Why are there so few 1980+ 2-4 unit buildings inside the loop?

Question

There seem to be two kinds of modern era (1980+) housing inside the loop:

1) mega complexes big enough to have on site management (these are the piles of apartments on top of parking garages that all look the same and have bland names)

2) Single family homes (these days, mostly three stories -- and they usually look the same -- garage on bottom, open on two, beds on three, all wrapped inside a Hardiplank shell)

Is it not possible to profitability build 2-4 unit buildings? There used to be duplexes and 4-plexes, but all the fourplexes in Montrose are old. . . all the duplexes in the Heights are old. I would love to own a 2-4 plex of modern-ish vintage, but they almost don't exist. Instead I own two units inside the same large complex. If I bought land and built my own 4 plex, could that make money? Since everyone just puts up more townhomes, I assume not. . . But for someone who wanted to build-rent-hold instead of build-sell, why not build a fourplex instead of subdivide into yet another 3-pack of townhomes on a 5k city lot?

Owen Hehmeyer · Answer

@Brian Nel I think you are right about increasing the number of units, but that could be done by building three 2000 sqft SFRs on a 5000 sqft lot or by building a 4-plex with four 1500 sqft units (both 6000 sqft). And yet we see only the 3-pack of 2000 sqft townhomes. My theory is that almost all builders are working for income, not capital gains, and so they build SFRs, which are easy to sell one at a time, to anybody. My theory is that the 4-plex would rent super easy, and that demand for the smaller, more affordable units, totally differentiated from everything else in the market, would be great, potentially even better than the bigger townhomes, but the sales outlet is only investors, and therefore less liquid and less profitable to sell in the short term. It is really a build-rent-hold model, which doesn't suit the investor profile building out Houston. Some Biggerpockets small time folks should try it.

Brian Nel · Answer

Great post. I've held this sentiment for a long time and you summarized it well. I searched until I was blue in the face for multifamily in the loop and best I could come up with was run down 2 units in Montrose way out of an attractive price range.

If I had to throw my $0.02 in here, I think it's due to how profitable it is to increase the number of homes on a lot. As you mentioned, a 5k lot can be scooped up for $200k-500k depending on area. If that same lot is divided to 3 townhomes, each will sell for $500k-1M. The developers that do this have such a tight grip on their construction contractors (an interesting and sad story within itself) that they have the homes built for bare bottom dollar. I would estimate $150k-300k. So with our ranges stated here your developer is looking at $850k-$1.6M gross profit. And to think that from purchase to re-plat and sale can be 6 months, you'd be hard pressed to make the argument that someone would be better building a multifamily and holding.

I would be curious to hear other opinions as well.