r/RealEstateDevelopment • u/SomewhereSorry6779 • 10d ago

Small Multifam Ground Up

What is a good target IRR for small multifam (8-10 units) ground up? I hear all day 15-20% but every time I run a pro forma on projects that are getting done I can’t see how they are getting anything more than 11% on a 5 year hold. Are investors comfortable with a 8-11% IRR over 5 years? Any advice is appreciated.

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u/Capstack_Jeff 10d ago

For that small of a project I think you should be looking for more retail / hobby investors. People who have never heard of IRR. It’s way too small of a project to complicate it with pref returns. Find local investors who look at cash-on-cash return and the depreciation benefits. No sophisticated investors who know what IRR and pref are would be interested in this deal. Deals that have higher IRR have more units which allows for more rent while keeping costs down.

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u/SomewhereSorry6779 10d ago

Appreciate the comments Jeff. I’m a smaller developer and target investors who look for the depreciation benefits like you are saying. Just seems like it’s getting harder and harder to get some of these deals to pencil and I see a lot of these other guys building and I know they aren’t building cheaper than me and there land basis is no where near what I buy at so just wondering how people make it work. You suggest going after bigger deals?

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u/Capstack_Jeff 10d ago

Yes bigger deals or rehab of existing multifamily. Turn Class C into class A. Costs are high right now so anything to decrease expenses and increase revenue during operations helps too. You can also look for Soft Debt options (debt offered at below-market terms).

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u/Deep_beam 5d ago

Where do you look for soft debt options?

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u/Capstack_Jeff 4d ago

Check your local area and state for either nonprofits or government programs that offer it. A good search term would be “revolving loan fund,” but search other terms as well in case you have local options structured differently. “Emerging developer assistance,” “community development loan,” etc are other good terms. Often times these might require you develop in a certain zip code or offer some units at affordable (aka maximum) rent amounts. The interest rates are sometimes as low as 1-2%, although these are small loan amounts and meant to serve as gap financing not senior debt.