Is this Modular Duplex a Good Idea?

Question

Hi, I’ve been analyzing dozens of properties in two particular markets I’m interested in. I’m ready to get off the sidelines but I keep running into some obstacles.

First the local housing market is booming and due to a housing shortage and these low interest rates real estate prices keep climbing. Deals are few and far between and any decent deals that cashflow favorably are getting snatched up quickly.

This leads me to explore another option...  I personally live in a modular home. I really liked the modular process.  It’s very efficient, high quality, customizable, and affordable.

I spent a lot of time before committing to the modular home process. And in addition to it working for us personally it also seemed to make sense financially.

Unlike manufactured homes that do not appreciate, the modular homes are technically appraised as a regular site built home since there is no trailer, it’s built up to code and has a permanent foundation.

My contacts have gotten me a quote for a modular duplex 3 bed / 2bath each side and I can be all-in with land for $195k. This equates to $85-90/sq ft. The local market is currently averaging $122/ sq ft.

So my questions would be:

1. Has anyone gone the modular home route for investing?

2. From research and talking to some individuals in the industry, modular homes are supposed to appreciate like a normal site built home, but does anyone have any firsthand experience with this as being true?

3. Does anyone have any cautions on this approach? On paper it seems to make sense, but this would be my first deal and I want to make sure I’m not missing something :) If you’re interested in seeing the number and sharing feedback here they are... https://app.dealcheck.io/#!/shared/-MNVioVAmX_-taJu90LZ

Thanks for your feedback.

David Edwards · Answer

Hi @Nathan W.,

Like you I've gotten into the mindset of modular homes and I am working on the development of a Duplex community consisting of 5 duplexes on 1 acre. All of these duplexes are modular.

Some things I have learned:

1) Modular homes absolutely appreciate the same as a standard stick especially if you highlight to your lender the performance improvements such as:

-Higher R value insulation. Our duplexes come with R20 ceilings and R14 exterior walls this provides a level of insulation much higher than is standard and results in lower energy costs and is an element that can be taken into consideration in appraisal

-Seek home improvements above stock plan to close the deal with your modular dealer. I am getting 6 extra windows at no cost including 2 transom windows in the bathrooms that really provide an higher quality feel and increase one of the main areas that tenants and potential buyers really care about (Bathrooms & Kitchens). You are better off getting those extra windows or a kitchen island improvement than you are with an improved appliance package as they provide a material impact to the home design.

-A higher pitch roof has a higher cost and should be considered if your duplex will be infill into an area where there are other homes with the roof pitch, but failing that we have not found that it has a real impact on appraisal (we are in an area of lower pitched homes however so take this with a grain of salt depending on your market) and a lower pitch roof means lower maintenance and capex costs. You have lower labor costs for repairs as contractors are not concerned about falling off and a lower pitch means less area which equates to fewer shingles and material costs.

-You can have decks built into the home plan. Ours has a 5 foot deck with roof built into the plan so that is easy peasy from your perspective and the presentation of the home lends to appraisal.

-I really like modular because we will be building several of these communities, that is the plan anyway, and it will be dead simple for future comps because we can literally point to the exact same home / community design.

-Repeated modular homes with the same floorplan also allows for operational simplicity. You will know exactly what is in each house, what the measurements are, etc. this means that if you have many you can have a standard depreciation schedule for them, it also means you can track statistics on repairs (a quote for a single home is completely applicable to any other property), how long appliances last, etc. This information can then assist you in future decisions and maybe help you predict failure of appliances so you can have a replacement geared up.

-The repeated design also means you can create extremely high quality marketing collateral at a cost you would not generally want if you were say BRRRR'ing various homes without a standard floorplan. and then you can use this material again and again. For example we'll be staging a unit and then doing high quality 3d floorplan pictures and creating a website on the units and other collateral because we know we can use those assets again and again for years and the costs will be worth it.

-A good dealer will help you push past any political red tape somebody that is confusing modular with mobile is throwing up.

Now, My duplexes come in at $88 a sqft base. We are upgrading with Luxury Vinyl Plank (LVP) flooring, this is an appraisal point and they last longer than the standard flooring, The extras windows (free), granite countertops because once again it helps with appraisal but also last a long time and they check a box for renters, and a few layout modifications that i believe add more value and let the units work better given the site layout. These addons get us to a $100'ish sqft price. Ohh the cost also includes foundation, delivery, button up. Also includes all appliances except clothes washer & dryer on both sides as well as air conditioners/furnace as you'd expect.  This cost per sqft works for me as the average low-mid new build in the area is at $150 sqft.

lastly.. Financing...

