Considering Multifamily Development for Investment?

Nationwide, multifamily seems to be the dominant sector of the market coming up in meetings, business gatherings, and events. It’s true, at least in Lee County, Florida. Rental rates are way up from last year, capitalization rates are continuously being suppressed, and there are waiting lists at rental communities at every grade. Replacement cost is catching up with the market and forget about getting discounts on multifamily properties. At this time last year, I stated that new development was much needed. In South Fort Myers, there is a demand for 900 new market rate units. Currently, there are less then half of that in construction, permitting, and planning stages. Our research has indicated that taking the risk of building and stabilizing can lead to a market rate Capitalization Rate. The competitive advantage to new development is new innovative ways to build and site prep to be in favorable lending and insurance terms. Just as a reference, if you are looking to develop on infill land sites, say 5-15 acres, density is typically 6-8 units per acre. Now, let’s discuss a few basics.

Once you determine if you are bankable and/or have the cash to make such an investment, the first thing to address are your goals and preference to build-to-rent or build-to-sell. There are mindboggling complications on both but adversely can provide great returns. As of today, the market conditions please are very favorable for new development. The housing market is way up as are rental rates. If you can throw yourself into the market at current competitive levels on your end product, your units have the upper hand on pre-existing inventory for many reasons. Keep in mind, on a build-to-sell product, a prospective homebuyer is typically willing to pay 15-20% more for a new home rather then a much older comparable. On a build-to-rent, a tenant is typically willing to go as high as 10% higher then comparables.

Next, if you are building-to-sell, do you know the difference between a Condo Association (CA) and a Homeowner’s Association (HOA)? My preference has always been a Homeowner’s Association, however, in most cases you are stuck with Condo Association structure if you build stacked units, such as a 2-story apartment building style, or coach homes. Anything where your neighbor is upstairs almost always requires a CA largely because of the “common elements”, ie.. roof, hallways, etc. If you you are building townhomes, villas, or any other units whose units are under their own roof and don’t have common hallways, you can likely qualify for an HOA. HOA’s are controlled by the homeowners, always a better situation.

In a build-to-rent, it is important to learn the market entirely. Sometimes, I find myself out of whack on market details, because the market is changing so quickly. Understanding inventory, vacancy rates, and pent up demand is critical. Hiring professional like myself at my firm will take a lot of the legwork out for you since we have trends, market information, and other important details.

In selecting your location, I always look to play devil’s advocate. What if you buy the land and in the end decide not to build. So, the first thing I look at is what I call “First Phase Exit Plan”, in other words, “What will we do if we need to dispose of this property if construction is not elected?” Well vacant land is valued much differently then fully entitled land. Fully entitled land is what us real estate nerds call “Shovel Ready”. In many cases, if you buy the land right, you can almost assume that you can get out of your land by entitling your land for development and selling to someone who wants to build. You have taken 25% of the work and expenses from under the next owner because entitlements require you to have a full blown site plan from an engineer with approvals from the local building department. In South Fort Myers for instance, fully entitled land is worth up to $35,000 per allowable unit in good locations. We recently sold a great piece of land on McGregor Boulevard for about $20,000 per allowable unit. Our expense for entitlements ran approximately $5,000 per unit, totaling an invested amount of $25,000 per unit. At this point, we are under the market if my investor elects not to build, and the investor can sell the land with sufficient equity to cover closing costs. You won’t make much of any money if you do the devil’s advocate way, but isn’t it better than losing money?

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