New Construction - Multi-Family and Apartments

[Siddharth Shastri]

Good Afternoon All !!

After having used the BP forums to guide us in transforming our investments (Multi-Family) into good cashflowing properties, my wife and I are at a stage where we would like to explore and eventually get into new construction of Multi-Family Apartment Buildings. We have no experience in this as yet, and, would like to slowly wedge our way into this form of investment. We've learned many useful things from the BP forums and it would be great to know your thoughts and experiences this time too. 

Here's what we know so far in rough detail:

New Construction

• Needs permits for utilities (Sewer, Water, Electricity) etc.   ~ 60k
  
• Needs plans for building (Engineering Plan)                        ~ 10k
• Easier to plan subs/contractors as you're starting with a clean slate
• Needs more capital compared to a rehab and has to be justified by rental comps in case you plan to build and hold. Numbers that decide this are:
  • Cost per square ft. to build or cost to build per unit
  • Cost of permits
  • Cost of engineering plan
  • Rent per unit
  • Running cost like - taxes, utilities, maintenance, admin etc.

Questions:

• What is the average cost in $ per sq.ft for new construction? (is this cost the same for constructing 1/2/3 level building with different units in each level?)
• How do we find Contractors that can take this from start to finish .i.e. can we sub it out to different subs (framers, sheet-rock, plumbers, electricians, roofers, etc)..or do we need a GC for getting the permits etc in place?
• What is the overall time-frame we are looking at for the whole project eg:
  • Engineering Planning, Utilities installation, Permits from the city, Actual Construction etc.
• Can I approach any bank to get a loan on this type of a new construction?
  • Are there any good ways to get funding for such projects?
• Are there any more important / relevant questions that I should be asking to get more details? 

As always, I'd be really happy to know your thoughts. Your inputs will help us understand this process better and make smarter decisions for the future !! 

Best,

Sid

[Sarah Ziehr]

Hi Sid, In my market construction costs range from $100 to $150 per square foot depending on high end, low end and if you are purchasing materials in bulk quantities. Soft costs of another 15-20% include loan fees, taxes, architects and real estate commissions.  

Get to know developers in your area, but know that they will likely want to make a 25% profit. I'm not sure if you can successfully accomplish a project like this with contractors. 

Another thing to consider is understanding the standard lot sizes in your area, what you can build there and what is the highest and best use of the property. Now zoning comes into play and you may find that the competition for land or tear downs in your area is competitive. For instance, in my market there are areas you can buy land or a tear down for $400k-$600k, then accrue $1.1M in construction costs, plus soft costs puts you at $1.32M, you would need to sell out at $1.9M in order to make a 30% margin.