone to run the project. I just figured out that I paid $72 per square foot for my Berwyn nine unit. I doubt it could be built for much less than that as it is a 1950's vintage brick building. 

@John Warren

Yeah construction costs have jumped quite a bit over time. Much faster than rents and return on MF.(There is actually a blog on here that covers the exact reasoning why). The 20 unit I bought in 2015 cost the original owner 33 dollars a ft to build in 1995. I payed 35 20 years later. He made only 40k on appreciation. The property had numerous management ineffiencies. I was able to reduce expenses by 7500 a year. Increase the income by over 20k. (Mostly through rent increases and allowing pets).  In just over a year I was able to force almost 200k appreciation. The weird part was shortly after I had it stabilized the bank ordered a re appraisal due to their error on the original appraisal. It came back 175k over purchase. So that experience put building new on the back burner so to speak.

 Take a look around your market. You will never see a 8,12,16 unit being built by itself.  The only mf you see sitting alone is generally 20 plus years old. These are actually the diamonds (imo) they generally are owned by individuals and self managed. Which provides the best opportunity for value add.  My experience is tenants prefer living here vs 100 plus unit complexes. There is a lot less competition for these, to small for the big fish, to big for the smaller invester.

I've wanted to build for some time. We have owned those lots since 2009. Everytime I start to get serious a better deal comes up.  A couple years back my aunt and uncle sold out a large tract of land to the sand mine. They got like 3xs what wood land was selling for at the time. His idea was to build 6 duplexes. I tried talking him out of it. Gave him all of the above reasoning. He didn't listen.. Fast forward, this comes up every christmas.. I would like to say I told you so, but I just listen and tell them "yeah new contruction is tough to make a profit."

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