I've posted several times about wanting to get into development, thought I'd throw some numbers out there to see if I'm anywhere close to making sense.
The idea is to use a somewhat somewhat generic sample project that I can use it to raise money and begin discussions with potential partners. Ideally I'll have access to enough funds that I can move fairly quickly once I find the right location.
6 unit apt complex near downtown Detroit
(4) two bed units, 1,000 sq. ft. each, rent for $1,600
(2) three bed units, 1,250 sq ft each, rent for $2,300
total of 6,500 sq. ft., roughly $150 per sq. ft. project cost
Project cost $1,000,000, monthly income $11,000 ($1.70 sq. ft.)
For the sake of conversation, using 50% financing at 9% for 10 years - debt service is roughly $6,500 a month
monthly expenses should about take care of the remainder, so I'm looking at zero income for 10 years (not including tax advantages) and pretty good income plus appreciation thereafter.
Does this seem like a sensible plan and something that people would invest it?
I appreciate all comments.
shellarchitect
May 13, 16 1:50 pm
sorry for the grammar... apparently a first post can not be editted
null pointer
May 13, 16 2:09 pm
Hmm... I think you're missing a lot of stuff from that analysis. Did you assume circulation and unrentable space are part of each of the units? Otherwise, you're undershooting your construction cost already.
null pointer
May 13, 16 2:10 pm
P.S. You need to be a lot more specific in your numbers. If you're going to play developer, you can't do the architect thang where you close your eyes and hope shit will work out. Shit does work out when you're building stuff, but you don't always make money. If you don't make money, you're not a good developer.
Dangermouse
May 13, 16 2:22 pm
a method i'm familiar with is to calculate your desired rate of return (for example, 30%, which is not uncommon). Then work backwards. Calculate your all in costs--getting the land, permitting, consultant and design fees, contingency, the actual cost of the building, finance costs, landscaping etc. What is the actual, all-in cost of the building per square foot? Then, what do you need to rent or sell at to get your desired rate of return?
then, there are issues of risk exposure, corporate structures to reduce tax liability, doing 1031's...
Carrera
May 13, 16 3:07 pm
Shu, good for you, but here is my two cents:
Unless your “potential partners” are like minded broke architects, nobody is going to park their money in a potentially negative position. It’s hardly an investment for investors without a return…or one that might come after they’re dead.
You need a ROI (return on investment) of at least 10% in real estate from day one because without it there is no cushion. No bank is going to loan without it; ROI has more than one purpose, first as profit, but also as cushion. Unless you’re flush with cash the bank needs to know that your Performa has a backup account…things might escalate unexcitingly…vacancy, more than expected planned things.
While residential is the most profitable platform it is also without long term leases like commercial. Leases from strong corporations are like gold to a bank…they like to know who they can screw after you screw them, and residential doesn’t have that….think they’ll look too hard at you on this having no place to go. Said this before, the easiest way to launch is with a strong commercial lease agreement from a reasonably established and going business…it’s your substitute for your (presumed) low net worth….plus a 10% ROI and you’ll be good to go for all concerned.
PS – The bank will also loan you more with a lease in hand. Also remember to pay yourself (or your relative) back during construction with fees taken out of the construction loan…putting you in a position to do the next one....because without the next one you're only a landlord not a developer.
shellarchitect
May 13, 16 4:07 pm
some good points made already.
Carerra - I think i need to think long and hard about your points, especially regarding commercial space. My initial thought was to keep it simple for the first project, but i respect your opinion and will look into it.
I have an excel proforma which says i should expect a 13% return the first year, including a 10% management fee. The biggest difference being that the spreadsheet deducts mortgage interest and includes depreciation
ColorBlindArchitect
Jun 25, 17 4:17 pm
Commented in the wrong spot. See below.
wurdan freo
May 13, 16 4:31 pm
What are other real estate investors doing in detroit? Are they still flipping distressed properties or have they moved to new builds?
Your choice of 6 units seems totally random. 4 units and the property can still qualify for traditional owner occupied financing. Maybe someone looking to house hack the property is interested in the 4 unit, especially if they can get a more traditional loan for it.
