Buy vs Build

[RCrein]

First of thanks to all for the informative posts I have already read on various topics. As I evaluate local buying opportunities for existing multi-family properties, prices have lead me to question whether building may have financial benefits that exceed buying given the right property.

Are there members out there who would share their build cost experiences? I fully understand that every design and location involve different costs. I am interested in units between quads and 12plex in a low-rise walkup design. I believe I can extrapolate some rule of thumb costs per door given approximate,

• total cost
• property cost
• dev charges
• number of doors and unit mix i.e. number of bedrooms & bathsparking (e.g. open surface, carports, detatched garages, underground)brief description of construction (e.g. brick over wood frame, formed concrete, etc) picture is worth a thousand wordsand of course some indication of how long ago this took place

Of course I`m open to other formats, comments and war stories. Thanks in advance to those who are able to respond. I`m sure others will benefit from the discussion as well but if you feel more comfortable to email please do.

 

[Thomas Beyer]

you can build for $125 to $160/foot PLUS LAND .. maybe a bit less ..

building is very hard to finance these days. Especially for rental with no pre-sales. Needs AT LEAST 50% of cost in cash .. better more !

How much cash do you have ? That is the limiting factor !

We are evaluating pre-builds / pre-fab on existing ("free") land. That is about $110 to $120/ft all in for a 20+ plex .. likely more for less units !!

 

[Nir]

QUOTE (ThomasBeyer @ Dec 7 2009, 09:13 PM) We are evaluating pre-builds / pre-fab on existing ("free") land. That is about $110 to $120/ft all in for a 20+ plex .. likely more for less units !!
Hi Thomas,
Based on the following calculation, I hope market rent is at least $1,500/2 bdr. Otherwise, unfortunately CAP not very good:
- cost to build 1000sq/ft apartment (say 2 bedroom)=1000*$120=$120,000
- rent of $1,500/mo=$18,000/yr
- estimated CAP = 0.5*18,000/120k=7.5%

 

[Thomas Beyer]

QUOTE (investmart @ Dec 7 2009, 09:41 PM) Hi Thomas,
Based on the following calculation, I hope market rent is at least $1,500/2 bdr. Otherwise, unfortunately CAP not very good:
- cost to build 1000sq/ft apartment (say 2 bedroom)=1000*$120=$120,000
- rent of $1,500/mo=$18,000/yr
- estimated CAP = 0.5*18,000/120k=7.5%
of course rent is NOT $1500 .. more like $800 to $1000 .. a CAP rate of 7.5% on new assets is an unrealistic goal !

Thus: no one does it usually .. and we are in "investigating mode" only !!

re your math: cost is maybe $3500/unit/yr for a new asset .. thus if rent is $1000 or $12,000/year then NOI is $8500 .. or a 7% CAP which is VERY attractive given mortgages at 4% !!

 

[Nir]

Yes, thanks for the correction. For new asset estimated CAP=0.65* x 12000/120000=6.5% with $1000 rent.

*based on 0.65 as best case scenario instead of $3500 which would be 0.7 or 30% of rent=estimated expense.

Re "investigating mode": I`m not surprised as I know you used to give CAP first priority.

Regards,
Neil

 

[ChrisDavies]

There`s a reason most new builds are condos, rather than rentals. It follows the money.

 

[Thomas Beyer]

QUOTE (investmart @ Dec 7 2009, 09:58 PM) ... I`m not surprised as I know you used to give CAP first priority.

..
actually, we use price/door plus cash-flow ability first priority.

If you buy new @ 120/door a minimum 5 year hold, better 10 years is the only way to make money .. or sell as condos ..

we have yet to buy a property EVER for more than 79/door ...

 

[housingrental]

Good posts above... and in many markets multi-units are selling for well below replacement cost... so very hard to find something that makes sense to do a project on

 

[MarkTorgerson]

QUOTE (ThomasBeyer @ Dec 8 2009, 09:37 AM) actually, we use price/door plus cash-flow ability first priority.

If you buy new @ 120/door a minimum 5 year hold, better 10 years is the only way to make money .. or sell as condos ..

we have yet to buy a property EVER for more than 79/door ...


Hi Thomas

Have you ever converted a building into condos and sold as individual units? Is this a consideration of any of your future exit plans?
I am still kicking around the idea of converting a building I have into condos and then sell at a future date as the condo market is currently saturated in my region. Was curious if you had some experience in that forum already.

Thanks

 

[Thomas Beyer]

QUOTE (MarkTorgerson @ Dec 8 2009, 10:50 AM) Hi Thomas
Have you ever converted a building into condos and sold as individual units? Is this a consideration of any of your future exit plans?
I am still kicking around the idea of converting a building I have into condos and then sell at a future date as the condo market is currently saturated in my region. Was curious if you had some experience in that forum already.

Thanks
yes, I have done a condo conversion TWICE .. once with a 24 suiter and once with a 42 suiter.

This is a HIGH RISK strategy that needs careful planning as the mortgage has to be discharged in one piece from a bulk sale or replaced with many smaller ones. Banks have pulled back from that lending environment so it works only for certain assets or cities (large ones, usually). You must consider the sales channel and the required upgrades and reserve fund requirements.

It is VERY cash intensive .. and not necessarily better cash-on-cash than a buy and hold with lower cash-to-mortgage requirements.

Many a REIN (or non-REIN) member has been burned in the overheated Edmonton condo market of 2006-2007 ..

Executed well a condo conversion can be very profitable .. but executed poorly it is a recipe for bankruptcy and poor health !

