How Should I Approach Building A 4plex?
I'm looking a a piece of land that could be combined to be just big enough to fit a 4plex with detatched garages given the local zoning. I only have a little over 10% of the land and construction cost available to me at this point. I believe construction cost will be somewhere around 220k and land 60k. I'm not a contractor nor do I have the time to be the general contractor on this project. Here in Salt Lake selling cap rates are around 8.5%. This means at a conservative 3200/month total rents and my rule of thumb of 25%expenses and vacancy the property should be worth 340k. How should I go about making this project come together? Can I use the 60k equity as a down payment as if I were building my personal residence? Is it better to have a contractor carry the loan? Thanks for any replies.
I'm less concerned about your 10% down than the economics of the underlying deal. Buying a $340,000 for $280,00 (a 15% discount) is a great deal. Building one for $280,000 (with the attendant construction and leasing risks) is pretty thin. I would want to net at least 20% on such a deal and I'd think of even that as a marginal deal.
Does your budget include carrying costs for a year (shouldn't take that long but better to be safe)? How confident are you of that $220,000 construction budget?
That said, and given that you've told us you don't want to GC this job yourself I'd get the property under contract and start looking for a builder partner. The two of you should be able to borrow 70% of the costs to do this project. You've got 10% he brings 10% you finesse the other 10% in his construction budget.
The land acquisition cost counts as equity only if you can get the seller to carry a note and subordinate his interest to the construction loan. Not impossible. In fact if you got him take $10,000 down and subordinate the rest you are getting pretty close to your other 10% down.