What a first ground-up multifamily deal actually involves

They die at the cost estimate, mostly. Entitlements kill a project slowly and it can be seen coming. A bad number in the pro forma kills it after $200k has been spent on drawings that can't be unspent. The specific version: hard costs get underwritten off a broker's rule of thumb, say $190/sf. Real subcontractor pricing comes back eight months later at $228. Now the project doesn't work and there are dead soft costs plus a land contract that still has to close. That's the classic small developer death. Get a real estimator on the concept drawings before spending on construction documents. It costs a few thousand and it's the cheapest money in the whole deal.

On your question 3, replacement cost. That's the actual argument right now and it cuts against you. If existing product is trading below what it costs to build, you build a new building worth less than you spent the day you finish. The only ways out of that are a market where rents are genuinely rising, a site nobody else can get, or a cost basis nobody else can hit.

Which of those three do you have? If it's none, the answer is buy existing and wait.

I'm new so mostly reading, but the draw thing confused me for weeks and maybe it helps to say it plain. The construction loan doesn't hand you $2.8M. You spend your own money first on the early stuff, then the lender inspects and reimburses in pieces, and there's usually a holdback until completion. So the cash you need at any given moment is more than the equity number suggests.

@megan_doyle15 has the practical version and it's the part that sinks people who came from renovation. Lenders also typically require equity to go in first, all of it, before the loan funds a dollar. So on a $4M project you're spending $1.3M of your own before you see a draw.

Also, retainage. The GC holds back 5 to 10 percent from subs and the lender holds back from you, and everybody is short on cash at the same moment near the end. That's when scope creep bites, because the change orders land right when there's no liquidity left to absorb them.

On the equity gap, the mechanism most operators use is a syndicate or a joint venture, meaning outside money fills the difference. The moment that happens the structure is likely in securities territory and needs to be set up by a securities attorney. That is not a formality, it is the difference between a deal and a problem. What is worth reading closely before anything else is the construction loan term sheet. Look for the completion guarantee, the recourse burn off conditions, the interest reserve size, and whether the lender can call a default on failure to meet a lease up milestone. That last clause is where a slow lease up turns into a lender taking the building.

A fair question for anyone weighing ground up development against buying stabilized: with meaningful capital and a partner, that money can often buy a stabilized 8 to 12 unit building in plenty of markets with cash flow starting month one. Development instead means several years of negative carry and typically a personal guarantee. People are often drawn to development because it sounds like the real thing, not because the returns are actually better for their size and risk tolerance, and it's worth being honest about which reason is doing the deciding.

@aaron_fitz10 that's fair but there's a real answer to it. Existing buildings at this size compete against every buyer with a checkbook. A site with a zoning problem that you can solve competes against almost nobody. The value you create in development is mostly created at entitlement, before a single shovel moves.

@devon_pierce, if your site is already zoned by right for 14 units then you're buying at a price that reflects that, and your margin has to come from construction execution, which is a much harder place to find it.

Nobody has raised lease-up so it's worth saying plainly. A 16 unit building delivering into a submarket that just absorbed 400 new units is going to give away two months free and take six to nine months to fill. A lender's pro forma often assumes 15 units a month absorption and three months to stabilize. Budget for the real one. That gap is an interest reserve problem and interest reserves run out.

Coming from the build side, the number worth challenging is the 14 to 18 month construction schedule. On wood frame small multifamily that's roughly right if permits are clean and the site has no surprises. Utility connections are the thing that blows it. A transformer lead time pushing a delivery by five months, with nothing to do but wait, is a common enough failure mode. Ask the utility for a written service availability letter during the feasibility period. It's free and it's the single most useful piece of paper to get before committing.

What actually happens if the project just doesn't work halfway through? Like the numbers stop working at month ten and you can't finish. Does the lender take a half-built building? Do you keep paying? I've never seen anyone describe that outcome in plain terms and it seems like the thing @devon_pierce should know before signing.

@jessreyes12 I wondered the same. From what I've read it comes down to the lender foreclosing on a partially complete asset, which is worth far less than the money in it, and then going after the guarantee for the difference. So the answer to "what happens" is mostly "you find out what your guarantee actually said."

@devon_pierce, the thing I took from this whole thread is that your four questions are really one question, which is whether you have enough capital to survive being wrong once.