Has anyone built and rented out a multifamily/4 unit?

Question

So, I am still early in the process but I am looking at re investments. I am looking at 4 and 2 unit properties. I have been unable to find any that fit what I am looking for. My market is the northern suburbs of NYC so its costly. I have only done some back of the napkin analysis but it looks like it is cheaper to buy land and develop my own 4 unit as opposed to paying for an existing property and then having to spend thousands to improve it. I like the idea of newer properties as they attract better tenants (for the most part) and then I can defer repairs for a few years.

The catch however is that I am no GC. Anyone ever done this early in their career? or as their first investment? I would love any/all advice. thanks.

Bill Thompson · Answer

Dave,

I just finished building a 2 unit investment property in Boston in September 2015.  Like you, I concluded it was more cost effective to build a new MF property rather than buy an old one.  Fortunately for me I already owned the land - it came bundled with a MF property I purchased three years ago.  That definitely helped but I could have made the numbers work even I had to pay for the land by adding another unit or two to the property.  I choose a smaller scale project because I could proceed without needing a variance or being subject to design review by the City of Boston.  I am not a GC but have participated in the renovation in several of my rental properties, so this was not my first rodeo.

I think your instincts are right on point with respect to realizing savings in both operating expense and cap ex over the long term.  I choose to build a modular home and was very impressed with the quality, durability, and energy efficiency of the final product.  The property got a HERS rating of 5+ (the highest possible) and we didn't really go out of our way to make the property energy efficient - it just turned out that way by virtue of the modular design process.  I expect to have really low operating and maintenance costs with this property.

Like New York, Boston is a high cost area so new construction is not cheap.  By using modular I was able to achieve modest cost savings... what I got was better quality at a slightly lower price point.  You will need to bring substantial cash to the table to pull off new construction.  My project cost about $460,000 ($130 / sf).  I used hard debt to finance $260,000 of the cost; the remaining $200,000 came from my pocket.  When I refinanced (DTI constrained) I only got about $100,000 of my money back after paying off creditors.  I can live with that because my cash flow is about $1,200 per month.

Overall, I'm pleased I went the new construction route.  In fact, I am looking to buy more land because I think I can develop more efficiently having been through the process once.  These are the takeaways from my experience...

1. Expect to come up with 20 - 40% of total development costs from your own funds, depending on who you use for construction financing.

2. Your experience will be determined by your local permitting process and how the building inspectors treat you.  There is the potential for a lot of delays, red tape, and needless hassle if you or your builder do not have connections in the right place.

3.  The big wild card from a cost perspective is site work, not construction of the building.

4. Modular construction can be a great way to go in the right circumstance.  If you are a novice at construction, hire a GC to deliver a turn key product.  Beware, some localities (like Boston) are extremely pro-union and will go out of their way to make your life miserable for choosing modular.

5. Make sure to choose a GC with a solid track record that can perform.  I've seen good ones get over extended and perform lousy on jobs.

Despite these concerns, I'm a fan of new construction for multifamily.  Here are some pictures of my recently completed project.

Bill Thompson · Answer

@Brian Kehoe The process took about 18 months, which includes many delays at all phases.  Here is the rough timeline.

March 2014 - Make inquiries.  Select contractor.  Preliminary site plan and survey.

April 2014 - finalize design, layout and specs

May - July 2014 - Modular company draft plans (I was told this would take six weeks... it ended up taking 12 weeks)

Aug - Nov 2014 - 3rd party Engineering review / signoff (I was told this typically takes 3-4 weeks... ended up taking 16 weeks)

Begi. Dec 2015 - Modular house is built at factory... takes about 7 days

Dec 14- Jan 2015 - Building permit (process should have been 2 weeks; ended up being 2 months... good ol' Boston runaround and redtape)

Beg Jan 2015 - Foundation poured.. cure time

Jan 16, 2015 - House set post phoned due to forecasted snow.  RECORD SNOW delayed house set until April 15.

Mid April 2015 - House set

August 2015 - Construction complete (many delays... utility hookups, contractor slow to complete finish work)

Bill Thompson · Answer

The biggest problem with my project was cost overruns for site work.  Apparently, storm water recharge / runoff is a huge issue for the "powers that be" in Boston.  It was a pain to get the site plan approved.  The process caused a delay of several months.  The site plan itself was way over the top in m opinion, with an elaborate drain system that included several manholes on my property.  I literally had to pour $25,000 into the ground for this.  Neither my contractor or I saw it coming.

