Multifamily Development Advice

[Matt Bell]

We have been provided first look at a property in Alabama where we invest.  The property is 6 acres, right off a main road and currently has a 4,000 sq ft house that would need be torn down.  The property is literally across the street from a University and based on the connection we have - we understand that we can purchase the property for $500,000.  Our long term goal has been to develop multifamily property at some point but this opportunity is presenting itself early in our investor life.  We need some help and advice from the experienced BP community.

1. Can anyone give us some metrics we should look at to determine if development of a multifamily property is feasible?  

2. How many units can you develop on 6 acres?

3. What are the typical per sq ft building rates for multifamily in the South?

Based on discussions with our property management company, they suggested building 2 bedroom/2 bath units in a mirrored floor plan so it is easy for roommates to share and split rent evenly.  The assumption is that such a unit would rent for $750 to $850/mo.  

My rough, back of the napkin estimates are below and based on quick internet research:

- 40 - 2/2 units that are each 1,000 sq ft for a total of 40,000 sq ft

- $100/sq ft building cost x 40,000 sq ft = $4,000,000

- Land purchase of $500,000 plus ground improvements of $500,000 (parking lots, gates, fences) brings the total capital needed to $5,000,000

- Assuming we raise 20% down ($1M) we would need to finance $4M

- Assuming an $800/mo average rent we would gross $384,000 per year on a pro forma basis

- Assuming 35% for all expenses other than debt service (management, insurance, taxes, utilities, marketing, vacancy, repair & maintenance) that results in a NOI of $249,600

- Assuming 30 year amortization at 4% interest on $4M the annual debt service is $229,200

All that only leaves a possible $20,400 profit at the end of the year on a $5M investment. Unless my numbers are way off, how do people make money developing multifamily properties?