It’s very challenging right now to invest into multifamily construction. This is mostly because lumber pricing has increased, sheet metal has gone up, and it’s tough to get appliances; therefore, it’s challenging to develop construction projects. Before construction materials increased, building multifamily real estate projects from the ground up was a lucrative way to build your real estate portfolio very quickly. It still is a good way to build your portfolio but the margins have tightened up. Continue reading to see the steps it takes to invest into multifamily construction.
There are a couple of steps you need to take before construction. You have to:
- Acquire a deal
- Deal with all the neighbors of the project complaining
- Get approvals for the deal and
- File for building permits
Timeline and Steps
Once you do that you can achieve a loan on the property to build out the project. We’ve been successful with the construction of our projects because we manage the construction in house. When you decide to build new construction projects, you have to factor in a 5 year timeline. If you commit to building 300 units, it’s going to take years to have the project approved and built. That’s even before you collect a single rent check. Deciding to build ground up is a big decision to make.
You’ll have to fund all of the approvals out of pocket and have a building permit approved by the town or city before a bank will consider closing the loan for the project. But when you overcome those hurdles, you would provide the bank with your purchase and sale agreement that you used to purchase the property. You also want to give them a proforma. This would let the bank know how much you’re going to generate in revenues once the project is completed and leased up along with the expenses that are going to be projected to have at this property once it’s built out. Additionally, you’d want to give them a construction budget so they know how much it’s going to cost. In the long run, it will also help you so you know where your numbers are going to shake out.
List of Expenses
Here is a list of the expenses when we built 24 units before the pandemic:
|3rd Party Testing||$11,439.56|
|FGA Bank Charges||$964.13|
|Garage – Architectural Plans||$1,000.00|
|Garage – Electrical||$5,717.60|
|Garage – Foundations||$13,996.75|
|Garage – Framer||$16,000.00|
|Garage – Garage Doors||$8,973.00|
|Garage – Permits||$410.00|
|Garage – Roofing||$6,478.00|
|Garage – Siding||$15,223.00|
|Garage – Drywall||$2,960.00|
|Utilities – Gas||$725.23|
|Utilities – Water||$3,058.25|
Overall, we spent about $4.8 million building the project. You have to make sure you figure in all of these expenses so that you don’t go over budget or have to come up with extra money for an expense you forgot about. If you want to invest into multifamily construction, make sure you are going through the required steps. It may be difficult to invest now due to the rise in prices, but if you decide to move forward, you now know what the steps and budget you will need to follow through.
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