Why build new? Plenty of options for rehab. Usually cheaper too. Are other local investors building new? Does the market allow for new construction?
I've always been told that you need to account for property taxes as an expense but that tax benefits should not be included in the proforma. Agree with the above that no margin is not attractive. Find the investor and the project will create itself.
gwharton
May 13, 16 4:37 pm
When calculating your ROI or IRR (internal rate of return), there are two specific things you should be paying attention to:
1) Risk-adjusted Net Present Value, and,
2) Cash on Cash Return.
NPV is a fairly standard way of doing pro forma analysis of a real estate investment decision against a set of conditions and profit criteria, with risk factors built in. It's less important that a project have a specific IRR than that it have a positive NPV when measured against opportunity cost and risk. Note that your NPV discounts future cash flows along a compounded exponential curve, so a dollar you expect to receive in ten years is worth far less to NPV than a dollar you receive in one year.
CoC is a measure of what your return on your committed equity dollars is. You take your projected net annual income and divide it by the number of dollars you invested to get that return.
shellarchitect
May 15, 16 5:05 am
thanks all, lots to think about.
is there a min value that I should stay above for the various rates of return calc? 10% makes sense but not sure about the other measures.
shellarchitect
May 15, 16 5:18 am
lots of very large unit new construction, smaller stuff seems to be mostly gut rehabs. I didn't consider that before, thanks.
only reason I didn't look at it before is that it's more difficult to estimate costs.
wurdan freo
May 15, 16 4:25 pm
Most investors for the size project you're looking at are only interested in COC and/or cashflow. That number is going to vary depending on the investor, but lets say your going for a traditional money partner and work horse relationship. Assuming both partners have experience and know what they're doing, you're looking at a 50/50 split. Local denver example. Money partner purchases existing small home with potentional. Work horse partner responsible for design, permitting, construction and sale. Purchase price 300k, improvements, etc. 250k sale price $, 750k. Sorry... no formatting on this android device for some reason...
wuzakee
May 15, 16 11:14 pm
I signed up because of these developer / contractor threads, and because I like reading all of carrera's posts. I'd comment on the other GC one that was going on, but that sank down the tubes pretty hard and fast.
I'll be of no use analyzing your pro forma because I know absolutely nothing about Detroit, but I can comment on RE investing and the type of things that wake you up cold at night for months on end.
And others have it hit on it - cash on cash. There are any number of metrics and formulas that you can use to either justify a deal or try to make it feel better, but cash on cash down the road is what's going to make you smile or cry.
The smaller the project (in $$), the bigger cash on cash needs to be. Why would I want to do a lot of work (and risk) for not so much of a return? If the project's bigger, I can be happy with a lesser rate, but only because the pot is bigger to begin with.
For 6 units - once that's built and CO granted, 6 units need to and can be rented ASAP. One month and full. So there's next to no absorption time before you're at full revenue (perhaps minus any discounts to fill it fast). At that point, why no cash flow? If your numbers are right, run away and reboot.
Also 10 yr at 9% is a scary number. Lender is only one making any money, highway robbery.
wuzakee
May 15, 16 11:26 pm
Also need to agree with comment about 6 units.
I don't know if conventional lending 4 home limit applies only to single family or multi, but that's a huge deal if it works for multifam.
You might want to build and hold forever, but you need to know your exit well before you spend.
If I have lots of money, or have 100s or thousand of units, I don't want to buy 4 unit. No thank you.
I'm I'm interested in getting into RE, I want to buy your 4 unit, and I want a loan, who's going to give it to me? A huge portion of multifamily, insurance, etc. lenders won't be bothered. But if I can get a conventional mortgage? More doors open, I can buy, you can sell. And you have more potential buyers.
Carrera
May 16, 16 12:34 am
Wuz... thanks for the endorsement, said at my start I'd stay around as long as someone was listening, figured lately it was time for me to move on....have also said with these things that you never know whose listening... so I'll keep listening and just be visiting when I know I can help.
shellarchitect
May 16, 16 8:41 am
Carrera, now i'm curious... are there any other relevant forums that I should be visiting?
