Should i start a construction for 12plex unit at current market?

Question

Hey everyone,i have land and plans for a 12plex in South-West FL.

Considering if I should proceed with construction at this market or should i just sale the land.

On one hand, contruction costs are high, insrance&intretst&property taxes are high and increasing and vacanicies are relatively high... on the other, once complete, it's defentiley an asset i'd be glad to own for many years.

Under my current assumptions, once stabilized:

Expected Cap rate of 7.5%

Expected COC of 6%

Mohamed Youssef · Answer

Jonathan, I’d first clarify whether the 7.5% is based on your total development cost, including the land. I’d also run the numbers using what you could sell the land for today. That helps you compare building with selling.

The other piece is how much cash you’ll need between breaking ground and stabilization. I’d test a construction delay, slower lease-up, and lower rents to see how much additional cash those scenarios require.

Wanting to own it long term makes sense. The question is whether the projected return leaves enough room for the construction and lease-up risk.

Does your 6% cash-on-cash assume permanent financing already quoted by a lender, or an estimated refinance after completion?

Jonathan Cappon · Answer

Thanks for the input Luis! One point I'd question is whether a lower CoC than cap rate necessarily means negative leverage, since CoC also accounts for principal repayments, which build equity. But indeed the overall debt service (calculated at 7%) drags me down.

I agree that stress-testing the construction costs, lease-up period, and permanent financing is critical and taking this in considration in my underwriting.

I'm also looking into the market value of the land with the plans in place to compare selling now versus the potential upside of developing and holding long-term.

Regarding sale after stablizaion (which i dont intend to do), do you think assuming sale at 6.5% Cap rate from NOI is correct/resonable assumption?

Luis Ochoa · Answer

@Jonathan Cappon , one number jumps out: your cash-on-cash (6%) is below your cap rate (7.5%). That means your permanent loan costs more than the building yields, so the debt is dragging your return down. Before you decide build vs. sell, re-run it with the takeout loan you can actually get today and see where the two numbers land. Then get a broker's opinion on the land with plans attached, because approved plans are often worth real money to a builder, and compare that check to your projected profit after a 10% cost overrun and a slower lease-up.

Should i start a construction for 12plex unit at current market?

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