Infill Ground up development
4358 Felton 4 Plex
Infill Ground up development
4358 Felton 4 Plex
Developmental Process for REal Estate Development
Hey, this is Jeremy With Sustainable Village Redevelopment, here to talk to you today about the developmental process for real estate, something near and dear to my heart after our first development, something that I know pretty well after having gone through the complete process recently and some of the pitfalls tricks and tips that I would offer anybody who’s looking to get into this exciting and rewarding field of real estate redevelopment in your local town or community.
First and foremost, I think you absolutely have to understand the zoning in your local town or community. Basically, what this constructed of are these six line items.
1)The height limit: how high can you build the building? If you can build higher, that allows you opportunities to add and augment the structure so you can get more floor area.
2)The floor area ratio pertains to how many square foot of building you can build compared to how many square feet of lot you have. If your floor area ratio is higher, you can build a bigger building.
3)Setbacks, obviously, is how far out you can build the building to the lot line. If you can build further out, or if you have an alley behind the property and that allows you to use some of the alley to comply with your setbacks on the back, you can build the building farther towards the rear of the lot and build it bigger or better situated so that you can use more of the land for a courtyard or whatever.
4)Obviously, how many units you can build is huge because the more apartments you can build, the more rent that the building will bring in, and the better it will offset your pro forma in that.
5)Is there an opportunity for a density bonus? Generally speaking, in San Diego, I think if you can get up to five units or over five units, you can apply to the city to get a density bonus. Usually, this entails giving them some portion, usually 10 percent of your apartments at market rate rent or affordable rent, and they’ll allow you 20 percent more apartments. You give them one, you get two, something like that, depending on how many units you’re actually building.
6)Then probably lastly, I know a lot of architect developers, and there’s architectural trickery involved in this. Can you build a two story apartment that you can chop into two after final by building duplicate fuller plans and putting an interior stairwell and doors that lock? Can you turn a garage into a living space after final by plumbing it, pre-plumbing it, things like that? Just ways to monetize your development in different ways so that your overall cash flow is better, setting you up better for future developments.
BUYING THE PROPERTY AND LOOKING FOR A DEAL
Secondly is buying the property. I mean, obviously, you’re going to try and be looking for some sort of deal. We’re looking for maybe something rundown, distressed, the owners behind on the payments, or it’s bank owned, or it’s obviously hopefully just not built to the highest and best use, which is what you’re going to be looking to do by developing a property, or it’s raw land. That’s something that I’m not completely familiar with, but we’re going to be getting into probably later on.
BEGINNING DEVELOPER LOANS YOU NEED TO KNOW ABOUT
Then understanding the loan programs. Obviously, the 203K and the home style renovation loan are fixer upper loans and allow you to really economically build up to four units. Whether it’s a single family house you’re buying and you’re adding a few units, you can go up to four units with three percent down financing, and it generally goes up to 1.2 to 1.3 million top. You build whatever you’re going to build. If you can build four units for that, you can build four. If you can only build two or three, you add an additional one or two units.
Then there’s obviously traditional construction on lending, which requires a much higher down payment. Hopefully, these beginning programs, the 203K and the home style renovation loan are the baby step that gets you to the point where you can afford to do bigger buildings, which is where we’re looking at, leveraging your first couple of properties and then building up to the point where you could build a little bit bigger community or whatnot. As far as the nuts and the bolts of the developmental steps, in my opinion, there’s a lot of them, but these are them.
There’s not many books on this, so I’m going to go through them and hopefully this adds value for you building a home for yourself, or building a duplex, or building a fourplex, or whatever your intention is. Whether it’s income property, or to live cheap or whatever, have a developmental plan. This entails understanding the zoning, buying a property, knowing your loan programs and more or less what you can do on the property. Tie up the property, buy it. You could use maybe a zero down loan, or an interest only loan, or a variable loan to get into the property cheap, because the whole intent is just to lock it up and start turning the wheels to get ready to redevelop it.
