Looking For The First Deal
I am looking into the possibilities of building a few multi-family homes on various lots in and around the city. I am not an investor at all. I have one property that is being rented, and that is only because I moved from an area shortly after I built a home -- causing me to secure a way to pay for the home until enough equity builds up in it to make some money on the deal. I'm well aware that many will offer advice against doing this as my first move into the RE market. This may be the case, but I'm looking at options anyway. I just don't know where to start looking for structured information on the processes involved. I'd simply like to buy the land, contract a builder to construct the multi-unit buildings, and start renting.
:::pause:::
Now that you are done laughing at me, can you lend me some advice other than "don't do it?". If you can, I need to know answers to some of the following questions:
1) Where would I go to determine if a piece of land is zoned to allow multi-family homes (3-5 units each)?
2) Aside from location, what should I look for in a piece of property? what should I avoid?
3) How would I go about estimating the rents for units? Aside from hitting a few apartment sites and comparing price/features/etc, are there any other methods that you all use to set your rents?
4) After I talk with the builder about price-per-square foot, what other "additional" fees should I consider when evaluating if a property can produce income or not? (could you tell me where I would go to find fees for things such as hooking up utilities, licenses I may require, etc) ?
I know I'll have more questions in the works, but I feel I've imposed enough on all of you volunteers.
Thanks in advance for not lauging at me too hard, and for your candid responses. I really want to move forward on something quickly. I'm also looking into buying some multi-family homes if I can find them, but so far I haven't seen one I feel comfortable with.
Thanks again.
To respond to some of your questions:
1. Check the zoning map and zoning ordinance of the town or municipality. This will show you the geographic areas that fall in the zoning classification(s) you want.
2. Chances are, those areas zoned for 3-5 DUA will be located where there are public utilities. However, while you're at the municipal office, you should check the utility mapping to identify locations of present or planned water and sewer lines. You should also look at floodplain mapping (FEMA). Regardless of the housing type you want to do, I would investigate the immediate area--what's there now and what may be planned or in progress. Check the town's master or comprehensive plan and also see what properties may be going through the development approval process.
4. Check with the municipality to determine permit and hook-up fees and license requirements. You will need to get development approval so you will need to hire a civil engineer to design and submit plans and estimate improvement costs. You should also have a RE attorney experienced in representing developers. I would recommend that your purchase contract contain the customary development contingencies (you don't close with the seller until you have all approvals and permits needed to be able to record the plan and get building permits). You should have your builder look at the parcel before you bid on it to check it out from a "buildability" and cost feasibility point of view.
If I were you I would start my research and due dillegence work at the bank! Banks are going to be pretty tough on lending for rental units, particularly with new investors or builders. Quite frankly, there are a lot of things that can wrong in the building process so a bank is going to want to see some solid proof they will get a return on their investment. In a large sense, you are going to be limited in what you can do by the amount of money you can borrow. Once you iron out at least a conceptual limit with the bank it will tell you what you can really afford to do in regards to property purchase, building costs, etc. Your rental rates are obviously going to be dependent on local market rates, your cost to build and maintain the structures/site and what profitability you are looking for.
Nancy answered most of your other questions accurately. Keep in mind that price per square foot quotes are pretty vague ways of cost estimating. Also note that any land with existing zoning allowing 3-5 UPA has most likely already been developed! Rezoning is an option you can look at though it is somewhat costly and a possible gamble on your return.
Thanks a million for both of your very helpful replies. While I may be new to the game, I wouldn't dream of getting into it if I didn't already have the capacity to do so. I have very good relationships with about three banks due to some other structured business deals I've done in the past. I've also made several relationships with real-estate agents (who I will get to help me locate properties I'm looking for), a real-estate attorney, and I'm now going to be looking at builders to establish relationships with. I intend to manage the first few of these myself, but should I get a few of these under my belt, I'll probably use a property manager.
From a bank standpoint, I'm well aware of what my "easily obtainable" cash amount is and under what conditions I'll qualify for it. I am talking with a few local professionals (with more $$) who might want to be a silent partners in these deals as well.
I asked my questions here because I've been watching these forums for a while now and I sincerely respect the advice you guys give. Instead of blurting out questions, I figured I would read what I could first, and then ask specific questions. I sincerely thank you both for your answers. They have been very helpful!