Carrera
May 16, 16 12:27 pm
Shu, don’t really know, there is one called BiggerPockets, suppose others, always places to learn, no architects there though….discussing it here is different…we have something they don’t, we’re architects and we have secret weapons…strongly believe in our problem solving abilities, the ability to see things no one else can, and that good design is good for business…plus we can draw, which is equity. I didn’t go into development just for the money, I was driven by control and my belief that I could do better work if left alone….but despite the uniqueness of discussing it here it’s always valuable to listen to the bean-counters & moneychangers, so if I were in your position I would search some out.
shellarchitect
May 16, 16 1:12 pm
btw - i just went back to one of your very first posts, some reasonable advice there. Think I'm going to approach my wife in a more serious manner about this when the fog of maternity leave starts to wear off.
She's very risk averse, but i'm convinced that life as an employee is far more risky than anything else.
shellarchitect
May 16, 16 1:22 pm
Should add that my limited experience with developers is that they must be idiot savants, certainly don't seem to know anything about architecture/construction.
wuzakee
May 16, 16 3:28 pm
Shu - if available funds, risk, and experience are factors, I'll say the same thing I've always said. The simplest, most economical, and potentially highest rate on return way to get into RE is... start small and start single family homes.
It's certainly not 2011 anymore, but unless we're approaching a cliff, the same golden rule applies - buy the ugliest thing in a nice block that you can manage to fix up. Everybody else is pulling you up - not the other way around. And then number two, sweat equity. Do everything possible yourself. That saves you another huge, huge headache - contractors. Not only will they drain you, they'll drive you insane. And since you're not starting with the few good ones, since you can't afford them, I mean, it's a jungle out there.
Then you can do what you want - sell if market is good or someone offers good money, rent, or rent until you sell. Being a landlord is a pain only until you get experience.
And I'm talking cheap houses - the kind that make up most of America - cheap cheap. That's where the easy buy-in is, and where the return can be.
The only time I lent anyone money was once to an older friend - a good chuck of change - that he used to buy a bunch of little, cheap houses. And he got great returns, 20% is totally doable and it was more when the market was depressed. But he was a hustler - he didn't care if he was buying houses, running a bagel shop, whatever. But he knew how to move, make things happen, find guys (crazy ones, of course, see above).
Getting a foothold is the key, beginning is the hardest
wuzakee
May 16, 16 3:46 pm
Also I'll just write that I'm sorry if that's not what you want or could consider doing. The biggest thing that drove me nuts were people telling me that I couldn't do what I wanted to do, and what do I know, I'm just anonymous on the internet.
Just it's an easy way to start. As an architect, designer, "someone who cares," whatever, you already have an advantage over almost every other person who tried to make a buck in real estate, who didn't care what came out the other end.
shellarchitect
May 16, 16 4:00 pm
Hey, I appreciate all advice. Seems like the easiest thing in the world is to find reasons not to do something.
wurdan freo
May 16, 16 4:19 pm
^word to your mom! I got my ass kicked in the recession and spent way too many years clawing and scratching and fearing the same thing would happen again that if I would have just gotten back on the horse....
Dangermouse
May 16, 16 4:23 pm
"Should add that my limited experience with developers is that they must be idiot savants, certainly don't seem to know anything about architecture/construction.
That is because it is very, very, very easy to make money as a developer. The difficult part is getting capital and investors, and even that is quite easy at the moment.
wurdan freo
May 16, 16 4:23 pm
Siegel also recommends starting with a single family home. If you're in the right market, one single family home development could equal a full years worth of fees or more. Then do four of them. Infill lot would be great 'cause then the roads are already there, utilities, etc.
Carrera
May 16, 16 6:28 pm
Agree with the single family run-up, even Warren Buffett said he’d get into it if he had the energy…which is the rub…renting to people is different than renting to businesses, my skin just wasn’t thick enough.
shellarchitect
May 17, 16 1:43 pm
listening to bigger pockets podcasts the past couple days, one of the most recent ones talks about joint venturing with existing property owners, show 171 if anyone else is interested.
