Multi-Family New Construction

[Brandon Smart]

I'm curious if anyone has had any success in multi-family new construction units. My location offers reasonable lot prices along with extremely reasonable construction prices. I have the idea in my head of building a duplex in a high demand area and living in one half and renting the other half for a year. Following that turn around and repeat the process again, while holding on to the first home and renting out both sides. The idea interests me because I would get the much needed landlord experience I need while I shouldn't have any major repairs for 15+ years on the new construction.

Any input would be greatly appreciated, just thought I would toss the idea around with some of you before I go into extreme number crunching. Thanks!

[Brad Brosmer]

I can't say that I've done duplexes this way but I have built new construction multi-family. We built an 8-unit building, which is the first phase of a property we're hoping to have more than 50 units on total over the next few years. This particular property we purchased as a value-add deal where it had an existing 13-unit building that was older and needed renovations so we did those renovations and did the construction of the new building at the same time to increase the rental base on the whole property. By doing the renovations and the new construction, we were able to increase rents in the older building by more than 30% which obviously helps NOI tremendously.

 Building commercially (more than 4 units) is where the real differences begin in new construction.  After 4 units, the building goes from being a residential structure (governed by IRC) to a commercial structure (governed by IBC) so it must be approved by the state (which means stamped drawings), meet ADA requirements, meet fire protection requirements (which is usually sprinkler systems) etc, etc.  As others have said, there are a lot of other hidden costs that one has to be aware of like sewer taps (can be up to $1500 per toilet), water taps, stormwater taps, electrical taps, surveys, drawings fees, and others.  To give you an idea of how much these can cost, we spent over $35,000 for tap fees alone for the 8-unit building.  Also in commercial MF, you have to consider monthly phone fees for sprinkler and fire systems, yearly fire systems checks, and other uncommon expenses to ensure you have your long-term costs figured.  

However, even with all these costs, it can still be a very good investment. We acted as our own GC which can take an investment like this from looking like a low-margin, very long-term investment to something that creates instant equity and cash-flow. Do keep in mind that depending on if you're using a bank for financing, the banks may not allow you to act as your own GC if you're not very experienced in the construction process. They are typically more lenient for owner-occupied SFR and maybe even a duplex. It would be a good question to ask up front if you're plan is to GC your own building.

One of the other benefits of MF construction is that you can typically construct units MUCH cheaper per unit than only building a duplex or SFR,. Economies of scale can be a benefit in this regard. Obviously the more units you do per building, the better the cost per unit ends up.