Equity Build Up During the Construction ProcessDec 14, 2020
It's not uncommon to see anywhere between $75-150k of equity right away—before a project is even finished. You're probably wondering how that happens or where we get that from. I want to address that here today.
I've talked with investors about this over and over again, because I've seen it over and over again with my personal investments, and also with investors that we've helped buy FIG investments.
If an investor comes in and builds new construction, they're able to get in at a much lower purchase price than what it's actually worth. That's what we call the equity play. How do we factor that in? The easiest way is you take the purchase price on what you're paying for that new construction fourplex, and you take a look at the comparable fourplexes (similar properties to the one that you're buying) and see what they've sold for. That's the best and easiest way in Utah, Texas, and Idaho. In Arizona, it's still a little early to where our projects aren't quite completed yet, and resale comps aren't there yet either.
So one of the ways that we can figure out what the equity play is, or what those properties' may be worth is you can work backward. What I mean by that is you can take your yearly NOI (net operating income), divide that by the current or going cap rate for that market... let's say it's 5%. You take those two numbers and you end up with what's going to be that market value.
There's a different way to look at this. You can take your comps, or you can work into it backwards by taking an understanding of what the going cap rate is, and dividing that by the net operating income.
A good example of this equity play is the duplex that I purchased in the Village at Boulders in Herriman, UT. This was around 2018. I purchased through the Fourplex Investment Group to build new construction. The purchase price at that point was around $400k and when it was finished, the market value (or the equity play) was actually around $500k. Maybe even a little bit more. And that was completed after about a 12 month build period. So within that build-period, and even sooner, I had about 100,000 of equity within that property.
Now recently, I just resold that property for $580,000. That was two years later. Yes, the market has gone up. But even before then—before the project was even finished—there was good equity play because I had taken on that risk. I came in early. I went through the new construction phase through FIG.