ColorBlindArchitect
Jun 25, 17 4:22 pm
Well, first, I would look for a 15 yr am to increase your monthly cash flow. You'll make a bit less money over the lifetime, but it will put you in the position to make enough money to expand, and that's the point of development and property ownership.
Additionally, I would comment that 10% is not enough for management if you're starting out. I would recommend 12%. Then add 5% nominal maintenance, and assume that at any given time up to 20% of your units will go un-rented. Then after all of that, project to make 30% or more (after asset appreciation and depreciation tax deductions, etc.) and if you do all that correctly, your investors will probably realistically make 20% on their investment. Or at least that's what the 12 years of data I'm looking at for 400 residential properties is telling me.
Mostly, and I say this as a Detroit native, go build somewhere that has a decent housing market and renters who can pay!
I've posted several times about wanting to get into development, thought I'd throw some numbers out there to see if I'm anywhere close to making sense.
The idea is to use a somewhat somewhat generic sample project that I can use it to raise money and begin discussions with potential partners. Ideally I'll have access to enough funds that I can move fairly quickly once I find the right location.
6 unit apt complex near downtown Detroit
(4) two bed units, 1,000 sq. ft. each, rent for $1,600
(2) three bed units, 1,250 sq ft each, rent for $2,300
total of 6,500 sq. ft., roughly $150 per sq. ft. project cost
Project cost $1,000,000, monthly income $11,000 ($1.70 sq. ft.)
For the sake of conversation, using 50% financing at 9% for 10 years - debt service is roughly $6,500 a month
monthly expenses should about take care of the remainder, so I'm looking at zero income for 10 years (not including tax advantages) and pretty good income plus appreciation thereafter.
Does this seem like a sensible plan and something that people would invest it?
I appreciate all comments.
sorry for the grammar... apparently a first post can not be editted
Hmm... I think you're missing a lot of stuff from that analysis. Did you assume circulation and unrentable space are part of each of the units? Otherwise, you're undershooting your construction cost already.
P.S. You need to be a lot more specific in your numbers. If you're going to play developer, you can't do the architect thang where you close your eyes and hope shit will work out. Shit does work out when you're building stuff, but you don't always make money. If you don't make money, you're not a good developer.
a method i'm familiar with is to calculate your desired rate of return (for example, 30%, which is not uncommon). Then work backwards. Calculate your all in costs--getting the land, permitting, consultant and design fees, contingency, the actual cost of the building, finance costs, landscaping etc. What is the actual, all-in cost of the building per square foot? Then, what do you need to rent or sell at to get your desired rate of return?
then, there are issues of risk exposure, corporate structures to reduce tax liability, doing 1031's...
Shu, good for you, but here is my two cents:
Unless your “potential partners” are like minded broke architects, nobody is going to park their money in a potentially negative position. It’s hardly an investment for investors without a return…or one that might come after they’re dead.
You need a ROI (return on investment) of at least 10% in real estate from day one because without it there is no cushion. No bank is going to loan without it; ROI has more than one purpose, first as profit, but also as cushion. Unless you’re flush with cash the bank needs to know that your Performa has a backup account…things might escalate unexcitingly…vacancy, more than expected planned things.
While residential is the most profitable platform it is also without long term leases like commercial. Leases from strong corporations are like gold to a bank…they like to know who they can screw after you screw them, and residential doesn’t have that….think they’ll look too hard at you on this having no place to go. Said this before, the easiest way to launch is with a strong commercial lease agreement from a reasonably established and going business…it’s your substitute for your (presumed) low net worth….plus a 10% ROI and you’ll be good to go for all concerned.
PS – The bank will also loan you more with a lease in hand. Also remember to pay yourself (or your relative) back during construction with fees taken out of the construction loan…putting you in a position to do the next one....because without the next one you're only a landlord not a developer.
some good points made already.
Carerra - I think i need to think long and hard about your points, especially regarding commercial space. My initial thought was to keep it simple for the first project, but i respect your opinion and will look into it.
I have an excel proforma which says i should expect a 13% return the first year, including a 10% management fee. The biggest difference being that the spreadsheet deducts mortgage interest and includes depreciation
Commented in the wrong spot. See below.
