New construction worthwhile for fourplex?

[Dana Bible]

I live in a small town outside of Nashville. My initial investment goal is to acquire a four plex and live in one of the units while renting out the other 3. I qualify for an FHA loan and was going to use that financing for the purchase.

The problem is that my community has very few multifamily properties that come available in any given year.  I looked at perhaps buying a larger house and subdividing it up but anything I look at is just not feasible.

My solution to this would be to obtain an FHA 203k construction loan and just build what I want, when I want it without waiting month after month hoping that something comes up.

I am looking for any advice, suggestions, or confirmation that as long as my numbers are right that this is a sound plan.

[Mike H.]

I have a hard time believing you can possibly come close to getting the same value from building that you can from buying. That being said, at the end of the day, its always about the numbers.

I'm guessing you want to buy a 4 plex so you can get a larger property in one shot. Otherwise, I'd recommend doing 4 sfh's.  Then again, its much easier to get financing as an owner occupant of a 4 plex maybe than to get financing for four different homes. 

And much cheaper on the owner occupant down payment so I'm assuming thats the other reason you're looking at a four plex.

I think ultimately it goes back to what do the numbers look like?

How much would it cost to build the type of 4 plex you want to own?
Lot? Construction? etc.
How much would you have to put down?

How much rent would you get for the types of units you were building.

And is that return better than anything else you could get for your money? If your answer is yes, then I would do it.  But I would add that 4 plexes can be somewhat like apts in the types of tenants you may get and they may require more management than sfh's. So there is a downside too in doing the multi-unit buildings.

But lets run a scenario. Lets say you find a lot that allows you to build a 4 plex (keep in mind that kind of zoning is not very common at least here by me) and you can pick it up for 70k.  Then you decide to build 4, 2bdrm,1bath, 800 sq ft units that cost you $90/sq ft to build. Comes to about 290k for construction. Plus the 70k, so you're all in at 360k.

Lets say you can get a low down payment loan at 5% down and 4.5% interest. Now your down payment is 18k and the loan is 342k which would be a payment of 1750 a month. How much would those 2/1's rent for? 800/mo? Thats 3,200 a month in rent (I know you'll be living in one but just doing the calcs as if you weren't).

Taxes and insurance another 600/mo? Maintenance 300/mo?  You're now at 2650. And vacancy at 7% (5% is typical for sfh's but I'm assuming the multi's are a little higher) or $225/mo.

Based on that:
Rent: 3200/mo
PITI: 2350/mo + Repairs/Vacancy: 525/mo = 2,875

Leaves you with a net profit of: 325 or 80/door.
Plus you'd have principal paydown of $450/mo as well so another 110/mo per unit.
Thats not bad for an 18k investment.

And, I know these numbers are absolutely pie in the sky. But what I'd want to do if it were me were to go figure out what the real numbers would be and see where things actually came out. Then I'd decide if it were worth it or not.

Maybe you play with the unit types there too. Maybe 2/1's at 800 sq ft are 800 but 3/1's at 1,000 sq ft rent for 1,000.  Thats 800/mo more in rent and your cost to build is only increased by 80k which translates to 400/mo more in a mortgage payment -which also means you'd increase your net profit by 400/mo (well less when you take out vacancy).

But still, you get the idea. To say whether its a good idea to build or not is really one of the questions that can only be answered with a question. And that question/answer is: It depends on what your numbers would look like if you do it. Your area and the type of 4 plex you build is what would determine whether it makes sense or not.

I think it would be pretty tough for anybody to tell you yea or neigh unless you could put some real numbers behind it.  But ultimately, I would think your decision should be based off how those numbers if you werent' planning on living there. If they came out with some decent profit (say, 100 bucks a door) and the additional principal paydown of another 100 or so a door, then it might be worth it to build.  

I'd rather do that than do nothing, thats for sure.  At least you're building your net worth, making a little money and getting some critical experience......