Anyone know about Real Estate Construction?

[Wrecked944]

I own a couple of rental units and have grown pretty happy being a landlord. So I am thinking of expaning and purchasing more units. However, some of my professional colleages have told me that doing new construction is more cost effective than purchasing existing structures. And so I "ran the numbers" and was astonished to see how right they were. So with that in mind, I have developed the following plan and I'd like to know if anyone else has done anything similar or can point to any obstacles or pitfalls I have overlooked.

1) Buy 1/5 to 1/4 acre of undeveloped land in my home city of Worcester, MA. I will only buy land which is already zoned for residential use and has access to city water and sewar and electricity. Fortunately, Worcester is an urban area so this is not terribly difficult. A quarter acre of land goes for about $50k these days (and may go for less if the real estate market "bubble" pops).

Some friends have suggested that things like sloped grades, water tables, zoning (even if it already zoned for residential use), etc may pose problems. I've also been told that it is incredibly difficult to get financing for undeveloped land and so I may need to purchase it with cash. Paying cash would not kill me, but it might be a PITA. Plus I don't know squat about the other stuff.

2) Build a four unit complex of "condo townhouses". I've found modular construction companies that will deliver a 1000sqf townhouse and install it for about $70k-$80k each. That's about $70 - $80 per sqf.

Apparently, some of these modular construction companies require you to hire a general contractor. But I have no idea why or what it might cost.

But anyway, at $80 per sqf ft, four units would cost $320k plus $50k for the land and add another $20k for site prep and the total comes to $390k for 4000 sqf of living space which is just $97 per sqf vs the current going price of $169 per sqf to purchase existing townhouse units in Worcester.

Even if I finance the whole amount (which I won't do), my mortgage would likely be about $4000 per month. But since townhouse units are renting for about $1400 in Worcester, I'd only need to rent three of the four units to be profitable.

Okay, it seems like a good deal to me. But I figured I'd run it past you folks since this BBS has proven to be the most knowledgable and helpful forum I've ever seen on the Web (at least when Bush and Kerry aren't being discussed)

[jrdavid68]

If I had the money/financing available, I would buy some property and build a storage facility. No running toilets to fix and minimal prep when one renter leaves to get it ready for the next. Find an older couple to manage it and sit back as the rent rolls in. Easier said than done, I'm sure.

[pbs911]

Part of my job is construction defect litigation. You assumption is correct that building new properties is always less expensive than purchasing exisiting units.

I wish to God I could by 1/4 acre of land in my neighborhood for $50k. I'd easily pay $500k. There are people paying $2m + for lots half that size in the harbor surrounding my neighborhood.

[tabs]

A 1/4 acre for 4 units? You better check with the city to see how much acreage you need to support 4 units....remember you need to allow for on site parking...

Also your estimate of ground or site prep at 20K is too low...this is the area where you can have the most cost over run...when moving dirt you just don't know what your going to run into. Also are the utilities allready existing at the street

In CA before you ever move a shovel of dirt you have to pay a water connection fee, Building Permits and a School Bond fee....where I lived it was about $2.00 a sq ft. So for a 4000 sq ft house it was going to cost 18K to the city and schools before a shovel of dirt was moved. So you better check that out as well.

[tabs]

BTW: Storage Facility is a GOOOD IDEA

[turbo6bar]

Janus Cole, you need to lock down your costs, before you make any decisions. Be careful when comparing price per square foot, because buying existing construction would consist of a modest down payment and financing the rest. If you build your own, you'll have your cash tied up for 4-12 months, and this money is generating no income.

I think your plan has definite potential. Let's say your really good, and your total cost is indeed $390k. With 20% down, your balance is $312k($78k cash down). You give a good local bank a mortgage, and your rate is 6%. P&I is $1872/month. Add $1000/month for expenses & property taxes??? Rent x 4 units = $5600/month. Potential cash flow $2728/month. Cash-on-cash return = 41.9% per year. That would be best case scenario. You haven't considered the instant equity you generate. At a cap rate of 10, and $4600/month income, the 4-plex is worth roughly $550k. So, your have cash flow and equity on your side.

I have considered building single family homes, but it's just not economically smart in my area. I can buy foreclosures for $55-70/SF. I could build them for probably $40-50/SF + a lot of my own time.