What are other real estate investors doing in detroit? Are they still flipping distressed properties or have they moved to new builds?
Your choice of 6 units seems totally random. 4 units and the property can still qualify for traditional owner occupied financing. Maybe someone looking to house hack the property is interested in the 4 unit, especially if they can get a more traditional loan for it.
Why build new? Plenty of options for rehab. Usually cheaper too. Are other local investors building new? Does the market allow for new construction?
I've always been told that you need to account for property taxes as an expense but that tax benefits should not be included in the proforma. Agree with the above that no margin is not attractive. Find the investor and the project will create itself.
When calculating your ROI or IRR (internal rate of return), there are two specific things you should be paying attention to:
1) Risk-adjusted Net Present Value, and,
2) Cash on Cash Return.
NPV is a fairly standard way of doing pro forma analysis of a real estate investment decision against a set of conditions and profit criteria, with risk factors built in. It's less important that a project have a specific IRR than that it have a positive NPV when measured against opportunity cost and risk. Note that your NPV discounts future cash flows along a compounded exponential curve, so a dollar you expect to receive in ten years is worth far less to NPV than a dollar you receive in one year.
CoC is a measure of what your return on your committed equity dollars is. You take your projected net annual income and divide it by the number of dollars you invested to get that return.
thanks all, lots to think about.
is there a min value that I should stay above for the various rates of return calc? 10% makes sense but not sure about the other measures.lots of very large unit new construction, smaller stuff seems to be mostly gut rehabs. I didn't consider that before, thanks.
only reason I didn't look at it before is that it's more difficult to estimate costs.
Most investors for the size project you're looking at are only interested in COC and/or cashflow. That number is going to vary depending on the investor, but lets say your going for a traditional money partner and work horse relationship. Assuming both partners have experience and know what they're doing, you're looking at a 50/50 split. Local denver example. Money partner purchases existing small home with potentional. Work horse partner responsible for design, permitting, construction and sale. Purchase price 300k, improvements, etc. 250k sale price $, 750k. Sorry... no formatting on this android device for some reason...
I signed up because of these developer / contractor threads, and because I like reading all of carrera's posts. I'd comment on the other GC one that was going on, but that sank down the tubes pretty hard and fast.
I'll be of no use analyzing your pro forma because I know absolutely nothing about Detroit, but I can comment on RE investing and the type of things that wake you up cold at night for months on end.
And others have it hit on it - cash on cash. There are any number of metrics and formulas that you can use to either justify a deal or try to make it feel better, but cash on cash down the road is what's going to make you smile or cry.
The smaller the project (in $$), the bigger cash on cash needs to be. Why would I want to do a lot of work (and risk) for not so much of a return? If the project's bigger, I can be happy with a lesser rate, but only because the pot is bigger to begin with.
For 6 units - once that's built and CO granted, 6 units need to and can be rented ASAP. One month and full. So there's next to no absorption time before you're at full revenue (perhaps minus any discounts to fill it fast). At that point, why no cash flow? If your numbers are right, run away and reboot.
Also 10 yr at 9% is a scary number. Lender is only one making any money, highway robbery.
Also need to agree with comment about 6 units.
I don't know if conventional lending 4 home limit applies only to single family or multi, but that's a huge deal if it works for multifam.
You might want to build and hold forever, but you need to know your exit well before you spend.
If I have lots of money, or have 100s or thousand of units, I don't want to buy 4 unit. No thank you.
I'm I'm interested in getting into RE, I want to buy your 4 unit, and I want a loan, who's going to give it to me? A huge portion of multifamily, insurance, etc. lenders won't be bothered. But if I can get a conventional mortgage? More doors open, I can buy, you can sell. And you have more potential buyers.
Wuz... thanks for the endorsement, said at my start I'd stay around as long as someone was listening, figured lately it was time for me to move on....have also said with these things that you never know whose listening... so I'll keep listening and just be visiting when I know I can help.
Carrera, now i'm curious... are there any other relevant forums that I should be visiting?
