Just refinanced - Multi-family Construction Success!!

[TangoWhiskey]

I wanted to put a post on to give the numbers of a deal I just refinanced and share a couple insights I picked up. Fundamentally the post is about the returns and the learning available if you will look at projects requiring major construction. I will post this in a couple other forums to try and help people looking for insight on development or thinking of major construction work. I"m putting a lot of detail because I always wish people posted detailed summaries of their deals, the numbers and what they learned.



My main realisation is that learning how to conduct major construction work can mean being able to quit a full-time professional job and become a full-time investor to replace the immediate income lost. This could be followed by rapid financial independence within 2-4 years depending on the amount of capital you start with. Achieving that level of wealth should be possible in any market from downtown Toronto condos to small towns. You also can start at any level of experience in construction so long as you are willing to dig into things and make tough decisions. Starting at a low level of experience will be no problem for people who like to lean into big unknown challenges to accomplish a vision and who can handle anxiety and stress. The path should and often does lead to a pot of gold but it also has the motivation of a steadily growing steamroller of personally guaranteed debt behind you. The highs are high and the lows get pretty deep too.



Fundamentally the returns come from being willing to take on an area of investing that makes other investors afraid, unwilling, or for whom it isn't feasible. If you like working hard and major growth through pushing personal boundaries, then taking on a big construction project is a good personal and professional choice.



I had only done minor cosmetic things before this project - changed a bathroom and replaced a roof, redone a couple of units with new laminate floor and paint. With high competition in the market for multi family right now a guy with construction experience and I jumped, partnering 50/50 for financing, operations, everything including deciding stuff.



Our project -



Bought a laneway on about 1 acre of land linking a well travelled main road and the ocean in a Halifax sub-market. The lane had an oceanfront house with two story unfinished garage addition at the bottom along with a good condition deep water wharf and boat ramp; 6 very small two level 2 bed 1 bath townhouses in the middle; and a 80 yr old character house turned into a duplex at the top main rd end. Paid the primarily welfare level C class tenants to leave and gutted them all. The oceanfront garage was turned into two 1 bed open concept apts; the 9 existing units were completely renovated incl putting in dishwashers and in-suite laundry; parking lot created and 300 ft laneway paved; landscaping; all new kitchens, bathrooms, roofs, decks, windows, doors etc. My partner and I acted as the general contractors - sometimes with our own labour and sometimes with up to 3 contractors with labour of their own. We bought and delivered all materials, sourced sub-trades and relevant experts and professionals, obtained permits and got municipal permissions, and did the design work. We also handled the property mgmt and leasing. We basically did everything except swing the hammers.



Bought for 750K in mid Jan 2013; 375K total construction spending; both construction financing and mortgage were interest only 75 % LTV with 1 year term and prime plus 1.5% rate. Refinanced on Wed Dec 18 th for total mortgage proceeds 1.175 mill. Cash in was 270K total or 135K each. Cash out was 181K, or 90K each.



Basically we created an extremely unique 11 unit laneway complex of A- units with 5 appliances, all with private entrances and parking, and shared oceanfront amenities like the wharf, boat ramp and two decks. By focusing in on the unique nature of the property we command above market rents and tenant pays all utilities. This took one year and left about 45K each of our funds in the deal ie cost us 45K each; returns are mortgage amortization of about 15K/yr each and cashflow of about 9-10K/yr each, plus 100-150K equity each.



So overall for the amount of work and dedication required to find and then execute on the deal I think the returns are fair. What it really taught me is that someone making a 50-100K/yr job should be able to leave paid work to take on a large construction project, whether overseeing others or doing it oneself in more classic sweat equity single family home rehabs. If someone can price the construction time and work, then they can quit. In fact, quitting now and spending the first few months learning how to price a deal and the work required is easily achievable so long as you are willing and able and you have access to enough capital to take down a deal.



Hopefully this post helps someone if they looking at different options. Good luck!

 

[TangoWhiskey]

Sequel to the above:



The refinance happened on Tuesday. Then on Wed we closed phase II.



