What are the main reasons why people in Real Estate do not buy land for cheap in a good location and put in a nice apartment complex? To me it seems very smart to do, but I must not be seeing the downsides. Any thoughts?
Hi,
As a professional developer let me clue you in a little. I am going to write this in laymens terms so it’s not to technical so you can understand.
For me to build a property I first have to own or control the property, it’s easier to do the older I get but back say 20 years ago when I built my first condo complex in Colorado I had no track record, no reputation and virtually no capital.
Most land parcels have some kind of zoning: multi-residential, commercial, multi use, industrial, etc. When we look for properties we initially look for land already zoned according to what we want to develop, just makes things easier than applying for a zoning change and going through that process.
Sometimes land is zoned say multi-residential 15 units per acre, well the zoning is residential but the complex we want to build that makes financial sense is 25 units per acre so we have to go and apply for a modification of the current density ratio.
So then when we find the right property the most we can borrow is about 50% of value on the land, so either we put 50% up in cash or propose anywhere between no money down and an owner carry note to 50% down with no note, and request the owner subordinate to new construction financing.
So I now maybe have a parcel I can work with, but to design a set of working plans it costs money to prepare the architecture and the civil and structural engineering cost’s, to do soils reports, and prepare the public works parts of fire / life / safety and ingress / egress in case of a fire emergency.
Now somewhere we have to secure financing for the project, everything to this point is paid out of pocket. The lender ask’s what experience you have and who is managing / general contracting the project.
Since building cost’s are fixed and the per unit / value of the project is based on a gross rent’s multiplyer or cap rate and projected the lender will want with little experience additional money in the deal when hard cost’s, soft cost’s and reserves are figured with the fixed cost of construction.
Qualifying is basically based on the project and the property but qualified management and good credit with a track record is important.
Now the property is built and units prepared but the unrented, there is a rent out period that can take weeks or months depending on how many unit’s are build and what the location, amenities and demand is.
There is no guarantee that a projected value will actually be the finished value and you have to carry cost’s all the way through the project, it is only when permenant financing is put in place that you recover your cash cost’s and discover how well you actually did.
Hope this helps you understand more!
GR
Your potential buyers pool for an apartment complex is fairly small compared to a market of SFH buyers. Many banks won’t touch lending on a big project like this. I’d love to start picking up some multi-unit properties in my market, but my banker wants us doing SFHs…so guess what we’re buying.
You also have to have lots of money to do a project like GR said. Most newbies won’t have access to that kind of cash/credit. Many larger complexes are owned by companies with numerous investors in on the deal.
So from what I gathered money is the biggest issue. I assumed that would be the case. GR did you start with a large project as well or did you start smaller? How did you get the money to start building?
Also–what is a good way to find a mentor in Real Estate? And how much do they usually cost?
Thanks for the replies.
Ryan
Single family houses are real estate and as such are valued based on comparable sales. In other words it is worth what every other house just like it in the same neighborhood has sold for in the last 3 months. The bank will loan you 80% of that value. Apartment complexes are not real estate. They are businesses. Businesses are financed based on operating income. A cap rate is assumed and multiplied by the operating income to get the value of the complex. The bank will then loan 80% of that figure. A new apartment has no income and thus the operating income has to be assumed. Nobody will take assumed operating income numbers from someone with no track record. You would have to have a partner that has credibility to provide these income and expense numbers.
Makes perfect sense Bluemoon. Thanks for the help.
What would be the best way to get in touch with finding a partner? Or how have many of your business/real estate relationships formed?
Thanks again.
It is done in my area-- or rather, it WAS done. Right now you can buy buildings for less than the cost of building them. Hopefully, that won’t last too much longer.
Big investors and big corporations build apartment buildings. Smaller investors build duplexes, or single houses. Sometims they are built to sell (spec), sometimes they are built to keep as rentals.
I would be careful with trying to partner with just anyone for business - especially as a newbie. What do you have to bring to the table? My wife is my business partner. Through doing deals and holding rentals, we’ve developed relationships with our Realtors, banker, and various different skilled workers. Our Realtors have been a huge help for referrals for repairs. They’re also investors, but we also had some REI experience before we got involved with them.
Hi Ryan,
I just saw your question so I have a chance to answer now!
I was a engineering and building general contractor and originally started in California after leaving the heavy construction industry.
When I got that shot at doing my first development project it was a 12 unit condo project, I found the property which just happened to have an approved set of plans and permits in place.
It was not directly for sale but I noticed someone broke ground, did some grading and utility taps and runs and then abandoned the project. It had sat for 4 or 5 months before I tracked down the owner.
I got a guy who was also a contractor in California to become my partner for the deal, his financials and cash to do the deal. I agreed to give him 60% for the opportunity and the risk.
We got the owner who had run out of money to agree to 50% down and carry a 50% note and subordinate to new financing, then got a private company to lend about 85% of the building cost and 50% on the land and my partner as I remember had to put up about 10% of the total project cost for overhead, soft cost’s and carrying cost’s.
I did all the work and built the project, we assumed the original owners LLC with everything approved and it took about 7 1/2 months to finish it, we had all the units sold within a month or two of finishing construction.
I think the average price of those units were about $165k and we made just over $400k in gross profit.
For the mentoring question shoot me a PM with a way to contact you and I can help guide you to finding what you need.
GR