It might be easy to lease a one-bedroom, 900-square-foot apartment. But it's much harder to sell the same unit without dramatically changing the design. On the surface, it seems like a natural progression for rental developers to offer a for-sale product because they already understand the nuances of multifamily housing. In reality, however, developers face a whole new set of rules and many different design considerations.
While the rest of the residential housing industry looks forward to mortgage rates dropping, low rates pose a threat to rental developers who lose some of their market to first-time buyers. Last year, 1.47 million households entered the for-sale market, while only 58,000 entered the rental sector, according to Tracy Cross, a Chicago-based market analyst. Developing for-sale product in addition to, or instead of, rental product can be a smart way for rental developers to recapture a share of their market that they might otherwise lose.
There's more good news: You're probably already leasing to your future buyers. Multifamily for-sale product generally appeals to the same market segments as rental developments: childless couples, single females, and older individuals.
Learn the Process "Developers don't need to be fearful of doing for-sale product," says developer Barry Mandel, president of the Mandel Group in Milwaukee, "but they do need to have a healthy apprehension of the process before they start."
Initially, a for-sale project will require a different approach to financing and sales than a rental project. Developers are likely to encounter greater costs doing for-sale, Mandel warns. For example, the cost of finishing interior spaces consistent with buyer expectations will likely be much greater than the finishes required in rental units.
It's important for rental developers to realize that even though they're not going to manage the project after it's completed, they'll still be accountable to the homeowners association long after they've finished the last unit, which could be a "continuing contingent liability," adds Mandel. That is why developers need to study the for-sale process and recognize that a commitment to service goes beyond the certificate of occupancy.
Mixing Product Types By mixing product types in the same community, developers can make as much or even more money than if they built just for-sale units or just rental units. It's the mix of the right product that drives deals, not a desired density. Instead of putting 400 rental units on a 25-acre site in a great location, you could develop 300 units in three different product lines, such as apartments, villas, and townhomes, to help absorb the land costs. It may be easier to obtain financing for a project that mixes product types and/or has multiple buildings because there tends to be stronger restrictions and pre-sale requirements on a loan for a single building, says Cross.
Mandel has successfully mixed multifamily product in a number of communities in the greater Milwaukee area. Rental projects can help attract critical mass, especially in redevelopment areas, but adding for-sale product will legitimize the location by offering ownership opportunities and direct buyer investment at that location, he says.
Another advantage of mixing product types will be potentially higher resale values. The resale value of a home will be especially important to younger buyers who don't see themselves living in the same place their whole lives. On average, 10 percent of a community is always on the market, Cross says. So, if your community has 300 units, there will be 30 units competing against each other, yet it's less likely that they will be the same unit type because there are a variety of product types in the community.
