First time investment property

December 25, 2011 12:33 PM

What do I need to know about building new multifamily homes and renting them out? Where can I learn about it?

I live in Houston, Texas and would like my first house I buy to be one that has units available for rental. I've seen duplex properties that are great except I wouldn't want to live there because they are old and the neighborhood isn't safe. I want to live in the building because there are tax benefits and loan benefits.

Have you built a row of townhomes or a duplex? I imagine it's more difficult than moving into and renting out existing units. Can it be done for under $500,000?

posted by abdulf to work & money (6 answers total)

From the tenant viewpoint, the new landlord/owner should know that they are entering into not just an economic arrangement but also a social contract. Particularly in places with legal rights for tenants, but (I would think) other places as well. Your property is someone else's home. The context requires a fair and responsive exchange (on both sides).
posted by ClaudiaCenter at 1:57 PM on December 25, 2011

I am an electrician and a real estate investor. Right now, it is cheaper to buy and re-model than build new. I would very carefully look at your local foreclosure market before you start building anything.

Buying and re-modeling requires very limited gov't over-sight compared to building new. If you buy a fore-closure and re-model, you might have to pull a few building permits to renovate it, and that is it. The existing structure is grand-fathered in to any new building codes, zaning and land use changes, and other issues. Further, in most states, including Texas, under the homestead laws, if the dwelling is your primary residence (even if it is a multi-family), the owner can pull the permits and do the work themselves.

If you build new, you need lots permits and several types of licenses. Homesteading does not apply to new construction. So, you need a licensed plumber, electrician, GC, HVAC, etc., etc. You have to deal with zoning and utility services issues. And more.

Unless you are contractor who really knows the building industry - you would be crazy to undertake such a task in this market. The building new learning curve is much harder than the re-modeling learning curve, and right now it is also more expensive.

Foreclosures are what you should be looking at.
posted by Flood at 1:58 PM on December 25, 2011

*zoning
posted by Flood at 1:59 PM on December 25, 2011

I don't know the Houston market at all, but I'd expect you could build a duplex for under $500,00. You might even be able to manage a three unit building. Four would probably be out for a number of reasons. My suggestion is to look for a local architect who does affordable housing. Many aren't only specialists in government subsidized work, but also do other types of designs. A few key questions:

Do you need a licensed architect for this? What is the threshold? (It ranges by jurisdiction, but it may be that you don't need a stamped set of drawings for a 2 or 3 unit building, likely you do for anything more than that).
What code and accessibility issues may trip you up locally, if any?
What scope of work would they propose and what fee?
Would they recommend working directly with a builder instead? And if so, any resources that may help you find one?

Most of the regulatory, building code and zoning issues that could crop up exist at state, county or municipal level. Beyond that, the notion of building a structure to house multiple families isn't all that complicated.

The bigger issue is probably financing. A new multi-unit building will cost a lot more than just splitting something existing up or patching together an old dump. At the same time, you won't get any efficiency of repetition that might come out of building a whole development at once. As a result, you may have trouble renting that second unit at typical developer profit margins. This doesn't need to matter unless you are trying to convince a bank to finance the whole thing for you.
posted by meinvt at 2:00 PM on December 25, 2011

When I managed a ten-unit apartment complex we belonged to a sort of "landlords club". I think it was about $100 a year and then they would help us if we had an eviction - basically telling us how to proceed legally. But the side benefit is you could call them any time and ask questions about landlording specific to our local. I'm offering this because I think a lot of the questions you will have along the way will be Houston-specific. Maybe you could find a similar organization. They were not property managers. They were a sort of social group for landlords. They had luncheons where you could go and socialize with others in the same business.
posted by cda at 3:45 PM on December 25, 2011

I'm a landlord.

I will tell you right now that buying an existing building and managing it as a rental, whether or not you live in any of the units, is a difficult undertaking and not for everyone. Unless you are of a certain mentality, you are best off hiring a property management firm. Since you expect to live in one, it sounds like you want to be an on-premises landlord, which is literally a 24/7 job. The broken furnace, the leaky toilet, the kitchen fire, and the warring tenants (if more than one) are going to become much more of your life than you expect.

I will also tell you that building a new rental property is an order of magnitude more difficult, and financially much more risky. I really doubt that you will be able to find many banks willing to lend to you in this current market, where there is a surplus of experienced property developers. The commercial lending market right now seriously sucks and is a major obstacle to the recovery of the housing market, largely because the residential supply right now is huge -- nearly unprecedentedly huge. There just isn't a market out there for new construction. Worse, a large number of banks that do lending like this are seriously overextended and want to reduce their exposure, not expand it.

Even in good times you would do well to have experience as a landlord learning the ropes and your market, ideally by successfully managing several buildings and getting a handle on what tenants want and what is in short supply, e.g. 1 bedrooms, or parking, or jacuzzis (it's almost never jacuzzis, renters are generally more practical than buyers). Just blindly picking a lot and building a duplex is pretty risky. You say that you've found duplexes, but don't like the neighborhoods they are in. This implies building a duplex in a neighborhood that doesn't already have them. Unless you know that this is an unmet demand and not a verdict of the marketplace, you are risking your and the bank's money, probably unreasonably.

I think it's good that you have a firm idea of what you want to do, manage a duplex. I suggest that you need to keep looking. Especially in the current market, with many foreclosures and other distress sales, the bargains are going to be out there; your job is to identify them and jump on them before someone else does. But it will be immensely easier to identify a property in a neighborhood you know that is really somewhat unwanted and do your damnedest to make it work in those familiar conditions. This will get your feet wet in the regulatory and financial aspects of landlording that will serve you well while you look for that ideal multi-family and make professional connections that will lead you to the people you need to know to put a project like you have in mind together. I'd guess this is 5-10 years out for someone starting from scratch.

Keep in mind that even regular every-day investment property landlords can get burned. I knew a family that bought a 10 or 12-unit in Chicago, more or less blind, and essentially bankrupted themselves bringing it up to code.

But really, if you waltz into a contractor's office with no idea what you're getting yourself into and no experience to guide you and a hell of a lot of questions, you're either going to get laughed out the door or fleeced.
posted by dhartung at 10:55 PM on December 25, 2011 [1 favorite]