Understanding profitability and the financial risks of owning a property is key to establishing a construction budget and making your small buildings business work.
Multifamily rental properties generate income from residential rents and, in some cases, activities within the building, including retail or office rents, parking fees, laundry, cell towers or air rights. Mixed-use properties require additional information gathering because commercial rents are calculated on a square-foot basis and can vary based on access to foot traffic, transportation or available parking.
Every building has costs associated with keeping it stable and well maintained. These include items like repairs, utilities, taxes, snowplowing or shoveling. If your property has a commercial or retail unit, preparing for a tenant may add costs.
What is left over from your income after vacancy loss and expenses is net operating income (NOI). A portion of NOI will become your profit. NOI will also be the source of funds to make distributions to project investors and to repay your permanent mortgage or debt service. Because of this, lenders go through a vetting process called underwriting to determine how much they are willing to lend. This is based on how much NOI is projected and the likelihood your building will generate this same amount every month.
Consider the amount of construction needed for a property to be habitable. The building or lot may require work before you can start on the project as you envision it. The amount of work required can have a substantial impact on the cost of your project, and therefore the feasibility of the project itself.