Phase II is the intended conversion of (the neighbouring property) an oceanfront 3 story yacht storage barn into a 6 plex with 4 two bed and two one bed units. This parcel also came with a neighbouring house that we got an appraiser to state was only 10 % of the overall value and thus only the oceanfront barn was mortgaged, resulting in us essentially buying a fixer upper house for free that we will spend 50K on and refinance in two months, creating 100K that appears solely because of creative deal making. This deal was also fascinating in how we handled negotiations. Starting from a signed contract that we had paid a deposit on and would have been legally liable for if the seller took us to court for not executing to buy on time, we were able to negotiate a 26% total price reduction, in stages, over the course of a series of closely fought negotiations that listed over a year.



We now have a development permit, have developed the concept and hired a designer to translate our concept into plans for the city building permit folks. This should come over the holidays.



I'll post here to describe how it goes if people are interested.



In total construction spending over the course of 18 months will be approx 1 million dollars.



One (poetic) way of describing taking on a big construction project like our last year if you are going to actively manage is that it is like riding on a mattress sitting on top of monsters you have to constantly placate with fistfuls of cash!

 

[RedlineBrett]

Congratulations Tris, that is definitely a cool project and well done for getting it to where you have.



With no multi family apartment buildings available in our area we have decided to go the development route as well. We've been working on it for nearly a year and only last week did we get our DP application submitted. 34 unit building, likely 2 years away from keys. It's definitely been a learning experience for me but for the most part we're ready for it.

 

[TangoWhiskey]

Brett - thanks for the good words and congrats on your own project.



I completely agree with your decision to move into development and am pursuing other projects of my own as well, this oceanfront gig is really just a two phase intro into construction starting with the renovation of existing units and ending with re-purposing an entire building to highest and best use. After this one option I have is to build on a 23 unit zoned lot adjacent to a 24 suiter I own. But now I have construction somewhat figured out the next step is to add capital raising on a systematic basis to it so I can do some of the stuff I would like to!



I think that right now is one of the very few periods of a market cycle where development makes sense if your time horizon is 5 years or more. The investing future is one of a low appreciation environment. I don't know about Alberta but I would say that most markets in Canada have tapped out on significant rent growth simply because consumer incomes can't handle significant increases in housing cost whether rental or purchase. So the short to mid term 5 yr future is one of limited appreciation increases/inflationary growth whether single family or multi family. As well, with todays ultra low rates on multi family the primary return stream has shifted from appreciation and cashflow to amortization/paydown. We can still aim to make 20 % per year, but most of that 20 % will come from paydown, thus requiring a long hold period with good management.



This phase of the market cycle means development requires the same amount of cash left in the deal after refinance as the purchase of a 40 yr old bldg with similar returns, and somewhat less cash than buying a nice buy and hold building that doesn't require major improvements. The difference will be that doing the development leaves you owning the nicest building with the leanest expense ratio. I would bet the 5 yr returns on a new building will be the same as the 5 yr returns on a 40 yr old bldg that cost maybe 1/2 or 2/3 of the new building but which will be harder to rent, have way higher maintenance costs, and probably require some major capital spending at some point in those 5 yrs in suite or system (roof/parking lot/hallways/heating) upgrades.



I notice a lot of the public and exempt market vehicles for Cdn multi family are moving into development, often of student focused properties for the higher returns; accepting lower returns due to the high market prices and lowered investor expectations; and moving into the US in search of better returns.



Let us know how it goes with your project. I would think that your main challenge will be finding the trades to build it on time and on budget - can you tell us more about it and how its going?

 

[Rickson9]

Kudos to you and your team for taking on such a task and congratulations on your success!

 

[TangoWhiskey]

Thanks Rickson. There was no team really, just my partner and I, plus spouses!

 

[DonCampbell]

Great post, thank you for sharing the story of your journey for all to learn from.



It really does speak a lot to find your niche and then "OWN IT!"



Congratulations!



Looking forward to hearing success from your next phase.



Don