Build Multifamily or wait for pull back?

Question

I have been looking for deals in the central Florida markets for months with no luck.  I currently own a triplex and quad in Ocala and would like to buy more.  The market, like many, is exploding.  Low low inventory means no good deals.  I have tried driving for dollars and cold calling owners with no luck.  Heck, I got 4 cold calls in two weeks myself on the properties I own.  So, I am considering building.  I have the lots under contract and can build 2 duplexes per lot for a total of 8 doors.  20% down financing at 4.5 for 20 years fixed (no ballon in 5 years).  Numbers look ok:  1,000,000 build.  COC of 9.0%. Cash flowing $208 per door after all expenses and reserves.  All looks great.  My only concern is will there be a pull back?  If so, do I wait and buy then or move forward.  I am buy and hold for at least 15 years.  I have plenty of cash reserves but just don’t want to be the sucker that built at the height of the market.  Any thoughts will help.  Thanks.

Clay Lehman · Answer

Good afternoon Mitchell.  It definitely feels like a bit of a frenzy here in the Ocala market.  You are ahead of the game having the lots under contract.  Also, those financing terms are strong.  I think the conundrum of waiting for a pullback is you may not have the interest rate leverage you have today.  Also, what is your advantage in waiting for the pullback to build?  I guess the assumption is that in a pull back the cost to build will be lower.  I think I would run the numbers on various scenarios.  What does it look like if your cost to build is 10%, 20% lower but your interest rate is 6%, 7%, or 8%.  None of us knows what the timing will be on a decrease in cost to build or what interest rates will be in that same time period.  I think the demand for your rentals will remain high for the foreseeable future and you have some margin if rent prices pull back long term.  I think ultimately, I would say that it is better to build now with those favorable financing terms vs waiting for the cost of construction to come down with unknown financing terms.  Thanks for posting the thought-provoking question.

Mitchell Miracle · Answer

Thanks for the insight.  Based on the number of available R3 lots right now (non) I feel pretty safe building.  Also, Marion County HUD is not predicting any pull back in new residents moving to Ocala.  They have put together a task force with several banking and real estate professionals to address the growing concerns in the market for affordable housing options.  I guess my biggest concern is that I build and then 10 Multifamily properties come on the market that I could snap up if I had not shot a cannon ball at one project.  FOMO is a powerful deterrent.  Lol

Mitchell Miracle · Answer

Thanks Clay.  The concern two fold.  If I wait I may be able to build for less.  Or, if there is a major pull back (20%) can I buy existing for less than the cost to build?  As you know being in Ocala, the rents are finally at a level that support new construction multi family.  I like the idea of no cap ex for 10 years I just see a ton of small multifamily being built in that market and fear a pull back in rental rates due to over saturation.

Clay Lehman · Answer

Yes, there is definitely a lot of building going on, so your concern about saturation makes sense.  One thing I was thinking about yesterday that would offset that concern is that many accidental landlords are selling.  I know in our portfolio, we have a few a month that rather than renew, they are electing to take their chips off the table.  So that will have an offsetting impact on rental demand.  The question then is of all the factors of rental demand vs supply, what will the balance look like.  Speaking very anecdotally, meaning I haven't done a study, it still feels like demand is much, much higher than supply and even though more and more investors are interested in owning rental houses here and new duplexes and triplexes it doesn't feel like it did in 2006 and 2007 when you would see homes go up and sit vacant.

In my previous response, I was thinking you were committed to building, either now or after things pullback.  I think you are correct that at some point there will be available inventory of multi-family homes that are cheaper than building.  It comes down to trying to time the market.  It is hard to know when the pull back happens.  The approach I am currently under taking is to build now with the favorable financing terms, but I am doing one single-family home at a time.  I could do more but I want to preserve some dry powder if there is a pull back or even just an increase in distressed inventory post moratorium.

Mitchell Miracle · Answer

I actually pulled the plug in the deal because Marion County wanted me to tie into the sewer main.  Added 104,000 to the project.

Mitchell Miracle · Answer

The total project was for 4 duplexes. They were 3/2’s instead of 2/2’s.  Also, the new ones that were 419,000 are all sold.  They were being built by Southern Impressions out of Jacksonville.  He will not build a new one now for less than 525,000 and is no longer spec building them.

Michael Mims · Answer

Hi,

$1,000,000.00 seems very high to build to a couple of duplexes here in Ocala. They are selling brand new quads for $419K. The new quads seem to be renting for $950 - $1050 a month.

Mitchell Miracle · Answer

Jay.  The pullback I am speaking of is in building costs, rental income, and in acquisition costs.  I feel like we are at top of markety for all three.  I like your comment that if it pencils it pencils.  I think that is my issue.  It barely pencils.  7% CoC is not strong.  1.25 debt to income is not strong.  It is acceptable on some large deals but not on this deal.  I think I can wait and acquire property at a better return if there is a drop in the market.  Thanks for the reply.

Mitchell Miracle · Answer

Chris E.  I do not live in the Ocala area.  Just invest there.  Not sure if they have any meetups.

Jay Hinrichs · Answer

pull back how..  rents go lower thats your risk or build costs come down  ( could be waiting a long time for that one.)  interest rates are historic lows..  if it pencils now its pencils your only risk like I said is if by saying pull back you mean rents go down ??  then that is your risk

Build Multifamily or wait for pull back?

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