With modular I'll have fewer draw. My biggest draws are at the back end where the draw for the home itself is taken DAY OF DELIVERY. this means that I am not paying interest on a loan for the home itself until after the thing is finished. This is markedly different from a stick build where you'll have many draws throughout the process and you'll be paying interest on those draws as the build stretches to 6 months or so.. That said you'll want a lender that works on modulars, some seem to have a hard time with this.

Long story short.. Modulars Rock! Do feel free to connect with me for more discussions. I will be happy to share my journey and ongoing findings with you and also very happy to learn from you as well.

@Kevin Wasserman

David Edwards · Answer

@Nathan W.

I just took a look at your deal calculator.

Few things. You have the cost of the unit, but I am not seeing the land prep costs, is this built into your $195K? I am thinking things such as:

-Sewer & water lines to public or the installation of a well / septic system. Keep in mind if on well/septic there are likely acreage requirements

-Site Engineer, does your area require a site engineer to draw up plans, pull permits, determine right of ways et with fire/utilities. This can be pretty pricey, other than the land and home it is my biggest expense

-Permits, all kinds

-Electrical installation

-Any landscaping. In my areas if you cut down certain trees during your build you must replace them and new trees are $200+ for decent ones plus the cost of labor, that can add up. Then you have grass and anything else you want to do to pretty up the place a little such as privacy fences.. you will WANT privacy fencing for your duplex. And if no garage then you will want each unit to have a 8x8 or so shed for lawn mowers and such.. unless your land won't have lawns, I've seen that. Just decks or even NO yard at all, I wouldn't recommend that kind of design for you with a 3/2 your likely going to have family with kids.. they need outdoor space.

Also did you verify the area has good internet? renters at least in my areas won't want to pay decent rents if the internet is just not good.

Trash service becomes a thing you need to figure out on occasion. In my area up to 4 units will be serviced by the city but as soon as I go over 4 now I need a dumpster and a private trash company which is an added headache around site design / cost management /security

Costs/requirements for driveways parking. In my areas they require concrete or asphalt driveways & parking and each unit requires 2 parking spots, that is 4 spots per duplex, that's 800 square feet of land for parking per duplex.

All of this adds up, but it works out, least for us it has.

Also... I see you have 5% vacancy, I'd bump that up to 10% for your first one. Assume it takes a month or a little more to get in your first tenants if you are going to hunt for GOOD ones. I know it's a new build and so you expect little repair/capex costs but I'd do 10% there as well. You want to build up the reserves for when you do need that new roof/appliances down the line and you can't be sure you won't get a bad tenant in that trashes the place so better to start saving that.

Ohh another Tip on the duplex design that I got from a member.. in your design have the entry doors for each side as far from each other as you can. The point is to let each tenant haver this though in their mind that they live in THEIR house not a shared house. the less they have to see each other the better.

-Dave

Jennifer B. · Answer

Hi Nathan,

I am a new investor and am currently researching modular homes. I too would like to go the modular home route for investing and build modular duplexes.

I have just come across your BP post from 3years ago and would love to know how your experience has panned out!

I am currently looking in my area for an existing multifamily property that comes with enough land that I could have zoned to build.

At your convenience, Would you mind sharing your experience with me?

Thank you for your time!

Jennifer

David Edwards · Answer

@Joe Kelly

Joe, please look in to difference between modular and manufactured (mobile) housing.

Are you sure your area has modular and not manufactured housing?

Frank Martielli · Answer

I read this thread with great interest. I found it very informative, and the differing opinions overall were useful. I also would appreciate an update on this; the good, the bad, and the ugly.

Christian Sobiech · Answer

Wow this is great information!  I have a property recently approved for a 2-family.  I'm interested in the modular route.  The property is in upstate NY.  I was quoted around $94 per sq ft for a duplex style (2240 sq ft).  I'm not going the turn key route so I would be responsible for the following GC work; Site work, foundation install, furnace/boilers install, water tank, septic, connect plumbing, install panel boxes (panel boxes provided by modular company) and connect power, interior flooring, appliances, complete the siding/roof (15%) as it is delivered 85% complete, landscaping, front porch, final coat of paint inside (comes primed), 2x stair sets to the basement.

My question, do you think the $94 a square foot is high?  The duplex would consist of (2) units each having (2) bedrooms, (1) full bath and (1) half bath, and is multi level.  Inside everything completed except final coat of paint, flooring (was looking to do the water proof click system in the entire place).

Thanks again for the information, very helpful sounds like you're having a good experience with modular!

