This developer realized a cost savings even before factoring in the shorter project schedule.
- JFH Capital is making the switch from renovating existing buildings to building new ones and has decided that modular makes the most sense.
- A 75% reduction in the project timetable will bring financial benefits, but those benefits weren’t the main factor when making the decision.
- As someone planning several future projects, this developer was mainly interested in the reduced construction costs that modular offered. However, he says that this savings has a lot to do with the fact that he builds in relatively small markets.
Joel Florek of JFH Capital is a real estate investor based in LaPorte, Indiana. Until recently, his business consisted mostly of purchasing, improving and renting out existing multifamily properties. When we spoke with Florek in August of 2023, his portfolio consisted of 150 units, managed by an in-house team.
He has been interested in new construction for a long time, and recently decided to start building his own projects, acting as developer and general contractor. After looking at the numbers and touring a couple of modular factories, he decided that modular construction would offer the best return on his investment.
He has just completed his first 8-unit project, working with Rochester Homes in Rochester, Indiana. He chose Rochester because of their decades of business experience and the fact that they have their own set crews.
Looking forward, Florek’s goal is to build 150 units per year, using modular. What sold him on this method of construction?
Time and Money
Part of the appeal is that the speed of modular means he can begin earning revenue sooner (a topic we explore further in this issue’s article, “Modular Math 101”). “Speed of construction is a big reason that volumetric modular makes a lot of sense,” Florek says. “With the recent 400 basis point increase in interest rates, time becomes more important than ever.”
He estimates that project timetables will be reduced by about 75%. “When I looked at the timeframes associated with either path, site building was a 9 to 12-month project and I would not be surprised if it extended to 15 months.” He says that, with modular, the elapsed time from when they first stick a shovel into the ground to when they expect occupancy permits is reduced to about 2.5 months.
How much income does that represent? “These six units will rent for $1150 per month, or $82,800 in annual revenue,” he says. “We have a 70% income to expense ratio, and an expected annual net operating income of $57,960. If we can complete the project six months quicker with modular, that’s $28,980 in top line cash flow.”
This project didn’t use borrowed money, but if it did, the reduced schedule would also mean less construction loan interest. “Carrying costs [on a project like this] would be about $70,900 per year at current interest rates,” he says. “If we can save even half that, it’s $35,000 less in carried interest.”
The ability to get the job done more quickly — and to start earning revenue sooner — has been a big plus with Florek’s financial partners. “I work with investors,” he says. “From their standpoint, speed of construction is probably what they’re most interested in.”
Lower Construction Costs
But while speed to completion is a big plus, it wasn’t the only benefit that sold Florek on modular. While some developers say that modular doesn’t reduce construction costs, in his case it did. He says those reduced costs are what ultimately sold him.
Construction costs vary by market, and part of Florek’s savings is because of where he builds. “I serve smaller communities, those with a population of 50,000 or less,” he says. “One thing I have learned in managing multifamily properties is that in smaller communities like these it’s more expensive to get things done.” The reasons include fewer contractors to choose from, and fewer contractors with the ability to scale up to service a growing developer.
In fact, Florek says that the cost to build in his area is about 10% more than Indianapolis, the nearest large metropolitan area. He believes that the savings he realizes from modular will help him profitably meet that 150-unit annual target.
In addition, Florek has the advantage of an existing trade base that he can redeploy to putting the finishing touches on his modular buildings. “We’re simply taking subs off of our multifamily renovations and saying ‘go finish this modular job for us.’ We already have a lot of subs in our network,” he says. Florek had to find excavation, concrete and a few other contractors, but he already had drywallers, painters, electricians, plumbers and others he could call on.
In fact, his subs’ remodeling experience proved to be a plus. “Little things may have to be fixed after the modules have been set in place,” he says. “For instance, if openings in the modules aren’t perfect, we may need to shave a bit of the stud in the marriage wall to make the drywall finish the way we want. We’re used to this type of work and we don’t get upset about it.”
The fact that subcontractors’ work is limited to site finishing after the set also appealed to Florek’s investors. “They liked how much of the scope landed on Rochester,” he says. “We don’t have major site work that’s dependent on framing contractors, drywall contractors, siding contractors and the like.” Fewer players means fewer things that can go wrong. “It’s a reduction in risk.”
Bottom line? “This project was a case study to determine whether we’re comfortable using modular to build a multifamily,” says Florek. “The answer is yes. We’re tremendously happy with the numbers, the process and the quality of the product.”
