instead of buying a multi family property can I bulild from scratch ?

Question

Im a new investor in the real estate Buisness , I was just wondering , instead of buying a 2-4 or even a 5-10 unit property could I save me some money by building my own ? I know a lot of people in the construction Buisness so would that be a better way to go or bad idea ?

Joel Owens · Answer

If you plan on buying existing then 4 units and you could go FHA and put 3.5% down. Live in one unit and rent out the other three.

If you do not want to live in the property then most loans will want 20% down.

No benefit really to 5 units. You can't get the long term financing and 5 units is too small for scale.

I think people owning smaller with units  under 4 can make sense or going much larger in scale. The in between 5,10,15 unit type stuff is no man's land. Tend to be very intensive properties, have crappy financing, and the sellers books are generally not good at that deal size.

Joel Owens · Answer

Hi Elias,

You would need to run an analysis of your market to determine what is possible.

For example if all you can buy is sellers wanting a 5 cap in your market with older buildings that those are tough deals to make work.

Instead if the pent up renter demand is there and you have a city or county that is pro-growth with planning and zoning than chances are good a new build might work. You might find with the cost to acquire the land, build the structure ( cost per sq ft ), etc. that you can be all in once leased up for an 8 cap. So you get a return by building new and have built in equity in the property and can sell in the market for a lower cap if you want or hold for cash flow etc.

Justin Tahilramani · Answer

A five unit property is considered commercial - I would recommend sticking with a trip-plex/quadraplex for a first investment. Five unit properties are pretty uncommon.

Justin Tahilramani · Answer

@Elias Chacon - You also don't know what you are going to get when you build a new property. You know exactly what you are getting when you buy existing property. May seem obvious, but dealing with the unknown can be COSTLY and FRUSTRATING!

Chris Martin · Answer

The normal path is a construction loan. Probably best to talk to some of your builder contacts on how the process works.

Elias Chacon · Answer

okay , what would be my options on finance ? Conventional financing ?

Elias Chacon · Answer

Thanks for the the advice guys, so let's say I do stick with the units already built and plan to buy a 5 unit property how would  I finance ? @justin tahilramani , @stuart birdsong,  @joel Owens

Stuart Birdsong · Answer

Elias, this is a very good question. I would first assess what the cost of dirt is and what construction costs are. It will essentially be decided by the numbers. Currently, in our market(Colorado), if you can find a good value on the dirt you might be able to build for cheaper than you can buy a pre-existing multi unit for, but more than likely not. However, labor and materials are continually on the rise.

instead of buying a multi family property can I bulild from scratch ?

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