1. What is ground-up multifamily development?
Ground-up multifamily development refers to the process of building new apartment complexes from scratch. This involves acquiring land, designing the property, obtaining necessary permits, constructing the buildings, and leasing the units after construction is complete.
Don’t worry if all of this seems daunting. At Goodin Development, we handle the entire process. Our team acquires the land, obtains all necessary permits, and arranges the financing.
Only after we have the project final and ready to start, we start raising capital from our investors. This is much less risk to our investors!
2. How does passive investing in multifamily development work?
Passive investing in multifamily development typically involves investors contributing capital to the project so that it can be built. As a limited partner, you invest funds without being involved in the day-to-day operations or decision-making.
By not having to be actively involved in the construction process, investors can still focus on their career and spend time with their family. In exchange for investing capital into the deal, you as the limited partner own a real percentage of equity in the LLC that owns the property.
The general partner or sponsor manages all aspects of the development process, from land acquisition to construction, property management, and the sale. Your returns are based on the project’s performance and the agreed-upon profit-sharing structure, often including both ongoing cash flow distributions and a share of the profits upon sale or refinancing.
3. What are the potential returns for passive investors in ground-up developments?
Returns can vary widely depending on the specific project, market conditions, and executed strategy. However, ground-up developments often target higher returns than stabilized property investments due to the additional upfront work and time required to construct the project.
At Goodin Development, we always offer a preferred return to our investors of 6% – 8% and this accrues during the construction period. We target a 15% – 20% or higher IRR over a 3-7 year hold period, with an equity multiple of at least a 2x. It’s important to note that these are projections and not guaranteed returns.
Related Blog: Understanding Key Metrics: Cash on Cash, IRR, and Equity Multiple
4. How long does it take to see returns on a ground-up development investment?
A typical project might take 14-24 months for construction, followed by a lease-up period of 4-12 months. Once the property is fully occupied and stabilized, we will evaluate the property performance and intend to start quarterly cash distributions to our investors as soon as possible.
Significant returns often materialize upon refinancing or sale. We intend to sell our properties typically 3-7 years after we start construction.
5. What are the main risks associated with investing in ground-up multifamily development?
Every investment comes with risk, and ground up development projects are no different.
Here are a potential risks with development projects and how we mitigate them:
We only work with reputable construction companies who have a tremendous amount of experience in this industry.
We sign an agreement with the construction company called a G.M.P. The G.M.P. stands for guaranteed maximum price. This specifies that if our construction costs go above our contract amount, the general contractor will pay the overrun amount, not Goodin Development.
We only invest in high-growth markets that have a strong future economic outlook.
We use market report data, feedback from our property management company, and information from comparable properties in the area to make our projections about rent and occupancy levels. We always strive to under-promise and over-deliver with our projections.
We only start raising capital from investors after we have projects fully entitled and shovel ready. This eliminates risk that upfront costs will be spent and the project will not get approved.
Nobody can predict the market. We always add a buffer percentage amount in our underwriting projections to account for any interest rate fluctuations while we work towards closing the deal. We also have fantastic banking relationships and have used fixed interest rate construction loans on previous deals to eliminate interest rate risk.
6. How much capital is typically required to invest in these projects?
At Goodin Development, typically the minimum investment we require is between $50,000 and $100,000.
7. How do I evaluate the credibility of a developer or sponsor?
Key factors to consider include:
8. What tax benefits should I be aware of when investing in ground-up developments?
Ground-up developments can offer attractive tax benefits, including:
However, tax implications can be complex and vary based on individual circumstances. Always consult with a qualified tax professional for advice tailored to your situation.
9. How does investing in ground-up development compare to investing in existing properties?
Ground-up development offers several distinct advantages:
