Build vs Buy & Renovate mutifamily in California

[Brad S.]

On moving from Bay Area to Sacramento the multi-family market here looked a lot better, but after analyzing a bit more I am realizing that the cap rates are not significantly different and come along with a reduced appreciation upside. The big difference i see here is abundance of land available to build something new in Sac valley vs in Bay Area. Assuming I am looking for a 40 unit property and plan to hold it for long term (20-25 years), wondering what other think of building a new multi family vs buying and updating an old building, at what point (maybe in terms of $ per square foot) it make sense to build instead of buying old. I would guess new building will have less maintenance for first 15-20 years vs an old one, which should make up for the difference in terms of money and time, but I haven't read much on people building new on bigger pockets (which btw I believe in like religion) makes me wonder what am I missing.

[Jason Hsiao]

If it's 20-25 years the math technically should make sense @Brad S.. People don't like to build new bc you end up having to catch up on rent you could've been collecting for 3, maybe 4 years depending on how fast you can get through the planning department. Sure you'll be able to charge a premium rent and maintenance will be lower, but in general it doesn't make sense.

40 units, let's assume $2,000/mo rent, at 36 months you've missed out on $2.88MM of rent, 48 months that's $3.84MM. This also hasn't even factored in the capital it requires to build the new property and the opportunity cost. 

I'm not familiar w/ the build cost in SAC, I assume it's higher than normal bc of spill over from Bay Area and shortage of labor, but let's say $200/sqft to build, avg unit is maybe 800 sqft? 40 units it'll cost you $6.4M in build cost along, prob another $1M in pre-construction costs like engineering, architecture, etc. Cost to acquire the land I dunno, $2M? Yeah, you can finish the math from there. You're not missing anything; the numbers typically don't make sense.

You can build, lease up, and then sell to a fund somewhere. The returns still doesn't make as much sense as fixing up an existing old building though, but hey money is money. So many people are looking for value-add multi's it's worth considering alternative strategies.