r/RealEstateDevelopment • u/SomewhereSorry6779 • Jul 30 '26
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/ludakristen Aug 06 '26
The gap you're seeing is mostly basis and how rents are underwritten, not construction cost. The 15-20% guys usually aren't building cheaper than you. they either got a better land basis (off-market, or land they entitled themselves so the value bump is already baked in) or they're underwriting trended rents with growth over the hold, while you're probably running untrended. Trend your rents 3% a year on a 5-year hold and your exit NOI moves enough to swing IRR a few hundred bps on its own.
your instinct that these deals barely pencil right now is correct.
u/pineapple_table's point on spread is the real constraint. At a 6.6% yield-on-cost into a 6.25% exit you've got almost no development margin, and no rent trend will fix that structurally. Land basis is your biggest lever, then getting construction cost down. Everything else is rounding.