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Apartment Life

Apartment Life
This small modern apartment building suits an infill lot.
Apartment starts have more than doubled in the last year. But nearly all the growth is in big apartment buildings, the domain of Real Estate Investment Trusts (REITs), institutional investors, and other highly capitalized players. What about smaller apartment buildings? This type of project makes a lot of sense for small builders looking to dip their toe in the rental market. It’s typically easier to find lots for small apartment buildings and get them permitted. They are a great option for infill locations.

It’s interesting to note that the government data for apartment starts (http://www.census.gov/construction/nrc/pdf/newresconst.pdf) show a decline in starts of 2-to-4 unit buildings in the last year. They accounted for only about 5 percent of the apartment units started in June. Competition in this sector hasn’t heated up like it has in the market for big apartment buildings.

Before the days of specialization, single-family builders commonly developed apartment buildings. Rents from the diversification strategy produced cash flow that could be used to build for-sale houses. During the housing downturn, cash from apartment investments kept some builders in business. 
Some apartment builders prefer to sell to investors rather than hold a portfolio. There’s often strong demand from smaller local players who can’t afford to buy bigger buildings. In fact, demand can be so strong that you may be able to sell the building before it’s occupied. The same people who buy single-family rentals often buy small apartment buildings. You may even be able to sell an apartment building to the same people who buy your detached homes.

There’s an art to designing effective multifamily buildings, of course. The best create privacy between the units by placing hallways, laundries, kitchens, and powders along common walls. Bedrooms and great 

rooms are typically isolated. Here's an example, Plan 535-4. Another key to effective apartment design is to minimize wasted space. That’s a bigger deal in large apartment buildings. Even so, hallway runs, landings, and entries need to be kept to a minimum because they don’t generate rental income. It’s a careful calculation, because buildings need to be a pleasant place to live, or you won’t get the rents you expect.

Local government requirements may make it more expensive to build an apartment project than you think. You’ll need a list from the city that shows development fees for things such as parks, schools, and roads. You’ll need to determine how much it will cost to bring utilities to the property. 
Before you can go into the design phase, of course, you’ll need to figure out the required setbacks for landscaping and side yards, along with curbs, gutters, and sidewalks, if they are required.

Consultants suggest that a good place to start the design process – after you find a suitable piece of ground – is perusing multifamily plans. Here’s a link to the Multi-Family Plans Collection at Houseplans. 

 
You’ll find a wide diversity of smaller buildings, from Craftsman (Plan 48-368, above) to

Contemporary in style (Plan 48-261, above).

Some builders build to condominium specifications so that the plans could be converted to condominium ownership, if the market turned to favor that option. To do that, each unit may need separate utilities. And the building may need to comply with different building codes or fire regulations.
 
This makes sense to consider, because the apartment construction market may be overheating in some of the biggest apartment markets. There’s also concern that rent growth is outpacing income gains in the hottest markets.  The key to making a small apartment project work, though, is finding an appropriate piece of land, preferably one that already permits multifamily construction, since getting land rezoned for multifamily use is often extremely difficult. The land needs to be in an area where rentals are in demand. An ideal location for small rentals is in between neighborhoods of big apartment buildings and single-family homes. Vacancy rates nationally are at an all-time low, but you’ll need data for the submarket where you intend to build.  Some builders shy away from multifamily building for fear of having to manage the property. But there are plenty of professional management companies that will take on the cost for a minimal fee.

Boyce Thompson is the former Editorial Director of Builder Magazine, and the author of The New New Home.

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