New 4-plex and 2-plex development - should we hold or sell?

Question

I have less than 24 hours as a BP member and this is new for me to reach out on something like this.. so please know this is out of my comfort zone to post openly on a forum/blog. I'm not sure what to expect in response - if any...

For the last two years we have been in the process of entitling and developing 18 acres of raw land into an 88 unit multifamily project. I am an experienced land developer - not a traditional multi-family investor. Initially, we intended to sell some of the buildings to our friends, many of whom are professionals that are making a lot of money as physicians but don't have time to find their own real estate investments, and keep the rest of the buildings for ourselves. However, as the buildings started coming out of the ground, we have had a qualified/experienced multi-family broker and property manager that has wanted us to sell all 88 units to a large fund or 1031 buyer who could take down the whole project. The initial reason we wanted to develop this property was to have some multi-family units for our own investment portfolio...not to develop and sell to a bulk buyer. Now that we have a few legitimate LOIs on the table to buy the project, I am wondering if we will regret selling all of it to one buyer. We do not have the pressure of a bank, investors, nor hard-money lenders, as we have built it with cash within our partnership. However, we have other multi-family projects in the works we would like to roll into.

I am new to BP, and have just been listening to past podcasts over the last two weeks as I traveled... and I'm hooked.  I just joined yesterday and I have read multiple forums and was impressed by the community.  This post is not an attempt to sell units to the BP community, but looking to some of the smaller multi-family pros out there that may have some valuable feedback that may even direct us on how we approach our future multiple-family projects.  It seems to me that there is a lack of opportunity for individual investors to buy in new projects as many funds and large 1031 buyers that have greater capacity seem to always get the deals first.

Here's the question for the BP community... What are your thoughts on selling it all (one in the hand) or is it your opinion that there is enough demand out there (in a sub 3% vacancy rate area) for smaller investors to buy new construction individually parceled duplex and fourplex buildings? Your input may be helpful on how we exit our next project and may even help us evolve our business model for future developments.  Thank you in advance for your thoughts!  - Brent

Don Spafford · Answer

@Brent Thompson I wonder if your 88 units is the same one I was about to acquire to build about a year ago but the land sold about a week before i had my private lender ready to go. If it is the area I'm thinking there are a lot more opportunities there to continue to build and I was looking into it but my builder/partners are currently too busy to take those on. I may need to chat with you to see what else you've got going on.

As for your question, there is a lot of demand and there are smaller investors looking for opportunities to get in, however if you have an offer you are happy with, I would take it. You never know what could or will happen in the future. It is better to take a sure thing now than to hope for something else in the future. Plus being new construction in that area chances are for a smaller investor the price to rent ratio will not be satisfactory to get cash flows. That's what's keeping me out of buying in Rexburg. But building to hold is a different story. So you can either not sell and keep them for yourself or sell them together. Especially if they are all grouped together, selling them off individually could be bothersome for multiple owners to coordinate the efforts for snow removal, etc. Assuming they share a common parking area, like the 88 door project I was referring to at the start.

Account Closed · Answer

Hi Brent,

is there any reason why you haven't raised debt for this project? If you had the land entitled and free and clear it shouldn't have been a big deal to get a 75% LTC construction loan from a local community bank; that would have left you with some capital for other projects and eventually resulted in better returns. It's often risky to put all your money into one project

Have you developped the property as a condominium, detached condominium, or individual multifamilies ..?

If the project isn't completed and fully stabilized i don't see any reason why you would consider selling now. The LOIs you got are very likely from people planning to flip your property once fully rented and optimized.

Since you already went that far into the project, i would complete the construction, try to fill vacancies. I would shop around to refi with long term debt in the best terms possible as soon as the CofO is issued. You may recover most of your initial investment if the returns are strong, and end up with a near free property paying for itself.

If the returns aren't that great and you have vacancies, then you can market your property as a value add deal at a meager cap rate. Considering the current multifamily frenzy, and the abyssal level of amateurism and lack of integrity of a skyrocketing number of new syndicators inspired by re gurus it is very likely that some wanna be syndicator will close your property to earn his sponsor fee even if it results in zero gain or a net loss to his investors

There is no right or wrong, but if you want to pursue more multifamily projects and wonder what works best as an investment product, my feeling is that your return/time on a large project will likely be the same than for dozens of 4plex at the end of the day. I have yet to see evidences of bulk discount when it comes to large multifamily deals. Large multis 100s + even often sell at lower cap rates than smaller ones as they usually are in expensive high density urban neighborhoods and cater to large institutional investors not interested in cash flow. However the headaches of developping and marketing dozens of 4plexes isn't the same than doing one 100 units ..