David Edwards · Answer

@Joe Kelly

We can agree that there are variant quality of builders across the spectrum of housing types yes?

Can we agree that it is therefore possible even likely that you encountered a low quality builder?

Modular homes can cost 15-20% less than a comparable site built home with the exact same quality and finishes. In some cases you may find you can go modular at an even lower pricepoint

Why?

Well, shorter construction time. A modular can be built and placed in 1-3 months depending on the builder's queue and building complexity. This shorter construction time effects loan costs.

Modular manufacturers benefit from purchasing scale. You will often find that modulars use similar finishings across designs but even excepting custom finishings the savings due to bulk purchases of wood and drywall etc leads to lower costs.

Then you have labor. In some areas labor may be more expensive, it is possible to purchase  a modular home that is built in an area with lower labor costs.

Also, permits. Permitting costs can be reduced for facilities with multiple buildings ongoing as they can negotiate discounts and use a third party to permit that is certified by the state.

Now, you do need to transport the home, but here distance is a factor, sure if you are going to ship 100's of miles this can add up but in general there is a service area for delivery at nominal cost.

Those designs over 1 story will cost more as you need to rent a crane but that is another area you can manage cost.

In the end I am pushing back against a blanket statement that "modulars cost as much and are built to poor quality" because frankly that is wrong. Are there bad quality builders? Yes sure, but there are great builders and it is irresponsible to make such a statement.

The modular duplexes I am going with provide higher quality insulation and finishes and structure than you find in local stick builds.

There have been studies showing modulars are sturdier than stick builds, and you can certainly achieve price efficiencies for the reasons stated above.

For an investor with a volume goal (such as my 100 units in 3 years goal) in an area with low or expensive inventory or high competition, or for investors in an area with a lot of ongoing construction leading to high labor costs, or somebody that wants to run a strategy that churns money fast then modulars are a great development platform.

David Edwards · Answer

@Lynnette E.

The company I am working with modularoftexas.com builds the foundation and will grade the land as needed.

What they put in is a hybrid Slab & Pier foundation. The slab is sloped towards a hole with a sump pump in case any water gets in however it won't have much get in as they put in the piers on top of the slab and then put in walls and seal the whole thing. This provides a great foundation with a crawlspace which makes it easy to effect plumbing or other repairs, string cable/internet lines, etc.

You can see how this works if you look at the pictures on their site.

The team is really great and connected me with a lender they have used. They have experience with investors as well and owner occupants.

The team is happy to make minor revisions to plans or even work with buyers to develop new plans within reason.

One thing to note is, in texas there does not appear to be a single modular company that does more than one story. From what I understand there is not enough interest to warrant the investment the builders would need to make in approvals.

Included in the pricing is builders insurance as well as inspections and permitting for the home itself. They also help as mentioned with any city politics red tape.

If anybody does reach out let them know you got their reference from me if you could, please and thank you!

Nathan W. · Answer

@David Edwards

Wow, this is great info. I appreciate you taking the time to share your experience and strategies.

Your idea of these smaller communities of duplexes on a one acre lot or so is exactly what I eventually would envision doing assuming I could get this first deal off the ground and worthwhile. I’m really at the front-end of all this.

The dealer I’m working with does land / home packages where they assist in taking care of everything for you from the home, land, land prep, setup, permits, etc. I’m sure I will likely be paying a little more for this approach, but this simplified option is more appealing for the first one while I’m learning the processes.

The $195k included an approximate of the land / home package with their standard build and layout. I’m sure I would want to make some upgrades so all-in if I could be in the 95-105 sq/ft I’d be happy with that. Then ideally I would hope it would appraise closer to the average of a site built home and have some equity built right in.

Your suggestions on the high pitch vs low pitch roofs was very helpful as well. My personal modular I did go with a high pitch for the aesthetics, but I was on the fence on whether this was really worth it on an investment property. I think with the majority of the homes in the areas I’m looking having a lower pitch roof so the money would probably be better spent on upgrades inside the home.

Also, thanks for taking a look at the numbers. To be on the safe side, I think I will go more conservative with the vacancy and add in some of the others that I had overlooked. :)

The biggest hurdle that I think I face is the financing. The dealer I’m working with generally works with individuals and not so much investors, so their partners don’t really offer much for investment loans, so my next step is to explore the loan aspect further and see what I can turn up.

Thanks again for taking the time to share your experience on all of this. I just sent you a connection invite. It’d be great to continue to connect as well as to follow your journey.

Nathan

Is this Modular Duplex a Good Idea?

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