Should I go for it? Big Project in Seattle

[Joseph Johnson]

I am extremely new to real estate investing, only owning a few properties and having project managed two of my own SFH. Want to get your advice on whether I should pursue this deal, its a huge project.

I have been offered first shot at a 10K square foot lot zoning LR2 , which essentially allows for cottage, townhomes, row, or apartments two stories high.

Its in a good neighborhood next to a park and the neighborhood next to it is one of the nicest in Seattle

We are close to finalizing price and terms. I even have them holding off on payment until permits are approved and they may even be willing to hold until project is finished (but the sticking point is the second position they would have during construction). So likely payment would happen just before start of construction.

I have recruited a builder friend of mine to partner with, but Seattle is not his primary building area and SFH are more his specialty but he has done multiple townhome projects and a few apartments.

I have found two private lenders willing to cover 100% costs of the following two options:

Build 12000 square feet worth of town homes (seattle uses this floor to area ratio to determine building size , for townhomes the conversion is 1.2 build-able feet per lot square foot. Preliminary costs to build would be 2.1 to 2.2 million for the whole project, lot cost, site work, permits, connection fees, points and interest, and construction.

New townhomes in this area are selling for $280/square foot, so an estimated gross could be 3,360,000. Not bad but that is a huge amount of money

Second option is to build a 13000 square feet of apartment complex. Apartments get a 1.3 FAR ratio to build on LR2 Cost to build would be very similar to the town homes even though it is larger, but has less roofing and siding etc. So would still be in the 2-2.2 million range for total costs. Rents in this area are going for $2/square foot. So theoretically 26000/month or 312K/year gross rents. Using 70% after accounting for tax, insurance, management, repairs, vacancy etc leaving 218K. Apartments in this area get a cap rate of 4-6. So theoretically, end value could be 3.5-3.9 million end value.

I obviously would lean towards the apartment option since it utilizes the value of the lot better. ( I really like how seattle does the FAR ratio system, that way a property becomes more valuable per square foot the larger the lot is).

Again, I am totally new at this, so I am wondering if I am getting over my head (well I know I am but wonder if it is worth a shot). Or should I do some feasibility and then wholesale the contract? Any help is greatly appreciated!