would appreciate advise on a deal I'm working on.

Question

Hi all.  Just wondered if you could provide feedback on a deal I'm working on.  The details are as follows:

No of Units: 4
Purchase Price: 120,000
Monthly Rent: $1800
Monthly Expenses: $1100
(I know...not a great deal)

The bigger question I have is that as part of the purchase I also get about an acre of land zoned for multifamily.  I could fit another 16 units in 4 unit buildings on the property (according to the current owner).  Does anyone have an estimate of what it would take to build 8-1 bedroom and 8-2 bedroom units?  The building details are as follows:

2 story
units are 800-1000 sqft
mostly sided
on slab
single entrance to each building

Thanks all in advance!

Ben Leybovich · Answer

Adam Demchik  I think that you better count on $70/ft.sq. to build new, but why?  You are paying $40,000/unit, while building them will run 65k-70k per unit.  The problem with this is that by spending 30% to 40% per unit more, you are not going to be able to justify higher rents proportionally – location, location, location.  The NOI on this building is too low as it is; the new buildings would be even skinnier :)  I don’t see this as a deal based on what you are telling us

Will Barnard · Answer

If their exists an old retail budiling, stands to reason (unless zoning was changed) that a new retail buidling could be built. Retail may be a higher and better use and if so, you could seperate that parcel and sell to a commercial develper as another option.

Yes, $70 per sq. ft sounds right for an SFR and you could likely do better for a small apartment, especially if you built 4 of them at once and perhaps get that cost down to $50, but again, that still does not make sense as compared to what you can buy existing for.

Will Barnard · Answer

Got it, sounds like you now have the info you need to make the right decision.

Good luck.

Will

Adam Demchik · Answer

Will BarnardThe old retail building was converted to apartments about 10 years ago (9 units).  There was a fire that ruined 4 of the 9 units and the city will not allow repair and then occupancy as the building is
too close to road.  So everything is zoned multifamily.  they will only allow a new build.

Ben LeybovichThanks.  Agree for 50k a unit I can buy in a very nice area with higher rents.

Adam Demchik · Answer

Will.  Thanks.  I am going to check with some local builders.  The last time I looked at building a residential house it was about 70/sqft for a pretty decent house.  With regards to the expenses, I think they are high due to the extra land causing the taxes to be inflated (as well as an old retail building on site that would need a teardown).  I like the idea of boat storage as the property is 3 blocks from one of the great lakes.

Thanks for the tip on building to cash flow.  Currently rents are 400-600 in the area.

Bill Gulley · Answer

With the additiona acre, I'd say it's not a bad deal as it carries itself. No, it doesn't meet the ratios, but, if you can buy property and it doesn't eat anything, it's nice to have stuff....you do know, they stopped making the stuff some time ago.

As to the units, ask a general contractor there or other owners what the costs are per foot. Depending on what it is, it could vary widely, 70 bucks a ft to 1,700 or more a ft, that would be luxury construction btw. You should be able to do a nice place at 100 bucks a ft, I'd think. But, instead of building and seeing if they will come, see what the market rents are for such units, from that you can get the debt service and amount to finance along with cash in, then build what cash flows, it may not what you initially think. Know what the budget is first then build to the budget. :)

Will Barnard · Answer

As to the land portion, adding that in may in fact make this a great deal. I don't know your local costs to build, but I will guess that you should be able to build 3800 sq. ft (900 per door average) buildings for $60 per sq. or less. That would cost you $228k for 4 doors and unless the rents on new buildings could be much higher, it does not make sense to build. In otehr words, your cost to build would have to be at half that just to get close and i doubt you can build at $30 per sq. ft anywhere in the country.

Some areas are just not condusive to spec builds. Can you do anything else with the land? Perhaps some mobile homes, rent for storage (boats, trailers, etc) or perhaps something else?

Will Barnard · Answer

Adam, with $1800 gross rents and $120k purchase, you are at 1.5% rent to acquisition ratio. Not bad, not fantastic. Each door only brings $450 (averaging the 4) so in that rent range, I would typically suggest you get closer to the 2% rule.

Secondly, your expenses of $1100 on gross of $1800 is quite high, any reason for that? Typically, you can expect 50% ($900 in this case) plus debt service.

would appreciate advise on a deal I'm working on.

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