MF Buying vs Building?

Question

Having spent my whole life as a salaried employee, No financial risks of any sort, time had come for me and the wife to retire. So I thought of getting in where the action is, yes, Real Estate. Having no idea where and how to start from, my wife and I though of Rental properties.

Am of the idea of acquiring a lot/land  and construct a MF building, whereas my wife thinks we should just look for a ready one with existing tenants.

Please shoot us with your advise in that regard or if you have any other ideas we are all ears.

Thanks,,

Nour Hatab

Minneapolis MN

Evan Polaski · Answer

@Nour Hatab, you can typically tip the scales towards build in a) extremely high priced markets, but then it is very hard and expensive to find land, or b) on a large scale.  Look around your market and you will likely see a general threshold of size that people are building rentals.  In Cincinnati, I cannot think of any brand new, ground up apartment developments under about 100 units.  I have seen full gut remodels in the 3 units, but they already have a foundation and exterior walls, which cost a lot of money to erect.

Since I am guessing you are not jumping into a $20mm project as your first go, buying will almost always yield better results.  Not only can you typically buy cheaper than build, but you also can start collecting rent much faster.  The typical build will take you 12 months minimum from buying land until you have certificate of occupancy and ready to sign leases.

Ashley Byington · Answer

@Nour Hatab

I like new rentals, they attract better tenants and won’t have an CapEx for a long time.

That being said, if you can connect with local builders who have upcoming multifamily projects you could potentially get a building under contract for a lot less than if you waited and got it under contract after construction was already under way.

For example, here in Idaho Falls there were triplex listings for new construction that were listed for $389,000. They were like a year out for completion so I drug my feet. Then they bumped up to $425,000 and a couple months later $450,000. We got the building under contract for $425k and the numbers worked but it sure would have been nice to get it for $389k.

Another example near Idaho Falls. My office is working with a builder to list and sell a 56 unit townhouse development. Some folks did cash hard money down upfront to fund construction and got four townhouses (1 building) for $666,000. One buyer I have got a building for $680,000. 6+ months later construction is well under way and units are at $185,000/each ($740k/building).

Long story short, if you have cash, start networking with builders and you can probably get a really good deal. 😀

Greg Dickerson · Answer

It really comes down to the numbers, your financial strength and resources and the supply and demand in your market. In most cases you can generate much higher returns from development that typical value add especially with prices in most markets these days. Development requires deep pockets, patient capital and serious expertise but it is very rewarding and a lot more fun than the typical value add. Another option would be adaptive reuse and or vacant and heavily distressed properties.

Steve Morris · Answer

If you haven't done it before, go find an experienced developer.

If it was as simple as getting dirt and then building and lease-up, it'd be easy.

However, there are lot of soft (aka go-away pmts to govt) monies and you need to get a good GC and architect to get you plans together.

If it is your first, buy an existing MF and learn as much as you can - Much less risk.

Nour Hatab · Answer

Thanks for the advice Shamar, I would certainly take it into consideration and will let you know...

Dallon Schultz · Answer

@Nour Hatab one of the attractive points to an existing building is that it's easier to project pro forma numbers and see how the property has historically operated. That can make it a little easier to qualify for financing because the lender will also be able to see how the deal has performed. In a lot of these instances you can find a property that is a) already cash flowing and b) could have significant value add based on current management, rents, and expenses.

I actually have a great connection of someone in the Minneapolis area that is crushing it in the multifamily space. He may be able to provide you with more insight within your local market. Feel free to add me as a contact and I can message you his info.

Tyler Weaver · Answer

You really cannot build A class amenities on an 8 unit building. It is just nice units, which competes directly with older buildings without amenities. There is also very little small pieces of vacant land that will allow zoning for multifamily. With larger scale, there can be money in the budget to piece together parcels and do the legal work and hearings to get zoning approved.

That being said there is a decent amount of development in the 4-20 unit level on an urban infill basis. Usually they do not have the clean ground up construction. Though I would argue that the stabilization of these structures costs more than ground up development in many cases. Some of the projects I have seen were a mix of existing building and building new next to it to create a larger footprint.

Ground up multifamily development at a small scale is probably not going to yield a better result than buying existing. At best it would be a similar return with more effort, but could be useful if you are looking to establish a track record in order to grow to larger deals.

Kyle Jean · Answer

Of note a HUD d4 loan is only going to be economical above $5 or $6mm at least.

Tom Wagner · Answer

I am also Minneapolis based (for the time being) and I have a long-term goal to develop some property here. However, I think it would be much safer to get your feet wet on a few six-figure deals before hopping into the $1mm+ bracket. Learn and make mistakes while the stakes are low, then level up as you get more comfortable.

Ian Stuart · Answer

Develop, but only if you know what you're doing.

Even if you're literate in the numbers, and your development yield shakes out to 7-8% on paper in a supply constrained market with strong demand drivers for your product - you still need the ability to execute. You'll want to bring on a partner.

This is especially important when it comes to financing the project. If you're planning to lever up and utilize HUD 221(d)4 financing to build (vs. a construction loan from a bank) they'll want you to have a GC / Manager / etc. with HUD experience.

Building is higher risk - but higher reward, and requires significantly more knowledge, expertise, and teamwork than flipping value add deals.

MF Buying vs Building?

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