You need to find a contractor who will work with you. I wonder if you could hire some labor and DIY. Then you're talking about real savings in dollars.

Storage facilities can be hit or miss, depending on area.

Do you surf mrlandlord.com Q&A forum? I assume the rental market in your area is strong. It's not so hot in most of the country.
Jürgen

[JavaBrewer]

Or a light industrial complex, metal construction, simple single office with bathroom. Cheap to erect and you can charge more money for rent plus you don't need the retired old couple holding the fort down. Only issue is you'll need more than a 1/4 acre.

[Porsche-O-Phile]

Yes, zoning laws and building codes are very particular with use of "your" property - you will need to comply with all new setback and FAR (floor area ratio) requirements, etc. You MIGHT be able to get four units on 1/4 acre, but you might not. I'd consult with an architect on that to do a preliminary feasibility study if there's a plot you're considering.

If you haven't bought the property yet, you can talk with the seller about whether or not any studies / submittals / approvals have been prepared with the locals regarding development. If so, you might be able to transfer standing approvals with the property. Sometimes they won't disclose that information but it's worth asking.

[Porsche-O-Phile]

I can even recommend one in your area if you're so inclined. Just PM me.

[Zeke]

You have not factored "on site" utilities, parking and landscaping to name a few. When you buy existing real estate, you get fully developed properties. Factor in your cost of permits and utilitiy hook up charges and taxes. And I don't think the GC will touch it for less than 15%, but remember, you get what you pay for. So, if you find someone for less, beware. Lastly, you may want to look into fund control (1.5%) and construction management if you are a neophyte (3-5%).

Edit: I assumed your 20K for "site prep" was preconstruction grading, soils reports, etc.

Dr. Sopp is right about CA land costs. If there were lots available in my neighborhood of 60-75 yr. old homes, a 50 x 110 would cost nearly 200,000. The homes here should cost about 200,000, but have peaked at 650,000 and in the last 3 weeks asking prices for existing properties on the market have been reduced on average 5%, one 9%. That one represented 44K of equity lost in 3 weeks. And it hasn't sold yet. (It's next door.) The sky is falling.

However, the land costs will remain more stable, if history serves.

[Porsche-O-Phile]

Interesting that you mention that - I've seen a small (very small) correction in a couple properties here in LGB also, but I think the market is still insanely overvalued. There are more than enough junk heaps around worth no more than $150K-$200K that are going for a half million or more. This is likely just a small "hiccup". The big crash (when it comes) is going to be HUGE, but the prices I suspect will get far worse before they get better (in general).

I wouldn't touch residential real estate with a 20-foot-pole in this area right now (not that I could anyway). If you buy now, you're going to lose your shirt a few months from now, just like people did in the 80s.

[flyenby]

phile'
I am a GC and have developed property in long beach for 20 years,and you are 100 % correct, this time around it will make the 80s look mild. a lot of people will get burned.................

[Zeke]

Originally posted by flyenby
phile'
I am a GC and have developed property in long beach for 20 years,and you are 100 % correct, this time around it will make the 80s look mild. a lot of people will get burned.................

Can't agree with that. Last time, when people lost their house, there was no one there to pick it up because people were leaving CA, no jobs.

Real estate will take a hit soon. But I don't think it will be actually worse than in the early 90's. The same conditions don't exist. As long as there are jobs, people will buy houses. If the prices go down, then more will be able to do so.

Some will end up selling 'short,' some will be foreclosed on, some will walk away as they did last time. But, for now, with the population expanding, there will be a buyer for each distressed sale.

Now, if a recession hits (I don't know what to call the present economic situation), game over. Same as '91-92. I went to Las Vegas for a couple years to find construction work. Hope I don't have to do that again.

[Wrecked944]

Originally posted by tabs
Also your estimate of ground or site prep at 20K is too low...

THANKS !! That is exactly the sort of stuff I was hoping you guys would know about. Site selection and preparation are probably the parts of the plan about which I know the least.

Originally posted by pbs911
I wish to God I could by 1/4 acre of land in my neighborhood for $50k. I'd easily pay $500k. There are people paying $2m + for lots half that size in the harbor surrounding my neighborhood.

