Developing 8 unit apt bldg in Middle TN - Here are my numbers...

[Winston Parks]

Fellow BPers,

I am in commercial RE development of smaller stand alone buildings that at this point are fairly cookie cutter. I have an interest in Multifamily investing; however, to this date I own ZERO investment properties.  I hope to change that with the development (not purchase) of an 8 unit building about 35 minutes outside of Nashville. I feel like I can build for cheaper than buying, running the numbers tells me otherwise. While there are many similarities, I am finding it really different developing MF than what I have been doing. Below are the "back of the napkin" numbers I looked up and some I took a guess. If anyone feels like blasting me then feel free! I will definitely update this post as I learn more and hit the GO button (or not). Thanks in advance for any input. 

Goal: Hold for 5-7 years then trade up. I will not develop property unless it cash flows in year 1.

(.58 acres with 3,000sqft min per dwelling so 8.42 dwellings or 8)

Land Cost: $25,000 ($3,125 per unit) - Hoping this land cost is what gives me an advantage

Construction Costs: $706,270 ($85 psf construction costs) - This isn't a hard quote yet and will be updated once I get it officially quoted. Based on average materials being used (vinyl siding, etc)

• Bldg envelope is 101’-4” x 41 = 4,154.67
• Two Stories = 8,309.33
• Apartment sizes: 993sqft

Soft Costs: $25,000

• Engineering: $5,500
• Architectural: $0 (Not sure if I will need architect yet. I know that <5,000 sqft you do not)
• Legal: $3,500
• Other: $16,000 (Budget for unforeseen issues)

Tap & Capacity Fees: $27,515

• Building Permit Cost: $2,391.17 (estimated $706K total costs)
• Site Plan Review: $224.64 ($100 + $.015 p/ sqft)
• Wastewater Capacity Fee: $750 per unit x 8 = $6,000
• Water Capacity Fee: $750 per unit x 8 = $6,000
• Meters: $300 per x 8 = $2,400
• Water Tap Fees & Install: $300 per unit + 900 installation = $2,400 +900 = $3,300
• Wastewater Tap Fees & Install: $300 per unit + 800 installation = $3,200
• Facilities Tax: $4,000 - ($500 * 8 units, I am assuming this will change as I haven't asked solid numbers )

Total Development Costs: $783,785 (8 units costing $94, 848 each, which I think is high)

Proforma

CF	$ -	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8
Income
Rental Income (Increase 2.5%/yr)	2.50%	$ 79,200.00	$ 81,180.00	$ 83,209.50	$ 85,289.74	$ 87,421.98	$ 89,607.53	$ 91,847.72	$ 94,143.91
Vacancy (10% in Yr1)	5%	$ 7,920.00	$ 4,059.00	$ 4,160.48	$ 4,264.49	$ 4,371.10	$ 4,480.38	$ 4,592.39	$ 4,707.20
Gross Income	$ -	$ 71,280.00	$ 77,121.00	$ 79,049.03	$ 81,025.25	$ 83,050.88	$ 85,127.15	$ 87,255.33	$ 89,436.72
Expenses
Real Estate Taxes	$ -	$ 9,000.00	$ 9,090.00	$ 9,180.90	$ 9,272.71	$ 9,365.44	$ 9,459.09	$ 9,553.68	$ 9,649.22
Insurance	2.50%	$ 3,000.00	$ 3,075	$ 3,152	$ 3,231	$ 3,311	$ 3,394	$ 3,479	$ 3,566
Trash Collection ($250/unit)	1%	$ 2,000.00	$ 2,020	$ 2,071	$ 2,122	$ 2,175	$ 2,230	$ 2,285	$ 2,343
Common Utilities	2.11%	$ 2,400.00	$ 2,451	$ 2,512	$ 2,575	$ 2,639	$ 2,705	$ 2,773	$ 2,842
Management Fee (10%)	10%	$ 7,920.00	$ 8,712	$ 8,930	$ 9,153	$ 9,382	$ 9,616	$ 9,857	$ 10,103
Repairs/Maintenance	3.00%	$ 2,138.40	$ 2,313.63	$ 2,371.47	$ 2,430.76	$ 2,491.53	$ 2,553.81	$ 2,617.66	$ 2,683.10
Turnover/Redecorating	1%	$ 2,000.00	$ 2,020	$ 2,071	$ 2,122	$ 2,175	$ 2,230	$ 2,285	$ 2,343
Snow Removal/Parking lot cleaning	2%	$ 1,500.00	$ 1,530	$ 1,568	$ 1,607	$ 1,648	$ 1,689	$ 1,731	$ 1,774
Landscaping	2%	$ 2,000.00	$ 2,040	$ 2,091	$ 2,143	$ 2,197	$ 2,252	$ 2,308	$ 2,366
Admin Fees	1%	$ 1,200.00	$ 1,212	$ 1,242	$ 1,273	$ 1,305	$ 1,338	$ 1,371	$ 1,406
Total Expenses	$ -	$ 33,158	$ 34,463	$ 35,188	$ 35,930	$ 36,690	$ 37,466	$ 38,261	$ 39,074
Net Operating Income	$ -	$ 38,122	$ 42,658	$ 43,861	$ 45,095	$ 46,361	$ 47,661	$ 48,994	$ 50,362
Property Value @ 8 CAP	$ -	$ 476,520	$ 533,223	$ 548,258	$ 563,686	$ 579,517	$ 595,761	$ 612,428	$ 629,530

Obviously, Once I account for my debt service (DS), say $758,000 @ 5.25% for 240 months ($5,108 p/ month), I am under water.

Year 1 NI [$38,122] - DS [$61,296] = -$23,174 = Meaning I cannot do this project.......

[Ian McKeown]

Clearly, you're not doing this deal.  Your 4.8% return on capital should be 12%-15% for the size and risk of this deal.  Your debt service will probably be in the 8-10% range.  Your $85/SF construction cost is sky high for a project that brings $0.79/SF rents.  

If you want to own something like this; find a property that rents at $0.79/SF and buy it at a cap rate that fits your IRR expectations. Or buy a value-add project that lets you increase rents and occupancy so you can build equity.

If you want to build; design 2 or 3 apartment floor plans that fit your target market.  Configure them into 2 or 3 building layouts and get an accurate construction cost.  Find an affordable architect and civil engineer who can provide some concept plans and help you with land planning.

Then go find sites that are big enough for your project and add the land costs into your proforma to see if you hit your target IRR.

You should get your ducks in a row before you chase sites.  You need a good story to share with investors and bankers.  This will make your "go / no-go" much easier.