Self Taught MBA: From Single to Multifamily Buildercomments (2) August 16th, 2012 in Blogs
Many of us came into the construction business hoping to, and then often becoming successful homebuilders. There's nothing more thrilling than building your first house, except maybe having your first child. And this may be one reason the recent real estate crash has done more than devastate the industry financially, but also emotionally. This became palpable at the International Builder's Show in the years following 2008-the walking wounded strolled through the convention center quietly, doleful. So many of us homebuilders witnessed our egos and dreams die along with the sales of single-family homes. But not to worry, as one wise and recession-toughed homebuilding veteran once told me, "I just go out and find a new niche, and then get a new ego to go along with it."
So we begin a new miniseries on niches that appear to work well today.
This first installment represents an easy fork in the road for an experience homebuilder, the move into small multifamily construction. There's no doubt this sector has recovered and rebounded. While real estate statistics for single-family homes show signs of a mild recovery, the multifamily business is booming. Nowadays it's unusual to find occupancies under 95%. Lenders are vying for more apartment mortgages, and rental rates keep rising. It's the good old days again for landlords.
I began building and rehabilitating a couple of small apartment buildings or duplexes in the 1992. I did it as a retirement plan, but I also sold buildings. And when the recession hit, this portfolio became what fed, clothed, and housed me for about two years. It was my safety net, even if this was not my original intention. The reason for this: apartments provide cash flow. This makes apartments very different from single family homes, even while they are similar to build.
For one, the value of income property is derived from the rents, not its curb appeal or other intangibles. Now that occupancy has skyrocketed, rents have trended higher, and banks have put out the welcome mat for multifamily lending. While most people invest in multifamily for the long term, you can also build it for sale. Spec apartment building involves finding a vacant lot with the requisite zoning, or a building to convert into dwelling units, completing construction, filing the building with tenants, and then placing a for-sale sign in the front yard. While you wait for a buyer, the mortgage is paid by your tenants. Once you find a buyer, the negotiations involve a calculator instead of a virtual chessboard of real-estate brinkmanship. The value of your building is based on a limited range of return on investment (ROI), right now in the 6-to-8% range.
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