When to develop a rental property from Duplex to Triplex

Question

We have a duplex and one of the units (2bd/1ba) is in sorry condition and may be nearing the end of its useful life - as in, its foundation would take 50-60k to fix and the wood siding needs to be replaced at not an insignificant cost. My question is: how do I know when it's time to tear it down and build a new rental? We think we have enough room to make the current rental unit into two separate rentals making our duplex property into a triplex.

Steven Foster Wilson · Answer

When I have an idea like this, I often will start meeting with contractors to get quotes as well as ideas of what they think. By doing this it helps myself have a better idea of what to expect and even gives me new idea of things I never would have thought to do. It’s always important to run numbers as well to see if it would even be worth it based on how much rent goes around you.

Josh Ess · Answer

I think an in depth analysis is warranted.  I'd talk with the planning department.

Some points that weren't mentioned.... Check to see if the property is within a Coastal Commission zone, as this could significantly add to lead times for construction and costs.  I'm looking into adding an almost 1200 sqft ADU to a property in SP.  This should add a ton of value, but since it is in the Coastal Zone, the additional review required for the project is almost $20k.... just for a Coastal Commission approval, that has the potential to be denied!

If you do enough and the City issues the units new Certificates of Occupancy, you could get the property out of the Rent Stabilization Ordinance, ie. uber-restrictive City of Los Angeles Rent Control.  This alone has the potential to make the property much more valuable.

Thomas Corey · Answer

yes, these are all great responses and gives me lots to consider. Thanks!

Charles Renn · Answer

Hi @Thomas Corey, you have great feedback here already, but if I can add anything, it would be to consider your exit strategy for this property. I say this because if you convert your assessed duplex into a triplex, future financing may be an obstacle unless you get the proper rezoning/reassessment completed.

If you're planning to hold long term and pass along to your heirs, enjoy possible cash flow, without refinancing, this becomes less concerning.

Hope this helps! San Pedro is a great market!

Evan Polaski · Answer

@Thomas Corey, as noted, first question is: is it allowed?  Second, assuming use is allowed: is financial and risk.  Potential income divided by cost.  Presumably, if the structure is already a tear down and you are allowed to have three units on your property, I am guessing the additional cost is marginal and worthwhile.  But again, by having 3 units, are their additional safety factors, i.e. fire escape, sprinkler, access issues that will dramatically increase the cost over duplex setup.

Karl Denton · Answer

Your biggest hurdle with any changes and rebuild is zoning laws and if they will allow you to change the occupancy. Call and chat with town hall. Also have to look at costs, I mainly try to follow a model where any of my renovations turn me 1% back, so if I’m going to do a 50k renovation I better be able to get an additional 500$ monthly for that.

When to develop a rental property from Duplex to Triplex

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