Regarding construction, all went well until the GC became over extended.  With modular the "button-up" work that is done in the three weeks after the house is set is very important.  The GC needs to be there to ensure everything goes smoothly.  My GC had previously scheduled a "house set" toward to end of my job.  He literally disappeared for three weeks!  I thought I was going to lose my mind.  The other thing that happened was my GC's subs started to bail on him... too much big construction luring the trades away... very difficult to find good people to work on small jobs.  Fortunately, I was able to take on a lot of this work using my own subs to minimize delays.  On the positive side my contractor was able to hold his price despite the fact my project was delayed for eight months.  We also share the same philosophy about the need for more "work-force" housing and green development in urban areas.  I would use him again.

Brian Kehoe · Answer

@Bill Thompson How long did the process take from start to finish? I also have a lot attached to a multi that I've been thinking about building on.

Lila Matessino · Answer

Reading all your posts brought thoughts of what I went through last Oct. when I went with modular for my own house. Although I am in NC, all mentioned above was the same here with putting up a modular. One important thing I would add is that one should watch the process very closely and inspect it every day. The modulars, even though one can tweek it to what you want, are basically a cookie cutter operation. In that I mean, my modular company uses it's own contractors on all the houses they put up and can get complacent. One example (and there were a few others): I wanted to eventually have a porch on the back of the house at a later date and wanted to keep that area clear of the a/c and electrical box. If I was not on site that day it was being installed, the contractor was putting it in the wrong place. It was caught before he got too far along and was able to move it but that would have been a real delay if it was not caught right off the bat. They had the correct plans but apparently they were just use to putting those things in a certain place on most of the houses they put up. One definitely has to inspect the work on a daily basis to make sure your plans are being followed. I am very happy with my home and the modular company I used and would use them again. Do your homework on the company you use as I have heard nightmares about some regarding schedules and quality, and most importantly the service the company gives after you receive your CO for anything that needs fixing or adjusting such as marriage walls and such due to things that happen in transit or settling later on. Make sure the company gives a good long term guarantee (mine is 10 yrs on structure and various years on the rest of things such as a/c unit, etc)

Adolph Littlejohn · Answer

Everyone has really given you some really good advice.  One thing to keep in mind is that you need a good GC a d architect.  My partners are developers.   They build I. Brooklyn, Bronx, Queens and Manhattan.  Currently we are building 7 three family homes in Coney Island.

New construction is a good route to go you just have to plan according and seek out good advice from experienced professionals.

Contact me anytime to discuss further.  Good luck.

Bill Thompson · Answer

I found my GC through the modular manufacturer.  They will only sell to you if you use one of their approved GCs or if your GC completes their training course.

Modular entered the picture because I heard it was more cost effective and conducive to green building, two items near and dear to my heart.  Both claims turned out to be partially true.

I did four other major projects before this.  The first was a two story addition to my primary residence.... new construction but not modular.  I had a good GC... paid close attention to everything he did.  The others were gut rehabs of large, old multifamily houses.  The properties were foreclosures.  I'm not a construction guy but had to act as GC because my lead guy was undercapitalized, so I dealt with the subs directly.  There were many unknowns with the those jobs that required "on the fly" value engineering so it made sense to pay my lead guy and his people by the hour for work completed.  Over time I learned how to do basic things myself to contribute sweat equity and make the jobs go faster.  I did easy stuff like demo, framing, drywall, mudding, painting etc.  My lead guys worked with a day crew and I worked with a night crew (after my regular 9-5) to speed things along.

My units rent up almost immediately because they are beautifully renovated and I deliberately charge below market rent.  My niche is workforce housing... housing affordable to ordinary working folk... teachers, bus drivers, administrators, etc.  Lease up took about two weeks.  Unit #1 is two bedroom, two bath that rented for $1,600 per month... unit two is a duplex unit, 4 bedroom, three bath that rented for $2,400 per month.  Immediate lease-up and low turnover offset the low rent.  The nicer units always attract the best quality tenants.

Dave H. · Answer

@Bill Thompson thanks for the input. I have a couple of followup questions:

-how did you find your GC?

-how did the modular homes enter the picture? (sales meeting, prior experience, etc..)

-you mentioned prior rehabs, did you do multiple other projects before venturing into your first build?

-did it take long to rent out the units? and do you find the new build attracted a higher quality of tenant?

Thanks again for all your help. BTW the house looks fantastic.

Chaim F. · Answer

@Dave H. I would suggest as @Steven Kopstein said you should rather partner with someone, like a contractor, or a expediter, since dealing with the building department, might be really tough in NYC for new construction.

Good luck

Steven Kopstein · Answer

@Dave H. Great question!  And as a fellow NYer I feel your pain with regard to costs here.  At least we get the high rents eventually - but it is challenging to cash flow.  I've also looked at new construction because it seems "cleaner" but I think it might be risky for a first move into REI.  Maybe try to meet with a local investor who has done it and do a JV?

Has anyone built and rented out a multifamily/4 unit?

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