Craig Jeppesen · Answer

It seems your goal/business plan is to own multi family, but not the entire project. You also have a buyer for the entire development and have potential projects coming up. Although I think this buyer is changing your original plan, I would sell as long as you will make good money on the deal. Put your profits into your next project and continue your original business plan on the next project. Oppurtunities often only come around once.

For your buy new question, I would love to buy new, but most times the cash flow or returns are not there or the initial investment requirement is too much. In my market I can buy a fourplex that is 10 years old for about $100k less than a new triplex and the gross rents would be more from having an extra unit.

Brent Thompson · Answer

@Chase Leavitt thanks for your input and for reaching out. I think we will be pulling the trigger on the bulk sale for all 88 units since the offers we have received have been close to our ask. Let’s stay in touch - we have another 74 units under development in The Boise area and the 4-plex lots will be finished and recorded Fall ‘19. We may decide to sell those to individual investors.

Scott P. · Answer

Hi @Brent Thompson, I'm just now seeing your reply from 6d ago.  I think we're both relatively new on BP.  I've learned that if you start with an "@" symbol and then start typing the person's name a box will pop up to select the name. Then it appears in blue and I think the person get's a notification that his/her name was used and might look up the post.  I suppose this theory will be confirmed it you get a notification about this mention of your name! :-)

Here's the answer to your question about why I like Duplexes.  First, it's not that i don't like SFRs or Multi's or whatever but I've found in my area that Duplexes have advantages.

1. I attract tenants who want as close as possible to a SFR, but for some reason don't want an SFR.  They tend to stay longer than a more transient tenant in a larger multifamily.

2. The lawncare can more naturally be either a landlord or tenant responsibility.

3. Duplexes tend to be smaller than SFRs.  A Duplex w/2 bedrooms (BRs) on either side is ideally suited for 4 people or less and commonly has only 1 person. That single tenant uses the 2nd BR for storage. That means less wear and tear.

4. If a SFR has no tenant, I have no income.  Only once in about 30 years did I have both sides of a Duplex empty.  So, there's almost always income from one side or the other.

5. In my area, each side of a duplex added together brings more total rent than a SFR commonly brings.

6.  If you allow pets (which i usually do not), you'll have a wider selection of tenants.  With a Duplex, the tenant has a little bit of yard for the pet unlike a larger Multi.

Items 3, 4, and 5 are the the most important for me.

Chase Leavitt · Answer

I think it all depends on the location and what someone is willing to pay for it. If I read correctly this piece is located in Nampa? I'm an agent with FIG and we presale projects, 100-300 units, to investors. We found a lot of success with breaking them down into 4-plexes, triplex, and duplex. We are currently selling projects in Magna, UT. as well as Meridian, Idaho and soon to be Nampa. Yes, you do need to have the marketing and pipeline to sell them off as 4-plexes versus the entire project. If you can sell the entire project off for the price you are looking for then it could be a lot less headache and something to consider. It all comes down to what someone is willing to pay for the entire piece versus what it would sell for if you sold as 4-plexes. Feel free to call or reach out to me if you'd like. I may be able to give some additional in site here as we are currently launching in that market. Last thought; the tax write offs with keeping properties can be very beneficial when done correctly. Keeping it might not be a bad idea either depending on your situation. Either way congrats! That's exciting stuff for you!

Brent Thompson · Answer

I love Eastern Idaho! My sister and brother-in-law have a beautiful ranch in Tetonia down on the Teton River and we love the Teton Valley, Swan Valley, Rexburg, IF, etc.  Coincidentally, I actually had a multi-family project come to us this week in Rexburg that I may come up and see in two weeks. I live in St George and we have a lot of Eastern Idaho folks in our single family development. We may know some of the same people..

Veronica Fletcher · Answer

Although demand for MFR is very high, I think you might have a harder time marketing to local investors in the Treasure Valley simply because there's no value-add opportunities. On the other hand, the real estate meetups have been filled with out of state investors for the past several months that are more than willing to pay cash for a turn-key operation. So that may be a sideways move you can look at, if you are going to be holding and managing some of the units anyway.

Don Spafford · Answer

@Brent Thompson Great! Yes, if you get out to Eastern Idaho I'd be happy to meet up. Keep me in mind when you get out this way.

Brent Thompson · Answer

@Don Spafford thanks for your comment and for reaching out. This deal is in Nampa and we have another 74 unit project just about underway. I may be headed to Eastern Idaho if this other deal is interesting and maybe we could meet up.

New 4-plex and 2-plex development - should we hold or sell?

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