All Forum Posts by: Rylan Lacey

In the spec home development space I’m building entry level 1,350-1,500 sq ft homes for about $200k (including land, interest/closing costs, build costs etc.) in Phoenix, I sell them for about $325k each. After commissions and such i net about $95k-$105k per home. Profit margins are identical to the new construction multifamily development I’m doing now, just with smaller sales price and smaller build price

Well how I’m able to get it that low is since I’m also the GC and developer I can do the whole thing for cost with super small and cheap subs. If I take out all soft costs, loan interest, and supervision the build cost is under $100 per sq ft. If I hired a GC company, I’d anticipate about $135-150 per sq ft to build, without soft costs or interest.

Hello Biggerpockets,

I’m in the process of buying a parcel in south Phoenix for 15 single family homes that I plan on building and selling as a rental community vs building and selling them as individual specs.

Almost my entire career I’ve been building ground up new construction houses and condos as specs, along with some ground up multifamily rental communities. 

However, as I’m seeing more and more of a demand and appreciation for rentals, I’ve noticed there has been a big boom of single family rental communities in the Phoenix area. I was wondering if anyone has an idea on how cap rates compare buying single family communities vs multifamily communities, and if investors are more interested in getting individual 30 year fixed loans or one commercial loan for the single family communities.

Any insight into this market would be greatly appreciated!

 Yes so the expense ratio certainly seems on the low side for buyers. If I kept it for myself long term I know I can be at 20% expense + 5% occupancy but the area I’m building in (south Phoenix) is growing so rapidly, I know I can still put my 2 bed 2 bath rents at $1,350 and still be very competitive in the area. I also implemented some 3 bedroom 2 bath on this lot that will rent for $1,650. I began consulting with ABI multifamily which is a huge multifamily broker here in Arizona and they said that a 25% expense ratio and 5% vacancy is right on point with what they recommend. The city wouldn’t allow us to squeeze 20 units on there so now we’re at 19 units. Gross rental income is $318,600 and then with 25% expense ratio and 5% vacancy puts you at a 5.7% cap. Just submitted the engineering and site plan to the city today so hoping to start construction by mid January.

Well often times when you get to that size the city will dictate what amenities they want and then you can put more on from there. I usually do the bare minimum as I’m not interested in real luxury multifamily builds. I’d do just a swimming pool and dog park and get bids for it from the proper contractors. Or just look around town and see what the newer construction projects are doing and make sure you’re not doing more than what’s required or competitive.

Hi Gabriel,

4 plex builds can be tricky if you’ve never built/developed before. Make sure you or the GC you’re hiring is commercially licensed as the city of Phoenix requires a commercial license to pull the permits. I recommend putting a good team together like a good architect, Civil G and D engineer and landscape architect for the project. Expect 3-4 months through the city as Phoenix reviews the project as commercial. Ensure there’s enough room for parking as Phoenix is strict with their parking standards. 1 space per 1 bedroom, 1.5 spaces per 2 bedroom and 2 spaces per 3 bedroom. Allow ample room for ada parking stall with adequate space for a van accessible spot. Allow for a trash enclosure and make sure there are adequate sewer and water lines to the property. There’s a reason you don’t see any 4 plex projects going up around town, it’s pretty tough to just get the project through the city, let alone building/developing the whole thing. 

I’m focusing all my apartments in south Phoenix, building 23 units right now. Beef up the numbers for carrying costs, or to help with the LTC to get the loan you need without having to come in with more funds to close.

 That’s interesting, over here getting good quality tenants isn’t an issue because of how in demand rentals are right now. Lots of tenants to chose from, I’ve seen more than 50 applications in a day, and during covid. It’s easier to get better tenants when you’re building ground up because you can add amenities that older places don’t have such as washer/dryer, extras like that can really set you apart and create demand. 

That’s a lot for soft costs, in Phoenix I average about $3,750 per unit. What’s great about the lender I work with, they reimburse for soft costs, so all that soft cost money I put in I get right out of the first draw of the construction loan so I’m not out that money for long. 

Contractors can be very tricky and hard to nail down a time/schedule. It’s important to try to set a schedule with them but when you look at the big picture, it’s important to measure progress in months rather than days or even weeks. It’s a bad rabbit hole to go down if you start measuring progress by the day or the week, because some weeks you’ll have tons of guys working on your project and you’ll go a week or two at times with no one on your job as coordinating all the subs and doing so correctly is a fine balancing act. However the more volume you have the more of an emphasis your job will have on a contractors schedule.

Phoenix is definitely a landlord friendly state, both on a lawful level and a supply/demand level. Great market for landlords, loads of applications, huge renters pool to choose from. Great place to get some rentals going here forsure, even with the rising prices

 Next year will mark over 200 ground up units for me

Mistakes that I see developers doing is they want to make a super cool, modern, fancy, high tech project. They want to be the best/coolest in the neighborhood but 9/10 times what they build is totally impractical. Stick to lower end, no need to be the coolest product on the block. Also they hire top contractors in the state and pay top dollar for them when a much smaller licensed sub can get the job done for a fraction of the price. Know what generates more rent/value, don’t put extra cash into things that don’t give you a return out of it

I’m getting the numbers based on a 20% expense ratio and a 5% vacancy. I know these numbers because I already personally own units of this plan that I have built. It’s actually a 17.5% expense ratio but I round it up. No maintenance hardly at all, no grass, modern irrigation systems, minimal required landscaping. Very simple plan. I think we’re getting more money per unit just based on pure influx of people moving here and new builds being so rare here in Phoenix on a small-medium scale. Plenty of new construction for 250+ units but hardly anything under 100 units. Plus multifamily is so hot here everything is under contract the week you put it up if it’s well maintained and a 5.5-6% cap. I’m not too familiar with the Salem Oregon market but I assume multifamily is hot there too, and If so you’re eventually you’re going to crack $200k+ per door

I always find land off of Zillow or I have MlS access thanks to my awesome realtor. Make sure you understand zoning and unit densities for multifamily in your area, realtors may be able to help with that. Look for some realtors that are trying to sell shovel ready land in your area, sometimes they have some knowledge about land and can point you in the right direction. Always good to use a realtor to help you

For me personally I don’t have anyone check on the land for me. It’s hard for me to rely on someone else to tell me and trust their word on it all being correct. The 3 big things I look for is 1. How close is a sewer tap? 2. How close is the water tap? 3. Is it in a flood zone/plain? That will usually take care of most of your due diligence on the build ability of the land. Usually an experienced architect can help you with things like that but you always want to see for yourself. You can learn all this by making an appointment down at the city for a proper appointment and and they’ll answer all questions you’ll have

Lenders hate lending on land. Unless you have great collateral to put up or have experience in this you usually have to pay cash for the land. Lenders will let you finance 50% but with no experience it’s tough, but it’s doable. I always use hard money for a quick close and leniency, just make sure to use a large one.

G and D/landscape architect can help you along with those things. If the tree is large odds are you gotta pay to relocate otherwise when you grade it you just remove it and haul it off.

You can demolish an old house. Nothing really to look out for on these other than some may have old septic systems that can get in your way, may have to pay extra to remove it because multifamily cannot use septic systems, at least here in Arizona

Hope this helps!