That is actually the reason I chose Worcester, MA as my base. Development in Massachusetts tends to follow the highways and radiate away from Boston. And Worcester is just outside the population belt and, I believe, next in line for major growth. Of course, I'd RATHER live in Newport Beach - if I were already wealthy.

Originally posted by tabs
BTW: Storage Facility is a GOOOD IDEA

Well, maybe some day. But not this time around. I believe there is value in doing what you know. And I already have my "team" in place for rental units. I have my own personal experience and people who work for me that do a great job. It took me a couple of years to get this "landlord" thing figured out and so I feel some confidence in expanding. Building a storage facility, while likely very profitable, would involve a learning curve.

Originally posted by turbo6bar
You need to find a contractor who will work with you.

Yes, that is becoming very clear. I'll get right on it.

Originally posted by turbo6bar
Do you surf mrlandlord.com Q&A forum? I assume the rental market in your area is strong. It's not so hot in most of the country.

Well, the rental market in central Mass is definitely hot. I must confess I don't spend much time talking to other landlords or surfing the websites. After beating my head against the landlord wall for a while, I hired a proerty manager who handles all of the day to day. Since then, life has been very good indeed. I'm not allowed to disclose how much he charges me, but I can assure you it isn't enough!!

Originally posted by flyenby
I am a GC and have developed property in long beach for 20 years,and you are 100 % correct, this time around it will make the 80s look mild. a lot of people will get burned.................

Agreed. I can't predict how badly the market will crash, but I definitely feel that patience can only make me more money at this point. I am at such an early stage of this project (i.e. still doing the research) that I don't anticipate looking seriously for land for at least a year or more.

And if I haven't said it enough, I've gotta thank you guys once again. This is by far the smartest, most well educated, and generous BBS I've ever seen. Really. You folks never cease to impress me. I'm printing this whole thread off as I type and I'll be re-reading it as I continue down this path.

[turbo6bar]

Originally posted by JanusCole

Well, the rental market in central Mass is definitely hot. I must confess I don't spend much time talking to other landlords or surfing the websites. After beating my head against the landlord wall for a while, I hired a proerty manager who handles all of the day to day. Since then, life has been very good indeed. I'm not allowed to disclose how much he charges me, but I can assure you it isn't enough!!

Don't underestimate the opinions of those who've been there, done that...
mrlandlord.com is the best collection of bright and experienced landlords.

[Wrecked944]

Originally posted by turbo6bar
Don't underestimate the opinions of those who've been there, done that...
mrlandlord.com is the best collection of bright and experienced landlords.

Excellent point. I'll make sure I surf over there and check it out.

[Steve W]

Janus, be careful and don't underestimate the soft costs. I am a full time real estate developer and one of my projects right now is similar to what you are proposing. I don't know how complex or expensive it is to develop condos in MA, but in California, the development and construction of townhomes or condos is a very expensive and long complex process. For a project as you propose in California, the soft costs include, architecture $20,000, engineering $8000, soils reports and inspections $7000, tract map application processes and HOA and misc $30-40,000+, school fees $15,000, parks and recreation $18,000, building permits $25,000, sewer facility charges $12,000, plus probably another $30-40k in misc expenses which might include fees to utility companies to bring in sewer, gas, electricity, telephone, and water, marketing expenses, and construction loan interest. One of the biggest expenses will be insurance. Typically insurance companies do not want to insure contractors or developers for new condo/townhome projects because of the huge claims that have surfaced by attorneys for homeowners association for such b.s. as toxic mold ect. Expect the liability insurance for a general contractor/developer for your project to be approximately 20% of the total retail value of a your project, which will be passed onto the client. On a project I am working on right now, a eight unit condo complex in West Hollywood, CA, the construction insurance is $300,000 for one year, and that was the lowest price shopped. Some developers are assuming the risk by building without insurance by funding everything in cash or other means, however if you obtain a construction loan, a bank will require full insurance for construction and product liability, and construction defects, and also require construction by a licensed contractor. I don't want to discourage you, and it may cost less in MA, but if you are not prepared and have lots of cash on hand, you may end up stuck and out of funds before you begin or complete construction, which I've seen happen too many times. Best of luck.