Building small apartment instead of buying - Good or bad idea?

Question

I live in Houston, TX. I've been looking for a small apartment (5-20 units), under $500K, not in section 8 areas, with room for improvements. Does not have to be in Houston but I know Houston the best. I have saved $150K and have family and friends willing to put in more. I also have a complex spreadsheet I run the number through and if I can get over 10% cash on cash, I'd try to go after it. But I have not been able to see anything that makes sense in the last year or so. I have experience in construction so I wonder how difficult would it be to find some land and build something like 10 units (1/1, 5K sq. ft. building on 10K sq. ft. lot)? Are we currently in a real estate cycle where it may be cheaper to build than buy? Any thoughts?

Cody L. · Answer

If you are seriously looking for multifmaily, then get a loopnet subscription.  It's worth it.  I never post on the 'free' area (even though I can with my paid subscription) as the signal to noise ratio of the inquiries is hopeless.

And when you're looking at spending a serious amount of money on a property, the few bucks you pay for loopnet is well worth it. It's sort of the defacto "MLS" for commercial properties.

Or if you don't want to or can't swing a loopnet sub, then find a few local brokers who specialize in multifamily (AND HAVE DONE DEALS OF THE TYPE YOU WANT) and have them help you search. I have about 4-5 brokers that send me deals (they don't send me stuff on loopnet as they know I already see those)

Giovanni Isaksen · Answer

Development is a three dimensional problem; there's cost, time and what a developer friend calls 'brain damage'.  Does the jurisdiction want your project, do the neighbors, how willing is the building department to work with you to accomplish your project when the city wants it? These questions help quantify how much brain damage you'll have to endure.

Relatively speaking Houston has a reputation for being fairly pro-development but it's good to consider all three dimensions when looking at a development deal, especially if it's your first.

Ryan Terwilliger · Answer

Good MF is a little hard to get into because there is not a good place to go to like HAR. Yea loop net whatever. It is best to get to those in and find a word of mouth deal or just start cold calling them. If you need help with the lot or finding one I can help. Let me know.

Anthony Dooley · Answer

After considering land costs, permits, materials, and labor it is cheaper in my area to buy and fix than build.  You would need to do the math for your area.  Zoning and permits would be the first place I would research.  Cost to build in your area by the sq. ft. will be different than other areas, so comparisons may not be apples to apples.

Cody L. · Answer

I don't think I'd build any mutilfamily as I can still find deals out there.  But I have enough land where I might build a 8-16 unit just for the experience of doing so.

What I'll be building soon is more commercial space.  I have a commercial tenant that's busting out the seems in 3rd ward of Houston.  He wants to double his size so I will build something for him.  There is nothing I could just buy to fill that need as I'll be building right across the street from his current business on some land I own.

Scott Choppin · Answer

@Frank S. @Cody L. @Ryan Terwilliger @Anthony Dooley

Frank, per your original question, I have been speaking to folks recently, where I have been describing that we are now in the "development" cycle of the market.

In a down cycle, where prices are depressed and the psychology of the market is pessimistic, then values are down and below "replacement cost". This buying below replacement cost is a common term used in the media and is familiar to most.

In an up cycle, you are buying above replacement costs (think: construction or build costs for new construction). So if you are a buyer, you are paying market costs and buying above build/replacement costs. However, if you are the developer, then you are "buying" at cost (by creating value as the developer), if you hold the property. Or you can sell above cost for a one time profit. There is where new construction starts to have economic traction. This is not commonly spoken about, and not something most people hold in their thinking.

At this point, you have to decide if you want to take on the role of being a developer, and work to produce value above your build cost.

I do agree with @Giovanni Isaksen's friend's assessment of the three dimensional model, although I am very optimistic that if you take the time to learn, the development model is achievable. I am not saying it's easy or simple, quite the opposite, but this is why there is value to be gained, if you have knowledge that others can't or won't acquire. It's a competitive advantage and marginal utility to understand and have knowledge of the development process.

I have written a post on the Lifecycle of a Multi-Family project that could be useful for you in this process of acquiring strategic knowledge about development.

I am an offer of help in this domain. Feel free to reach out or ask questions here on the post.

Thanks.

Frank S. · Answer

Good point @Cody L. thanks!

Frank S. · Answer

I agree. A decent, commercial multi-family MLS does not exist. LoopNet is good but most properties are hidden behind a paywall. If you know of any small apartments that meet my description, please reach out to me. In the mean time, I am cold calling prospective sellers.

Building small apartment instead of buying - Good or bad idea?

Most Popular Reply