Execution and cash availability are critical elements !

 

[Nir]

QUOTE (ThomasBeyer @ Dec 8 2009, 09:37 AM) we use price/door plus cash-flow ability first priority.

Thanks Thomas. The correlation between price/door (within a specific rent range) and CAP is close to 1(!)
Therefore, fyi indirectly you are indeed giving CAP first priority. you just use a more simple formula...which is a good thing.
similarly you could look at price/rent or price/annual rent which when correlated with CAP is close to minus 1.
Cheers, Neil

 

[Thomas Beyer]

QUOTE (investmart @ Dec 8 2009, 10:08 PM) Thanks Thomas. The correlation between price/door (within a specific rent range) and CAP is close to 1(!)
Therefore, fyi indirectly you are indeed giving CAP first priority. you just use a more simple formula...which is a good thing.
similarly you could look at price/rent or price/annual rent which when correlated with CAP is close to minus 1.
Cheers, Neil

Of course price/door, cash-flow and CAP rate are related ! But: Complex problems have simple, easy-to-understand wrong answers ..

Buying a building is not that simple (i.e. price/door or CAP rate) as many factors have to be considered such as:
a) CAP rate
b) price/door
c) what is behind teh door i.e. condition of suite
d) what is in front of door, i.e. condition of common areas
e) rents today
f) immediate rental upside
g) long term rental upside
h) balconies ?
i) suite size or price per sq ft
j) views ?
k) macro-location, i.e. future of city/town
l) micro-location i.e. suburb
m) condition of major elements like roof, boiler, windows, balconies
n) interest rate on mortgages
o) cash per door i.e. cash-to-mortgage
p) availability of 1st and 2nd mortgage money
q) condo conversion abilities / potential
r) who pays utilities
s) potential future tax increases or decreases
t) ability to lower operating expenses
u) curb appeal
v) "feel" of suite / attractiveness
w) competition from new construction
x) competition from existing buildings
y) in-migration
z) new jobs coming (or leaving)

.. maybe I forgot 3 or 6 more ..

one of these elements overlooked .. and there goes $100,000 or $1M in potential profits !!

 

[RCrein]

Many thanks for your posts. I will add their content to my analysis. I had run across a piece of land that seemed like a good opportunity but as often happens complications arose and I have moved on. Thanks again, the looking and learning continues.

 

[kanabel]

QUOTE (ThomasBeyer @ Dec 9 2009, 10:02 AM) Of course price/door, cash-flow and CAP rate are related ! But: Complex problems have simple, easy-to-understand wrong answers ..

Buying a building is not that simple (i.e. price/door or CAP rate) as many factors have to be considered such as:
a) CAP rate
b) price/door
c) what is behind teh door i.e. condition of suite
d) what is in front of door, i.e. condition of common areas
e) rents today
f) immediate rental upside
g) long term rental upside
h) balconies ?
i) suite size or price per sq ft
j) views ?
k) macro-location, i.e. future of city/town
l) micro-location i.e. suburb
m) condition of major elements like roof, boiler, windows, balconies
n) interest rate on mortgages
o) cash per door i.e. cash-to-mortgage
p) availability of 1st and 2nd mortgage money
q) condo conversion abilities / potential
r) who pays utilities
s) potential future tax increases or decreases
t) ability to lower operating expenses
u) curb appeal
v) "feel" of suite / attractiveness
w) competition from new construction
x) competition from existing buildings
y) in-migration
z) new jobs coming (or leaving)

.. maybe I forgot 3 or 6 more ..

one of these elements overlooked .. and there goes $100,000 or $1M in potential profits !!

A to Z checklist! This should be part of any due diligence chapter in real estate educational books
Thanks Thomas

 

[Thomas Beyer]

QUOTE (kanabel @ Dec 9 2009, 09:02 PM) A to Z checklist! This should be part of any due diligence chapter in real estate educational books
Thanks Thomas
hey .. 26 lessons learned .. and still learning after a decade doing it !!

 

[kanabel]

QUOTE (ThomasBeyer @ Dec 9 2009, 09:04 PM) hey .. 26 lessons learned .. and still learning after a decade doing it !!

I thought it was "80 lessons", not 26. Looking forward to buy your book when it`s out. I am sure it can be helpful (as your posts are) to skip some mistakes on the road to Belize, but some of them you have to learn yourself, and it`s usually hard way. At least in my case

Cheers
Dejan

 

[Thomas Beyer]

QUOTE (kanabel @ Dec 9 2009, 09:25 PM)

I thought it was "80 lessons", not 26. Looking forward to buy your book when it`s out. I am sure it can be helpful (as your posts are) to skip some mistakes on the road to Belize, but some of them you have to learn yourself, and it`s usually hard way. At least in my case

Cheers
Dejan
26 lessons as part of 80 ..

 

[myme22]

QUOTE (ThomasBeyer @ Dec 9 2009, 08:04 PM) hey .. 26 lessons learned .. and still learning after a decade doing it !!

Thomas,

Great common sense list!

Do you have a specific concern with balconies?

Serge Merckx

 

[Thomas Beyer]

QUOTE (myme22 @ Mar 8 2010, 02:41 PM) Thomas,

Great common sense list!

Do you have a specific concern with balconies?
they tend to stick out .. get rained on and rot ..

 

[housingrental]

Thomas on occasion comes out with gold

QUOTE (ThomasBeyer @ Mar 8 2010, 05:48 PM) they tend to stick out ..