WHY I am NOT building 12 additional Units on Land I already own!

[Richard Sherman]

I was responding to another investor's question on building and thought this might be useful for others.

Background-

-32 Unit property just west of Salem, OR which was originally permitted for 40 units, but only 32 were built (in the late 1970s) The property is in an ideal location, backs up to Elementary school field and walking to all three schools in town, parks, aquatic center. The property has had a string of mom and pop owners, has been neglected and lots of deferred maintenance, but great location, large units, lots of green space and across the street from an A property

-There is 3/4 of an acre at the back that looks directly at the field and already has utilities and permits for 8 units. The City is SUPER excited about more housing, was offering to waive zoning requirements and allow us to build 12 two bedroom units. (There is a big housing shortage in the Portland area in general.)

To Build or Not to Build-

-Initial research shows the cost to build at roughly $120-135 per sf in this location. We have good connections for materials (literally buying lumber from a mill at cost due to employees in the family).

-Utilities In

-Permits mostly done and waiver already in place

-Setback waiver in place

-Plans and engineering covered (using a local Architect that has plan sets that are already engineered for this area and stamped) Cost minimal 5k maybe total for changes and some additional material engineering.

-No street closures needed as it is the back of the existing property.

Basically, it could not be any more ideal to build. I already have the land, most of the high-cost items (utilities, permits, engineering, and architecture are all done) BUT....We are not going to build and here is why.

If I can buy at between $85 and $110 per SF for in place, including the land, then the building would have to generate returns higher in proportion to account for the value of the in-place structure AND the land AND the price difference between buying and building.

for 12 units, that would mean=

Land Value = $250k (probably low for a lot that you can build 12 units on)

Cost different between building and buying (middle number used) = 12 x 850SF= 10,200 SF x (125per SF- 100 per SF) = $255,000.

This means that the value of that 12 unit building would have to be $555,000 MORE than an in place 12 unit. We are in contract on a 20 unit with similar SF build in 1989 in a better area (larger town), and we are paying $94,500 per door and $111 per SF (brand new roof, middle of town, etc). If we build new units in the other area will rent for about the same as these. There is just no way that I can justify building new units which would cost (when assigning land value) $140,750 PER door when I can buy at $94,500 per door.

At some point, the in-place values will get closer to the building costs (economy will slow some, materials may come down some, and in place will increase more) and at that point, I am building.

DO NOT let ego get you into a bad deal...the desire to be a "developer," or to have the newest property, etc. I am also omitting the flipping hassle of building (anyone who has done any before knows what I am talking about.)

[Jay Hinrichs]

those build cost seem very high for apartments.. we are building nice new homes with upgrades for about 100 a foot maybe tad more.. not including land. Metro PDX.  And salem area always seems a little lower. 

I would think apartments in that area would cost more like 75 to 80 a foot to build /  is this the Monmouth area ?

for all the reasons you point out is why in many areas of the mid west etc you see next to no new construction 

unless its in suburbs and A properties..  existing is far less than replacement.

when your buying a 1400 sq ft rancher in the mid west for 80k all in .. cant really justify building new in those areas.