Is building an apartment building a good investment?
Are you missing out on a huge opportunity by not building apartments
or are you avoiding a major, major risk? I'm gonna answer that in this video coming up.
In this video, I'm going to walk you through the 4 things you need to consider
if you're going to build an apartment building. That can be a very scary endeavor if you don't
understand these 4 things. Hey, my name is Mike Fritz. I'm the founder of Titanium Capital
Investments in the multi-family CEO system. My greatest passion is helping people just like you
create financial freedom with multi-family real estate so you can hang out with your kids and
your loved ones and live life on your terms. And to do that, you want to make sure you're making smart
investments. But I have a lot of people ask, "Should we be developing or building apartment buildings?"
Well, the very first thing to consider when you ask that question is a very simple basic question.
"What is my return?" When people ask, "Should I be developing or building?" I have one question, what's
the return on investment? How much money are you going to make once it's built and leased up, once
all the units are leased or at least 90 percent of them are leased, what is your return on investment?
That's really all I care about. I know a lot of people think it would be cool to be a developer, a
lot of people have lost their shirt on development because they misprojected how much money they were
gonna make after the project finished. So, one of the most important things to think of of what's
your return is make sure your projections of when you rent this out and lease this up,
make sure they're very conservative and accurate based on what the market is being rented for. If
2 bedrooms are going for 800 dollars a month in your area, don't underwrite 850
or 9. That's just not realistic. Would you be able to get that? Maybe over time but let's not
underwrite the deal that way. We want to make sure we're going into it conservatively. But really the
only question that matters is "what's my return?" And when thinking about your return on investment,
here's the thing that comes into play when developing property. Number 1, how much does the
lot cost? Meaning the grass you're building on, the dirt, how much does the piece of property itself
cost bear with no property on it? Then, how much does the construction cost? What's a contractor
going to charge me to actually construct and build the property? And then the loan program.
What kind of money do I need in order to get the loan done? Is a bank gonna require 20 of
the construction costs? Am I going to need interest reserves and make interest payments
throughout the construction process? I need to make sure I understand the loan program
that I get with my bank to make sure I know how much money I actually need to get into the deal.
But one of the things that's really hard to project when you're constructing a project
is expenses. How much are the expenses going to be on a brand new property? There are no furnaces to
fix and roof stuff because it's all brand new. So, how do I really calculate my expenses? I calculate
my expenses in the 30 to 40 percent range. Meaning 30 to 40 percent of your gross rent is going to
be expenses. I would plan on 40 and just enjoy if it was less but make sure you can make money
running at a 40 expense rate. That allows you to be conservative in your underwriting.
Piggybacking on that, diving deep into the second thing you need to really consider
is construction cost and here's why, they change. A lot of things can change the cost of materials.
It can be something like a pandemic which makes it harder to produce materials, it can make it
a hurricane which all the houses that are wrecked need more materials which creates a shortage which
creates a higher price of materials. It can be a lot of things that dictate the cost of materials.
So, when you're pricing out your project, you want to make sure you get accurate material costs
from your contractor and making sure those aren't going to fluctuate from the time you
got the cost to the time you actually need the material. A really good contractor is your best
partner in this specific strategy. You want to make sure your construction costs are nailed
down as close as possible. I know things happen. You get into a project, something costs a little
bit more than the contractor thought it would, that happens. I understand that. But we want to get as
close to that number as possible to make sure as we're making our projections, we truly understand
if the property is going to be profitable or not and if the property's not profitable,
then there's no reason to do it. So, when people ask me, "Is building apartment a good investment?"
The construction costs will often dictate that response because if material costs are really high
and labor costs are really high, then it's going to be really hard to make money on a development
project. When the economy crashed in 2008 and 2009, a lot of contractors and construction
workers were put out of business and they changed industries and went away from the construction
industry. Well, what that did was create a shortage of labor in that specific space for many, many, many
years to come. That is currently coming back up and I'm really thankful for that but it's
created a long-term labor shortage. Because of that labor shortage, the price of labor has increased
because of many things like a pandemic and disasters, the price of materials have increased
so we right now are in the time where building a property is really, really, really expensive.
So, you want to make sure again, as long as you can get really strong returns, let's do it. Throw
a comment in the comment section below, would you consider building an apartment complex or is your
area a great area to build an apartment complex? If you've done this, I want to hear your journey
below. If you haven't, what questions do you have? Blow up our comments section. I want to hear your story.
The 3rd thing you want to consider when asking yourself, "Should I build an apartment complex?" is
what is the demand in the area I'm considering developing? So, what you want to do is look in
that area, is there a lot of vacant apartments? If there's a lot of vacant apartments, do not build
in that area because obviously, there's a greater supply of apartments than there is a demand for
them. And by adding more apartments to the market is not going to help you. You're probably going
to have to rent it out for a cheaper amount which will significantly hurt your cash on cash return
or put you in a place where you're not making any money or even losing money every single month.
Make sure you check the demand. Check the vacancy and occupancy rates of neighboring properties
so that you can see if there's a real demand for more apartments. The other thing you want to ask,
"Are there a lot of apartments for sale?" If there's a lot of apartments for sale in your area, don't
build. If there's very few for sale, construction might be a really good idea because you construct
it and you could maybe even sell it the day you build it. You don't even have to lease it
up. And a lot of other developers or multi-family real estate investors will buy that and they'll
do the lease up. So, what you want to look at for demand is making sure you look if there's a lot of
apartments for sale, not a great area to develop. If there are very low inventory for apartments
for sale, could be a very good area to build apartments and sell those off to another investor.
And the 4th strategy you want to consider when you think about developing apartments
is your strategy. Meaning are you planning on using these for traditional rentals? Are you planning on
using these to create Airbnb's? Are you planning on using this for student housing or assisted
in senior living? Are you planning on this for section 8 or subsidized housing? Your strategy
will determine if you should build as well. Because let's say there's a low demand for apartments,
but there's a high demand for student housing or senior living, it might mean you don't necessarily
build the traditional apartment building but you build an assisted living center. The whole point
about development and building an apartment is you want to match the strategy with the demand. What
does the area need and how can you give it to them? Does it need more traditional rentals? Does it need
student housing? Is the Airbnb market pretty short or is it way plentiful? Pick your strategy based on
your area's need. So, when people ask me, "Mike, should I build an apartment building?" The answer really is
depends on the area, your return on investment and your strategy. Thank you so much for tuning in
today. Because of that, I want to give you a free gift. Make sure you join our free multi-family
master class where I walk through how to bust into the multi-family real estate market even if
you've never raised money or you've never bought a deal. Go down in the description, click that link
and you're going to see me in the training and I'm going to be walking through some other case
studies of students that have gotten properties and I want to help you see how you can do that too.