Shu, don’t really know, there is one called BiggerPockets, suppose others, always places to learn, no architects there though….discussing it here is different…we have something they don’t, we’re architects and we have secret weapons…strongly believe in our problem solving abilities, the ability to see things no one else can, and that good design is good for business…plus we can draw, which is equity. I didn’t go into development just for the money, I was driven by control and my belief that I could do better work if left alone….but despite the uniqueness of discussing it here it’s always valuable to listen to the bean-counters & moneychangers, so if I were in your position I would search some out.
btw - i just went back to one of your very first posts, some reasonable advice there. Think I'm going to approach my wife in a more serious manner about this when the fog of maternity leave starts to wear off.
She's very risk averse, but i'm convinced that life as an employee is far more risky than anything else.
Should add that my limited experience with developers is that they must be idiot savants, certainly don't seem to know anything about architecture/construction.
Shu - if available funds, risk, and experience are factors, I'll say the same thing I've always said. The simplest, most economical, and potentially highest rate on return way to get into RE is... start small and start single family homes.
It's certainly not 2011 anymore, but unless we're approaching a cliff, the same golden rule applies - buy the ugliest thing in a nice block that you can manage to fix up. Everybody else is pulling you up - not the other way around. And then number two, sweat equity. Do everything possible yourself. That saves you another huge, huge headache - contractors. Not only will they drain you, they'll drive you insane. And since you're not starting with the few good ones, since you can't afford them, I mean, it's a jungle out there.
Then you can do what you want - sell if market is good or someone offers good money, rent, or rent until you sell. Being a landlord is a pain only until you get experience.
And I'm talking cheap houses - the kind that make up most of America - cheap cheap. That's where the easy buy-in is, and where the return can be.
The only time I lent anyone money was once to an older friend - a good chuck of change - that he used to buy a bunch of little, cheap houses. And he got great returns, 20% is totally doable and it was more when the market was depressed. But he was a hustler - he didn't care if he was buying houses, running a bagel shop, whatever. But he knew how to move, make things happen, find guys (crazy ones, of course, see above).
Getting a foothold is the key, beginning is the hardest
Also I'll just write that I'm sorry if that's not what you want or could consider doing. The biggest thing that drove me nuts were people telling me that I couldn't do what I wanted to do, and what do I know, I'm just anonymous on the internet.
Just it's an easy way to start. As an architect, designer, "someone who cares," whatever, you already have an advantage over almost every other person who tried to make a buck in real estate, who didn't care what came out the other end.
Hey, I appreciate all advice. Seems like the easiest thing in the world is to find reasons not to do something.
^word to your mom! I got my ass kicked in the recession and spent way too many years clawing and scratching and fearing the same thing would happen again that if I would have just gotten back on the horse....
"Should add that my limited experience with developers is that they must be idiot savants, certainly don't seem to know anything about architecture/construction.
That is because it is very, very, very easy to make money as a developer. The difficult part is getting capital and investors, and even that is quite easy at the moment.
Siegel also recommends starting with a single family home. If you're in the right market, one single family home development could equal a full years worth of fees or more. Then do four of them. Infill lot would be great 'cause then the roads are already there, utilities, etc.
Agree with the single family run-up, even Warren Buffett said he’d get into it if he had the energy…which is the rub…renting to people is different than renting to businesses, my skin just wasn’t thick enough.
listening to bigger pockets podcasts the past couple days, one of the most recent ones talks about joint venturing with existing property owners, show 171 if anyone else is interested.
Well, first, I would look for a 15 yr am to increase your monthly cash flow. You'll make a bit less money over the lifetime, but it will put you in the position to make enough money to expand, and that's the point of development and property ownership.
Additionally, I would comment that 10% is not enough for management if you're starting out. I would recommend 12%. Then add 5% nominal maintenance, and assume that at any given time up to 20% of your units will go un-rented. Then after all of that, project to make 30% or more (after asset appreciation and depreciation tax deductions, etc.) and if you do all that correctly, your investors will probably realistically make 20% on their investment. Or at least that's what the 12 years of data I'm looking at for 400 residential properties is telling me.
Mostly, and I say this as a Detroit native, go build somewhere that has a decent housing market and renters who can pay!