I am looking at building a modular 4plex. The numbers on the construction look like it can be built for about $280K. There will be 4 2bdr, 2ba appartments at about 900 sq. ft. each. My research on rents came at about $700 per unit, so GOI is 700x4x12=$33,600. Taking into account Operating expenses, vacancies and reserves, I estimated NOI to be at $26,500. CAP would come up to about 9.4. That’s all good.
My investors also want to know what they can sell this property for once it’s fully rented. I showed them that if we use CAP of 8 it brings the value to $331K. I know CAP is very local number.
My question is:
Is there any other way I can demonstrate that the building can be resold for profit once fully occupied?
I think you are shooting to low on your cap rate. I think you are in the low teens for a property such as that. I don’t think it is really feasible today to develop such a small property. You really need economies of scale.
I am not sure I fully understood your reply. Are you saying that I can’t build it for $280K? Or that I will not be able to sell it for more than what I cost to built?
I think previous post stated that an 8 cap would be more realistic if say there were 48 units instead of 4 (economy of scale). It also depends on your market.
I am interested in modular 4 plexes as well (Less to market time and less contractor hassle). I have 14 contiguous lots and am thinking about putting 4plexes on them or maybe a condo conversion setup (the lots are waterfront). Have you found any suitable companies yet?
I believe you can build it for the 280k. I just think that your estimate of a cap rate for the property is to low. I think you are in the low teens for a cap. My reasoning is that properties that are smaller are more susceptible to vacancy issues. Mortgages are more expensive for small investment properties and investors require a greater return for more risk. Therefore inherently riskier.
9%(.80) + 14%(.20) = 10%
The former example assumes that the buyer has 20% down and can qualify at a rate of 9%. They also require 14% return on their equity.
You may say wow 14% but, 14% is not far fetched for the risk involved maybe even low. You have to remember that the S&P return over the last 50 years annualized is right around 11%. A 4 unit property is more risky than an S&P index fund and more time intensive. Thus, as an investor going to require more return.
If you are experiencing high growth rates where you are then that may offset the return from cash flow and give you a lower cap.
Sean,
Thank you very much for the explanation. For some reason I was under the impression that the higher the CAP rate the more expensive the property valuation would be if the NOI is the same. I’ve no idea how it got it confused :0
Chilipepper,
I’ve been researching a lot of modular builders. Since it depends where you are geographically, the list would change. I am in NC and the one I liked was HandCraftedHomes (http://www.handcraftedhomes.com/) .
Also check out Builder Online web site. They published Top 100 Modular manufacturers in the country:
There are a lot of choices and you can 1. buy directly from the manufacturer (average prices $37-42 per sq. ft. and do what is called “Owner Completion”, where you hire your own subcontractors to grade and prep the site and do all the post delivery finishes. 2. hire a ‘dealer-contractor’ to do a ‘turn-key’ solution where you give them the floor plans and they do everything else (average prices around $70 per sq ft), or use a local GC to supervise your project and pay them a small fee for their services. In NC we still can do ‘Owner Completion’ but it might not be available for too long. You’ll need to check in your state.
I would recommend picking up ‘The Modular Home’ book by Andrew Gianino. Great resource!
I wanted to start with 4plexes to test the water with modular homes and see how it goes. The big plan is to do what you guys are saying is to build a much bigger development.
Maybe it’s your area, but that seems expensive. You can buy brand new brick fourplexes in Texas for $225-300k (2/2 and 3/2 mixes). As long as the numbers work, things should be fine.
Your expense numbers are WAY OFF! Gross rents are $33,600. If you are lucky, operating expenses would be $15,000 (45% of gross rents). NOI would be $18,600 at best. Therefore, your Cap Rate at the construction price of $280,000 is 6.6%.
I agree with Sean that a cap rate of 14% would be reasonable for a 4-plex. In that case, the value of your property $18,600/.14 = $132,857!
I would not advertise a NOI of $26,500 to your buyers. There is plenty of study data out there that will refute that. If they rely on your representation, when they don’t get it, they could easily sue you!
I would suggest that you do a search of this site. Search “operating expenses”. To answer your question, operating expenses consist of taxes, insurance, management, maintenance, advertising, fuel for your vehicle (going to and from your property), office supplies, evictions, exterminations, entity maintenance, legal fees, court costs, lawsuits, capital expenses, damage done by tenants, etc, etc, etc.
You are correct, the taxes that are included in operating expenses are property taxes and other related taxes. They do not include any taxes on your profit, etc.