Get prequalified for your expansion or developmental property loan, one of these programs or something like that. Start getting those wheels turning so you’re pre qualified. Meet with architects. Develop an architectural plan of what you can build within these constraints of the zoning for the highest and best use. Generally speaking, making huge apartments doesn’t get you that much more rent, and it all costs you per square foot. Just threading that needle and that balance of what you can build nicely that’s affordable to the consumer and makes you money and is the highest and best use.
FINDING AND VETTING A CONTRACTOR
Find contractors to bid on the project. Obviously, you need somebody to build it. Submit to the plan check in your local county or city. In my experience, this takes two to three months to go through plan check, so they will review your plans, approve what you’re proposing to build, and then give you a permit. Sign the contractor after you’re already in plan check and you’re starting to head down that direction or some variation thereof.
GET YOUR BUILDING PERMIT FINALIZED
Get your building permit once it’s been processed through plan check and they approve. You want to get your building permit so you can break ground. Get the loan funded right around in the same time frame. Break ground on your project and start building.
UTILITY UPGRADES: ELECTRICAL , WATER, GAS, SEWER START IMMEDIATELY!
One thing that we messed up on was not working on the utility upgrades. If you’re augmenting the structure, they’re probably going to ask you to augment the water, gas, and power links to your property, and meters. So I would get working on that immediately. We got stuck at the tail end of our property and it almost dragged us under.
PRE-LEASING YOUR BUILDING TO SPEED UP REFINANCE
Getting close to final, start with the pre-leasing. If you can get some of the apartments pre-lease, that will help you with the refinancing at the tail end of the loan if you want to do that for your cash out refi. Get working on that as soon as you can, as soon as you have a viable product and marketing material. Begin the refi process, so you’re starting to get prequalified to refinance into a long term loan, or cash out refi loan, or whatever that looks like for you.
WHAT TYPE OF LOAN FOR YOUR REFINANCE? CASHOUT AND ROLL IDEALLY!
Consider a cash out refinance. That’s what we did just because generally, you want to try and build the property for less than it will be worth so that you can either refinance into long term more economical money or pull some money out to roll into the next project. Maybe another thing is the difference between a portfolio lender versus traditional banks and mortgage lenders. Portfolio lenders are usually local credit unions that have much more flexible terms and can offer you reduced rates or more flexibility of cash out refis.
We were looking at going into a jumbo loan that was going to be five percent to six percent interest on this fourplex that we built here in San Diego. I called every credit union in town and I found a front wave credit union here in San Diego that would do a $1.4 million cash out refi, $100,000 back to us at 3.1 percent. Traditional lenders just couldn’t do that. They we’re operating within the very strict Fannie Mae and Freddie Mac guidelines or whatnot.
Then just what’s your exit plan? Are you cashing out? Are you pulling cash out of the building? Are you getting an equity line against the property, saving, partnering, and then rent and repeat, if you’re going to go on and build more stuff, or maybe just build an income property and then use some of the equity and money that’s coming from the income property to buy a nice house for your family or just continue the process?
OUR FUTURE DEVELOPMENTAL PLANS: ADDING MUCH NEEDED AFFORDABLE HOUSING TO COMMUNITIES WE LOVE AND WANT TO SPEND TIME IN!
For us, we built our first fourplex in San Diego. I’d like to build another fourplex in Lake Tahoe next so that we can have a cheap or economical home up there. In San Diego, where the rents cover most or even provide us some profit, and we even inject some short term rentals into the buildings just to keep the rents low for our long term tenants. there’s a lot of play in what you can do, tons of creativity involved in this process. But it can be amazing to be able to design and build structures of your own imagination and see it come to life, build your own house to live in with units to support it. It’s something that we’re very excited about and are in the beginning stages of this rents and repeat cycle.
If you have any questions or you’d like to talk through more of this in depth, I’m open to talking to anybody who’s interested in creative. This is just another company that we’re building and we’d be honored to talk to you if you’re interested in this. I can be reached at 619-885-8818 or Jeremy@SustainableVillageRedevelopment.com, and then obviously, you can see more out our first project here in San Diego at SustainableVillageRedevelopment.com.
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