Building a 4-plex instead of buying one...

[Chad Duncan]

I am wondering if building would be better than buying. I live in Portland Oregon and the cap rates for multifamily are around 5-6% max. My idea is to buy some land, and build a 4-plex on it. House hacking on one of them. Anyone have advice, ideas, or subject matter experience on this? Thanks.

[Mike Wood]

@Chad Duncan I build my duplexes, as it makes more sense to me than buying turnkeys. But there is some very different issues when building than buying.  Financing can be a really big difference, as you would be looking at a construction loan and for me, that means coughing up 20% of the total costs (land, construction, permit, etc).  Another issue is zoning, and you might find it difficult to find land with the proper zoning for 2-4 unit buildings.  Things like design the building and getting plans might be an issue.  There are alot of choices to be made when building also, something that you must be comfortable with.

In my area, I can buy a turn key duplex for about the same as I can build it, but the house is older and comes with those Capex risks. I can build some equity into the project if I build from vacant land, plus I build exactly what I think renters want nowadays. I stay with duplexes (2 unit houses) due to building regulations and limited land zoning for 3+ unit building in my area.

With all of the above being said, you should be able to do a quick check in your area to see if building makes sense.  First is land cost, second is building cost and last is what existing 2-4 unit buildings are selling for.  Land costs is likely the biggest decider if things make sense.  Below is a quick example that works in my area (I am looking at this project right now).

2 unit duplex, 2bed -1bath, 1800ft2 total (900ft per unit)

Construction Costs = $90/ft2 = $162,000

Comps sales prices = $140/ft2 = $252,000

If I pay $52,000 for the land, the cost of the land is $28.89/ft2, making my total costs $118.89/ft2 (equity of $38k), this is a good deal.

If I pay $100,000 for the land, the cost of the land is $55.55/ft2, making my total costs $145.55/f2 (equity of -$10k), this is a bad deal.

Your construction costs per sq ft will vary with region, for me $90/ft2 is right for the size of duplex that I build.  

Once you determine this, you can drill down into the income to determine if it makes sense from an investment standpoint.